July 14, 2020

Volume X, Number 196

July 14, 2020

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July 13, 2020

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Report Cryptocurrency Fraud and Earn a Whistleblower Award

Cryptocurrency is a digital asset that uses cryptography and blockchain technology to make secure financial transactions independent of a central bank. Since 2017, companies and individuals have raised more than $20 billion using initial coin offerings (ICOs). In 2018 alone, more than 2,200 ICOs raised $11.4 billion. As investors continue to pour money into ICOs, the U.S. Securities and Exchange Commission (SEC) continues to uncover fraudulent ICOs.

According to a recent SEC investor bulletin, “[f]raudsters often use innovations and new technologies to perpetrate fraudulent investment schemes” and “it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.” Since 2016, the SEC has significantly increased the number of enforcement actions against companies and individuals for fraud or other violations in connection with cryptocurrencies and ICOs:

  • 2016: 1 cryptocurrency enforcement action;
  • 2017: 5 cryptocurrency enforcement actions;
  • 2018: 19 cryptocurrency enforcement actions; and
  • 2019: 17 cryptocurrency enforcement actions.

Fortunately for whistleblowers, the SEC Whistleblower Program issues awards for original information about cryptocurrency fraud.

SEC Whistleblower Program

Under the SEC Whistleblower Program, the SEC issues awards to eligible whistleblowers who provide original information about violations of the federal securities laws, including fraudulent cryptocurrencies and ICOs. When the information provided leads to enforcement actions with total monetary sanctions in excess of $1 million, a whistleblower may receive an award of between 10 and 30 percent of the total monetary sanctions collected. Since 2012, the SEC has issued more than $450 million in awards to whistleblowers. The largest SEC whistleblower awards to date are $50 million, $39 million, and $37 million.

The SEC Whistleblower Program also protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Whistleblowers can even submit a tip anonymously to the SEC if represented by an attorney in connection with their tip.

Cryptocurrency Fraud or Violations That May Qualify for an Award

The most common violations committed by ICOs are failing to register the digital assets as securities, making false and misleading statements to potential and actual investors, and misappropriating investor funds / operating Ponzi schemes.

Unregistered ICOs

An ICO is considered a “security” under the U.S. federal securities laws when it shares the same characteristics as an “investment contract.” According to the U.S. Supreme Court’s 1946 Howey decision, an investment contract exists when:

  1. A person invests money
  2. In a common enterprise
  3. With a reasonable expectation of profits derived solely from the efforts of others.

When an investment contract exists, the federal securities laws require all offers and sales of the security (that is, the ICO) to either be registered under its provisions or to qualify for an exemption from registration. A failure to register is a violation of the Securities Act of 1933. The SEC has brought several enforcement actions against companies for this violation, including:

  • SEC v. Telegram: $1.7 billion unregistered digital token offering; and
  • SEC v. Kik: $100 million unregistered digital token offering.

For more information about the registrations requirements for ICOs, see the SEC’s Framework for ‘Investment Contract’ Analysis of Digital Assets.

False and Misleading Statements 

The SEC has also brought enforcement actions against ICOs for making false and misleading statements to potential and actual investors. For example, in SEC v. Meta Coin 1 Trust, the defendants claimed that the offering:

  • Was backed by a $1 billion art collection or $2 billion of gold;
  • Was risk-free and would never lose value; and
  • Could return up to 224,923%.

These statements violated, among other things, section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Theft of Investor Funds / Ponzi Schemes

In many enforcement actions against fraudulent ICOs, the SEC discovered that the defendants were merely operating a Ponzi scheme. For example, in SEC v. Argyle Coin, Argyle Coin (a purported cryptocurrency company) raised more than $30 million from 300 investors in the U.S. and Canada by falsely promising investors that the companies would invest in whole diamonds to cut down and sell for huge profits. Instead of using the investor funds as advertised, Argyle Coin’s founders misused or misappropriated more than $10 million to pay prior investors their purported returns and for personal expenses.

For more information about Ponzi schemes using virtual currencies, see the SEC’s investor alert.

How to Report Cryptocurrency Fraud

To report cryptocurrency or ICO fraud and qualify for an award under the SEC Whistleblower Program, the SEC requires that whistleblowers or their attorneys report the tip online through the SEC’s Tip, Complaint or Referral Portal or mail/fax a Form TCR to the SEC Office of the Whistleblower. Prior to submitting a tip, whistleblowers should consult with an experienced SEC whistleblower attorney and review the SEC whistleblower rules. A skillful analysis may be the difference between a multi-million dollar whistleblower award and no award at all.

© 2020 Zuckerman LawNational Law Review, Volume X, Number 142


About this Author

Jason Zuckerman, Whistleblower Litigation Attorney, Washington DC  Law Firm

Described by the National Law Journal as a “leading whistleblower attorney,” Jason Zuckerman litigates whistleblowe r retaliation, whistleblower rewards, wrongful discharge, and other employment-related claims. His practice focuses on representing senior executives and senior professionals in high-...

(202) 262-8959
Matthew Stock, CPA, Auditor, Zuckerman Law Firm
Certified Public Accountant

Matthew Stock is the Director of the Whistleblower Rewards Practice at Zuckerman Law. He is an attorney, Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor. Mr. Stock has audited a broad range of industries, both domestically and internationally, including large public companies and financial institutions. As an auditor, Mr. Stock developed an expertise in financial statement analysis and fraud recognition.

At Zuckerman Law, Mr. Stock leverages his experience as an attorney, CPA, CFE and external auditor to assist whistleblowers investigate and disclose complex financial frauds to the government. His practice focuses on representing whistleblowers in rewards cases at the SECCFTCDOJ and IRS. In addition, Mr. Stock assists whistleblowers in Sarbanes-Oxley whistleblower retaliation cases, analyzing a wide range of accounting issues, including financial statement fraudinadequate internal controls, and issuer disclosure violations.