December 13, 2017

December 13, 2017

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The SEC’s Cyber Specialty Unit Strikes With Its First Case

On December 4, 2017, the SEC Enforcement Division’s new Cyber Unit filed its first enforcement case for a fraudulent initial coin offering (ICO). This new specialty unit was established in late September to increase the Enforcement Division’s focus on cyber-related securities law violations. The focus areas of this unit include securities laws violations involving “blockchain” technologies and ICOs.

An ICO is a fundraising event in which an entity offers participants a unique “coin” or “token” in exchange for consideration. ICOs are typically announced and promoted through public online channels and issuers usually release a “whitepaper” describing the project and the terms of the ICO. The tokens are issued on a blockchain, or cryptographically secured ledger. Generally, coins or tokens may entitle holders to certain rights, such as rights to profits. These coins or tokens may also be listed on online platforms, often called virtual currency exchanges, and are often immediately tradeable for crypto currency.

The complaint, SEC v. PlexCorps, alleges that the defendants fraudulently raised up to $15 million in an ICO from thousands of investors since August 2017 by falsely promising a 13-fold profit in less than a month. The defendants include PlexCorps, its founder – a recidivist Quebec-based securities law violator – and his business partner. The SEC’s complaint alleges that the defendants marketed and sold securities called “PlexCoin” over the internet to investors in the U.S. and elsewhere, claiming that investments in PlexCoin would yield “outlandish rewards” of a 1,354 percent profit in less than 29 days. The complaint further charges the main defendants with violating the anti-fraud and registration provisions of the federal securities laws, as well as misappropriating investment assets on “extravagant personal expenditures.” The SEC also obtained an emergency court order to freeze the assets of the main defendants.

The SEC’s Chief of the Cyber Unit admonished, “This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing,” and “[w]e acted quickly to protect retail investors from this initial coin offering’s false promises.”

This first action by the SEC’s new Cyber Unit confirms that the SEC will be devoting additional resources and prioritizing its policing in these areas and bringing cases that involve cyber-related violations of the federal securities laws. 

©2017 Drinker Biddle & Reath LLP. All Rights Reserved

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About this Author

Katherine Armstrong, Data Privacy Lawyer, Drinker Biddle Law firm
Counsel

Katherine E. Armstrong is counsel in the firm’s Government & Regulatory Affairs Practice Group where she focuses her practice on data privacy issues, including law enforcement investigations, and research and analysis of big data information practices including data broker issues.

Katherine has more than 30 years of consumer protection experience at the Federal Trade Commission (FTC), where she served in a variety of roles, including most recently as a Senior Attorney in the Division of Privacy and Identity Protection.  In the Division of...

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James G. Lundy, Drinker Biddle, regulatory investigations lawyer, financial services compliance attorney
Partner

James G. Lundy represents clients in financial regulatory investigations, financial services compliance and governance, white collar criminal investigations, and complex business litigation.

With 12 years of senior Securities and Exchange Commission (SEC) experience and more than two years of in-house experience at a futures and securities brokerage firm, Jim has developed an in-depth working knowledge of the various regulatory bodies with enforcement oversight of the securities and futures industries.

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