As the U.S. Securities and Exchange Commission (“SEC”) continues to step up its enforcement concerning cryptocurrencies, U.S.-based exchanges should take note when conducting due diligence concerning tokens to list for trading to ensure that the projects are not smoke and mirrors.
That’s the lesson to be drawn from the SEC’s final judgment on consent against individuals associated with Centra Tech, Inc. for their initial coin offering of CTR tokens to investors. (Securities and Exchange Commission v. Sohrab (“Sam”) Sharma, et al., Civil Action No. 18-cv-02909 (S.D.N.Y. filed April 20, 2018).) Although Centra claimed partnerships with Visa, MasterCard, and the Bancorp, in fact, no such partnerships existed. Additionally, Centra created fictitious members of its executive team, along with fabricated bios, lied about the company’s “financial services” products, and manipulated trading of the CTR tokens to drive up the price and to increase additional investor interest and raise over $32 million. At certain points during the ongoing fraud, the funds were worth more than $60 million.
In the end, the SEC’s Crypto Assets and Cyber Unit obtained disgorgement of over $40 million from the individuals behind Centra (which was deemed satisfied by the orders of forfeiture entered in the parallel criminal proceeding against each of them in the Southern District of New York), officer-and-director bars, and permanent injunctions from conducting or offering any additional digital assets. Several individuals associated with Centra previously pled guilty to multiple counts of fraud and received multi-year prison sentences.
Although CTR was not listed on any cryptocurrency exchanges, exchanges are on notice that they will need to dig significantly below the surface of cryptocurrency projects before listing them for trading, or they too could face exposure when investors ultimately are defrauded.