Decoding the Surge in Cryptocurrency Enforcement Action: What It Means for Investors

• United States Sec. & Exch. Comm’n v. Cutting, 2:21-cv-00103-BLW (D. Idaho Sep. 28, 2022)

  This case is relevant because it discusses an enforcement action by the SEC against a cryptocurrency company for securities fraud and for selling unregistered securities. However, the case does not specifically mention any statutes or regulations that the SEC relied on in bringing the action, which would have been helpful information.

  “2:21-cv-00103-BLW 09-28-2022 UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiffs, v. SHAWN C. CUTTING, Defendants, CRYPTO TRADERS MANAGEMENT, LLC, JANINE M. CUTTING, GOLDEN CROSS INVESTMENTS, LLC, LAKE VIEW TRUST, and TYSON TRUST, Relief Defendants.”

  “The SEC alleges that Cutting lured investors into investing millions of dollars into his company, Crypto Traders Management, LLC (“CTM”), through false representations and then misappropriated investor funds for his personal use in violation of the anti-fraud provisions of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5. The SEC further claims that Cutting participated in the sale of unregistered securities in violation of the securities registration provisions of Sections 5(a) and (c) of the Securities Act.”

  “In the past several years, the SEC has aggressively ramped up enforcement activity against illegal altcoin offerings, as well as other types of fraud associated with altcoin offerings, such as soliciting bogus investment fees from investors or conducting old-fashioned Ponzi schemes dressed up as novel, “cuttingedge” investment opportunities. See, e.g, Statement on Potentially Unlawful Online Platforms for Trading Digital Assets, SECURITIES AND EXCHANGE COMMISSION (Mar. 7, 2018) https://www.sec.gov/news/public-statement/enforcement-tm-statementpotentially- unlawful-online-platforms-trading; Statement on Cryptocurrencies and Initial Coin Offerings, SECURITIES AND EXCHANGE COMMISSION (Dec. 11, 2017), https://www.sec.gov/news/publicstatement/ statement-clayton-2017-12-11; Investor Bulletin: Initial Coin Offerings, SECURITIES AND EXCHANGE COMMISSION (Dec. 11, 2017) https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings; Investor Alert: Bitcoin and Other Virtual Currency-Related Investments, SECURITIES AND EXCHANGE COMMISSION (May 7, 2014), https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investoralerts/ investor-39 B. The SEC Investigation and Overview of Allegations In October 2020, the SEC began investigating Cutting and CTM for securities fraud violations associated with Cutting’s cryptocurrency investment fund.”

• Sec. & Exch. Comm’n v. Terraform Labs. Pte. Ltd., 23-cv-1346 (JSR) (S.D.N.Y. Jul. 31, 2023)

  This case is relevant because it discusses the SEC’s authority to regulate certain crypto-assets as securities, and applies the Howey test to determine whether the defendants’ crypto-assets qualify as securities. However, the case does not specifically address recent enforcement actions, as the research request asks.

  “Terraform Labs, 2022 WL 2066414, at *4.”

  “Comm’n v. Alpine Sec. Corp., 308 F.Supp.3d 775, 790 (S.D.N.Y. 2018).”

  “Here, the SEC asserts that each of the defendants’ crypto-assets is an “investment contract,” one of the categories of products that the statute recognizes as a “security.” See Id. (stating that “the term ‘security’ means any . . . investment contract[.]”).”

  “For the reasons below, the Court concludes that the SEC has alleged facts sufficient to claim that the defendants’ crypto assets are securities.”

• U.S. Sec. & Exch. Comm’n v. Kik Interactive Inc., 492 F. Supp. 3d 169 (S.D.N.Y. 2020)

  This case is relevant because it discusses an enforcement action by the SEC against a cryptocurrency company for allegedly violating securities laws by offering and selling unregistered digital tokens. However, the case does not directly address any specific statutes or regulations, and it is not clear whether the case is still good law.

  “OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT ALVIN K. HELLERSTEIN, United States District Judge: The U.S. Securities and Exchange Commission (“SEC” or “Plaintiff”) filed this action against Kik Interactive Inc. (“Kik” or “Defendant”), alleging that Kik’s unregistered offering of digital tokens violated Section 5 of the Securities Act.”

  “As detailed further herein, I hold that undisputed facts show Kik offered and sold securities without a registration statement or exemption from registration, in violation of Section 5. Therefore, the SEC’s motion for summary judgment is granted, and Kik’s motion for summary judgment is denied.”

  “”Section 5 [of the Securities Act] provides that it is unlawful for any person to use the channels of interstate commerce to sell a security unless a registration statement is in effect as to such security.” SEC v. Verdiramo , 890 F. Supp. 2d 257, 268 (S.D.N.Y. 2011) ; see also 15 U.S.C. § 77e.”

• Sec. & Exch. Comm’n v. Premier Links, Inc., 14-CV-7375 (CBA) (ST) (E.D.N.Y. Jul. 27, 2022)

  This case is relevant because it discusses an enforcement action by the SEC against a company for violating securities laws. However, the case does not specifically mention cryptocurrency companies, so it may only be partially relevant.

  “14-CV-7375 (CBA) (ST) 07-27-2022 SECURITIES & EXCHANGE COMMISSION, Plaintiff, v. PREMIER LINKS, INC., THEIRRY RUFFIN a/k/a THEIRRY REGAN, DWAYNE MALLOY, CHRISTOPHER DAMON, Defendants, JOHN DESANTIS, ROBERT BLOOME, JOSEPH J. BYRNE, NICHOLAS SPINELLI, MARGARET RAVA a/k/a MARGARET AMATULLI, DARNEL JACKSON, FREDDIE ANDERSON, QUATRO HOLDINGS, INC., and NYC CLAIMS, INC., Relief Defendants.”

