While the SEC’s case against Ripple Lab received the most attention from the industry in the past couple of months, there has been some other enforcement-related news, which are worth to be reviewed.
One of the very important decisions had been made in the case of SEC v. Ripple Lab. As part of the ongoing litigation, the agency sought to introduce to evidence the past communication between Ripple Lab and its attorney to prove that the company knew that its token sale could be considered an unregistered securities offering in violation of the U.S. securities law.
Earlier, the SEC filed a Motion asking to strip the attorney-client privilege from certain communication between Ripple Lab and its attorneys and compel the company to produce memos discussing the sale of XRP token with the company’s attorneys. The Judge denied this Motion based on the rationale that the privilege “encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.”
Although the Ripple Lab’s battle with the SEC is far from being over, this is a very important interim decision for the case and the industry overall, showing that the communication between clients and their lawyers is protected and cannot be used against clients.
While everyone’s eyes are on Ripple’s case, the SEC continues to enforce the U.S. securities law and bring charges against individuals and companies who violate such law. In May, the SEC filed a complaint with the U.S. District Court Southern District of New York against BitConnect and five promoters for conducting an unregistered offering and sale of securities.
According to the complaint, Trevor Brown, Craig Grant, Joshua Jeppesen, Ryan Maasen, and Michael Noble acted as promoters and, together with BitConnect, raised approximately 2 billion dollars from investments into the BitConnect “lending program.” In exchange, the promoters received a percentage of the invested funds each of them raised. At the same time, none of these promoters were registered with the SEC by broker-dealers in violation of the U.S. securities law.
BitConnect promised investors as high as 40% monthly return from the company’s Bitcoin trading operations. In addition, BitConnect offered referral commissions to existing investors who referred new investors to the lending program. The referral commissions ranged between 0.2% and 7%, depending on the referrer’s level. Many may remember a very aggressive marketing campaign of BitConnect filled with a large number of testimonials from investors with referral links to the BitConnect lending program.
For their promotional efforts, five promoters listed in the SEC’s complaint together received over 5.5 million dollars. The SEC’s complaint charges the promoter defendants with violating the registration provisions of the federal securities laws and Jeppesen with aiding and abetting BitConnect’s unregistered offer and sale of securities. The complaint seeks injunctive relief, disgorgement plus interest, and civil penalties.
In April, the FBI issued an interesting report about the rise in the use of cryptocurrency in business email compromise schemes. Although the scams involving compromised emails had been around for decades, the use of cryptocurrency in such scams became a rapidly increasing trend in recent years.
The scammers operate in a similar manner to the wire transfer frauds when a business or personal email accounts get compromised through social engineering or computer intrusion with the request to transfer funds to the scammers’ bank account. But with the growing acceptance and wider use of cryptocurrencies in business and personal transactions, the scammers direct the victims to transfer crypto funds to the scammers’ wallets.
It is understandable why these crimes become more and more common. Although most crypto transactions can be traced on the blockchain, there is no mechanism to identify the owner of the wallet. Crypto transactions are much faster than bank wires, and they cannot be reversed. Being a more efficient alternative to bank transactions, unfortunately, crypto transfers are also used by criminals in all kinds of scams, including email-related.
According to the FBI report, the mentioning of cryptocurrencies in the business email compromise complaints was minimal before 2018, but since then, the numbers have more than doubled every year. Just last year alone, there were 20 crimes reported with an average monetary loss exceeding 10 million dollars. It is anticipated that this number will continue to rise; therefore, the FBI warns people to be extra cautious when receiving requests for crypto funds transfers over an email.
This summary is provided by Katrina Arden, an attorney licensed in California, Puerto Rico, and the Russian Federation. Katrina Arden, Esq. is a frequent guest at blockchain conferences. She consults startups, including those operating in the blockchain field. Attorney Katrina Arden authored many legal articles and participated in discussions with multiple countries’ regulators on developing and implementing the blockchain and cryptocurrency law.