White Collar & Criminal Law News

NYC Man Faces Suit to Bar Use of Cash in Digital-Coin Fraud (1)

Aug. 12, 2019, 8:15 PMUpdated: Aug. 12, 2019, 10:47 PM

A Brooklyn man faces an “emergency” SEC suit Aug. 12 seeking to stop him from misappropriating $8 million invested in his companies through a 2017 initial coin offering.

Reginald “Reggie” Middleton, a “self-described financial guru,” raised $14.8 million through the coin offering and follow-up sales, according to the Securities and Exchange Commission complaint filed in the U.S. District Court for the Eastern District of New York. He moved $2 million of the proceeds to blockchain addresses his company didn’t control after the SEC told him in July that an enforcement action was coming, the agency said.

Middleton and his companies allegedly “touted outsized—but fictitious—investor demand for” their digital tokens. Middleton, who began blogging about publicly-traded companies in 2007 and “claims to have foreseen the financial crisis and the collapse of Bear Stearns and Lehman Brothers,” is the sole owner of Veritaseum Inc. and Veritaseum LLC, the SEC said.

The companies and Middleton claimed to have a product worth millions of dollars ready “when no such product existed,” according to the agency. The product would allegedly “replace brokers, banks, and hedge funds.”

Middleton tried to refashion the tokens as “pre-paid fees” or “software” and “likened them to gift cards” in an attempt to get around federal securities registration requirements, the SEC said. He also placed “manipulative” trades to drive up the price of and demand for Veritaseum’s tokens before taking about $520,000 of the proceeds for personal use, the agency said.

The SEC asked Middleton and his companies to voluntarily stop dissipating the coin offering proceeds Aug. 5 but they declined, the complaint said.

Causes of Action: Exchange Act §10(b)—Using a manipulative or deceptive device or contrivance for a securities transaction in violation of SEC rules (15 U.S.C. §78j); SEC Rule 10b-5—Employing a device, scheme, or artifice to defraud, making untrue statements or omitting facts, or engaging in any act, practice, or course of business which operates as a fraud or deceit (17 C.F.R. §240.10b-5); Securities Act §17(a)—Employing a device, scheme, or artifice to defraud, making untrue statements or omitting material facts, or engaging in a transaction, practice, or course of business which operates as a fraud in an interstate offering or sale of securities (15 U.S.C. §77q(a)); Securities Act §5(a)—Unregistered sale of securities (15 U.S.C. §77e(a)); Exchange Act §9(a)(2)—Trading a stock so as to manipulate prices (15 U.S.C. §78i(a)(2)).

Relief: Temporary and preliminary asset freeze; temporary and preliminary injunction prohibiting defendants from “destroying, altering, concealing or otherwise interfering with the access of the Commission to relevant documents"; expedited discovery; “a qualified third-party as an independent intermediary that can escrow all digital assets"; permanent injunction prohibiting defendants from violating federal securities laws; disgorgement with interest; permanent officer and director bar for Middleton; prohibition against Middleton “participating in any offering of digital asset securities"; civil fines.

Response: “This is a meritless action by the SEC. Mr. Middleton and Veritseum have acted appropriately and have been truthful about the company’s innovative software platform, and we look forward to proving that in court,” David Kornblau, Middleton’s counsel, said.

Attorneys: Covington & Burling represents Middleton.

The case is SEC v. Middleton, E.D.N.Y., No. 19-cv-04625, complaint filed 8/12/19.

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bloomberglaw.com