SEC launches action against crypto “guru” Reginald Middleton and his firm Veritaseum
The action aims to stop the defendants’ dissipation of the $8 million of investor proceeds that remain from the $14.8 million they fraudulently raised in an initial coin offering.
The United States Securities and Exchange Commission (SEC) continues its fight against illegal cryptocurrency schemes. On August 12, 2019, the US regulator filed its Complaint against Veritaseum, LLC and Veritaseum, Inc. and Reginald Middleton with the New York Eastern District Court.
This is an emergency action which aims to stop the defendants’ dissipation of the approximately $8 million of investor proceeds that remain from the approximately $14.8 million they fraudulently raised in 2017 and early 2018 in an offering of digital securities. The list of defendants includes a Brooklyn-based self-described financial guru (Middleton) and two companies he controls. They are alleged to have raised $14.8 million by making material misrepresentations and omissions about the unregistered securities they offered: digital assets called “VERI Tokens,” “VERI,” or “Veritas.” The defendants are said to have conducted this offering in a so-called initial coin offering (ICO) that took place from April 25, 2017 to May 26, 2017, and in post-ICO offers and sales.
According to the SEC’s Complaint, the defendants knowingly misled investors about their prior business venture and the use of offering proceeds; touted outsized investor demand for VERI; and claimed to have a product ready to generate millions of dollars of revenue, when no such product existed; placed a series of manipulative trades in VERI Tokens to increase their price and to induce investors to buy more tokens; and misappropriated investor assets beginning during the ICO phase of the offering.
To avoid the federal securities laws’ registration requirements, Middleton attempted to refashion VERI variously as “pre-paid fees” or “software,” and likened them to gift cards. In reality, VERI are securities, as the substance of the Offering shows, including, for example, in Middleton’s statements that “today’s roughly $3.30 purchase of VERI tokens could yield ($3.30 x 5,000%) = $165” and that “purchase of Veritas goes directly to fund” the business.
To encourage purchases during the ICO phase of the offering, the defendants told potential investors that Veritaseum had products ready to go to market that would replace brokers, banks, and hedge funds. These statements were all false. There were no products “ready to ship” or that would net millions in revenue or replace financial institutions.
Moreover, after the ICO phase, Middleton placed a series of secret, manipulative trades in VERI on a digital asset platform, artificially increasing VERI’s price by approximately 315% during just one day of trading. He then touted these price increases and returns to VERI holders, stating, for example, that because VERI was “up 33.51x from its April 25th initial sales price, some prescient folk are quite happy.” Middleton also misappropriated for his own personal and undisclosed use at least $520,000 of the amounts raised in the Offering.
The SEC notes that the Offering was illegal, as there was no registration statement filed or in effect for the offers and sales of VERI, and no exemption from registration applied.
On July 30, 2019, the day the SEC’s staff informed the defendants’ counsel that the staff was likely to recommend that the Commission approve the filing of an enforcement action against the defendants, and on July 31, 2019, the defendants moved more than $2 million in remaining Offering proceeds from a blockchain address they controlled into other addresses, and used a portion of those funds to purchase precious metals.
The SEC’s staff requested, through counsel, that the defendants voluntarily agree not to engage in further dissipation of the Offering proceeds. The defendants, through counsel, declined the staff’s request.
The Commission now seeks, inter alia, an order freezing Defendants’ assets, disgorgement of ill-gotten gains, as well as imposition of civil money penalties on the defendants.