UPDATE (August 13, 2019 23:10 UTC): The SEC has obtained a temporary restraining order freezing the assets of Reggie Middleton and Veritaseum.
The order covers accounts at traditional financial institutions (Bank of America, Citi and JPMorgan Chase), cryptocurrency exchanges (Gemini and Kraken) and 15 addresses on the ethereum blockchain.
The U.S. Securities and Exchange Commission (SEC) is seeking to freeze the assets of Reggie Middleton, organizer of the $14.8 million Veritaseum (VERI) initial coin offering (ICO).
According to an emergency action filed Monday in the U.S. District Court for the Eastern District of New York, Middleton conducted a fraudulent and illegal ICO in 2017 and manipulated the securities’ value afterward.
A self-described “financial guru,” Middleton is accused of propagating false information about his businesses, as well as conducting trades in the open market that jacked up the price of VERI. The SEC further alleges he misappropriated at least $520,000 of investors’ money for personal use, as well as $600,000 to purchase precious metals to prop up another scam.
In addition to freezing Middleton’s assets, the SEC asked the court to prohibit him from destroying or altering documents and place a lifelong ban his ever operating a public company or participating in a digital asset securities offering.
According to the complaint, Middleton failed to register the VERI ICO with the SEC and claimed the coins were not securities, but investments in a technology platform or his personal brand. At several points, Middleton described VERI tokens as prepaid fees, software, or compared them to WalMart gift cards. This obfuscation, the SEC alleges, was an attempt to “skirt” the law.
The allegations of market manipulation stem in part from “Middleton plac[ing] a series of secret, manipulative trades in VERI … 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,” the SEC said.
Also, allegedly, yikes: manipulating unregistered tokens is going to be considered by the SEC as market manipulation per 15 U.S.C. § 78i, which is not something we've seen before in an unregistered ICO complaint as far as I can recall.https://t.co/mfoRqeywlZ pic.twitter.com/O6ZrGEIpOk
— Preston Byrne (@prestonjbyrne) August 13, 2019
‘Rap star net worth’
Investors purchased 51 million tokens during the 2017 ICO, for 69,000 ether (valued at $14.8 million at the time), and continued to buy in based on Middleton’s material deceptions, the SEC said.
As part of a misinformation campaign, Middleton said he had brokered deals with airlines, ultra-high net worth individuals, and “one of the largest stock exchanges in the Caribbean” to sell VERI for its various stated use cases, according to the SEC. In total, he claimed to have sold $35 million worth of tokens for institutional use.
In fact, by June 2018, only 75 of the roughly 2 million tokens were “exchanged for research or any other services.”
Middleton instead fabricated trading volume on the EtherDelta exchange to pump VERI’s price, the regulator said. He would then publicize the increasing volume or price to entice more investments.
The SEC quotes an email Middleton sent to an employee, detailing the first known instance of market manipulation: “The EtherDelta market is not accurate because of the very, very low volume. I will try to push more volume in… [t]his time next month, I’ll probably have all (as in every single) hip hop and rap star/producer beat in net worth.”
An additional $8 million of funds raised during the ICO are missing. In 2017, Middleton claimed hackers stole and liquidated the 36,000 tokens from company accounts.
In a separate document. SEC attorneys wrote:
And in just the last two weeks, after they learned that a Commission enforcement action against them was likely, Defendants transferred over $2 million of the remaining investor proceeds, at least in part to fund other endeavors.
Specifically, Middleton allegedly began transferring 10,000 ETH (worth about $2.3 million) of investor funds to “other digital asset addresses,” and another 750 ETH (about $172,500) to his personal account days after the SEC informed Middleton’s lawyers they would recommend an enforcement action.
SEC Complaint v Reggie Middleton by CoinDesk on Scribd
Deception image via Shutterstock