June 26, 2022

Volume XII, Number 177

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Increasing Due Diligence Before Token Listings to Uncover Fraud

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.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 144
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About this Author

Matthew E. Brown Boston Complex Litigation Attorney Nelson Mullins
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Matthew focuses on complex litigation and legal risk assessments and strategy.

Experience

Following is a selected sampling of matters and is provided for informational purposes only. Past success does not indicate the likelihood of success in any future matter.

  • For more than a decade, Matthew has represented numerous Fortune 50 and 500 companies in complex product and commercial litigation in areas including false claims act and unfair trade practices act claims, government...

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Matthew B. Lerner Atlanta Tort Lawyer Nelson Mullins Law Firm
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Matthew has a national practice that focuses on the representation and defense of manufacturers in products liability litigation, with an emphasis on medical device and pharmaceutical litigation. He routinely litigates matters in state and federal courts across the country, including multi-district litigation. Matthew has been part of numerous trial teams over the last few years, including for cases that were tried in courts in Arizona, California, Florida, Nevada, Oregon, Texas, and Wisconsin. He also has extensive experience managing electronic discovery issues in mass...

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Matthew G. Lindenbaum Financial Litigation Attorney Nelson Mullins
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Matthew represents companies in high-stakes litigation with an emphasis on class action defense in the automotive and financial services industries, including the emerging crypto-currency industry. He also defends companies and individuals in government investigations and enforcement actions involving the United States Department of Justice, the Securities and Exchange Commission, and conducts internal investigations for companies and special board committees.

Matthew is the leader of Nelson Mullins’ Boston Litigation Team and has been...

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Robert L. Lindholm White Collar Defense Lawyer Nelson Mullins
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Rob focuses his practice on government investigations and white collar defense, high stakes business litigation and class action defense, and e-discovery and litigation readiness. He represents financial institutions, Fortune 500 companies, private equity firms, hedge funds, and companies/individuals involved in the cryptocurrency industry in a wide array of internal/government investigations and commercial litigation.

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