  “Premier Links, Inc. (“Premier Links”), Christopher Damon (“Daman”), Dwayne Malloy (“Malloy”), and Theirry Ruffin a/k/a Theirry Regan (“Ruffin”) (collectively, the “Premier Links Defendants”); and (2) Freddie Anderson (“Anderson”), Robert Bloome (“Bloome”), Joseph J. Byrne (“Bryne”), John DeSantis (DeSantis”), Darnel Jackson “(Jackson”), Margaret Rava a/k/a Margaret Amatulli (“Rava”), Nicholas Spinelli (“Spinelli”), Quatro Holdings, Inc. (“Quatro”), and NYC Claims, Inc. (“NYC Claims”) (collectively, the “Relief Defendants”). The SEC’s Complaint alleged violations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Rules promulgated thereunder (“Rule 10b-5”).”

  “The Court granted in part and denied in part the SEC’s Motion for Default Judgment. More specifically, the Premier Links Defendants were found liable as to the securities law violations and the Court issued a permanent injunction enjoining them from committing or aiding and abetting future violations of the securities laws.”

• Sec. & Exch. Comm’n v. Ripple Labs, Inc., 20 Civ. 10832 (AT) (SN) (S.D.N.Y. Mar. 11, 2022)

  This case is relevant because it discusses an enforcement action by the SEC against a cryptocurrency company for alleged non-compliance with securities laws. However, the excerpt does not make clear the ultimate outcome of the case, which would be helpful to know.

  “Id. Ripple did not hold an “initial coin offering” (“ICO”); “offer[] or contract[] to sell future tokens as a way to raise money to build an ecosystem;” or promise profits to any XRP holder. Id. Ripple also has no relationship with the majority of XRP holders, nearly all of whom purchased XRP from third parties on the open market. Id. Moreover, Ripple has no obligation to any counterparty to expend efforts on their behalf, and does not pool proceeds of XRP sales in a “common enterprise.” Id. ¶ 10.”

  “Ripple states that an ICO “commonly describes a fundraising mechanism where an entity sells directly to investors a digital asset that has no functionality or utility yet, as a means of raising funds for the operations of the entity.” Answer, Preliminary Statement ¶ 9 n.4.”

• Sec. & Exch. Comm’n v. LBRY, Inc., 26 F.4th 96 (1st Cir. 2022)

  This case is relevant because it discusses an SEC enforcement action against a company that allegedly failed to register a digital asset as an investment contract under the Securities Act. However, the case does not directly address the substantive question of whether the digital asset is a security, as it focuses on the denial of a motion to intervene.

  “The question presented in this appeal is whether the district court’s denial of intervention as of right to LBRY Foundation Inc. (“Foundation”) in a Securities and Exchange Commission (“SEC”) civil enforcement action against defendant LBRY, Inc. (not Foundation) was an abuse of discretion. The SEC charges that LBRY failed to register as investment contracts under Section 5 of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77e, an offering of digital assets called LBRY Credits (“LBC”).”

  “In SEC v. W.J. Howey, Co., the Supreme Court held that the test for an investment contract under the Securities Act is whether the scheme “involves [(1)] an investment of money [(2)] in a common enterprise [(3)] with profits to come solely from the efforts of others.” 328 U.S. 293, 301, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). In July 2021, Foundation filed a motion to intervene as of right and by permission. See Fed.”

  “Daggett v. Comm’n on Governmental Ethics & Election Pracs., 172 F.3d 104, 111-12 (1st Cir. 1999).”

• Sec. & Exch. Comm’n v. Mahabub, 411 F. Supp. 3d 1163 (D. Colo. 2019)

  This case is relevant because it discusses an enforcement action by the SEC against a company for violating securities laws. However, the case does not specifically mention cryptocurrency companies, so it is not a direct answer to the research request.

  “William J. Martinez, United States District Judge This is a securities fraud case that Plaintiff Securities and Exchange Commission (“SEC”) brought against Taj “Jerry” Mahabub (“Mahabub”) and the company he founded, GenAudio, Inc. (“GenAudio”) (together, “Defendants”). The SEC asserted various theories of liability under the Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§ 77a et seq. , and the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78a et seq.”

  “In the Summary Judgment Order, the Court found no genuine dispute that Mahabub, acting on GenAudio’s behalf, knowingly or recklessly made six materially false or misleading statements in connection with two offerings of GenAudio securities, in violation of Exchange Act § 10(b) ( 15 U.S.C. § 78j(b) ), and Rule 10b-5(b) ( 17 C.F.R. § 240.10b-5(b) ). Because this is an SEC enforcement action, the SEC did not need to prove that anyone relied to his or her detriment on those statements.”

  “Accordingly, they had violated Securities Act § 5(a) and (c) ( 15 U.S.C. §§ 77e(a) & 77e(c) ).”

• United States Sec. & Exch. Comm’n v. Beaxy Dig., Civil Action 1:23-cv-1962 (N.D. Ill. Mar. 29, 2023)

  This case is relevant  because it involves an enforcement action by the SEC against a cryptocurrency company for alleged violations of securities laws. However, the excerpt provided does not make clear the specific violations at issue or the outcome of the case.

  “Among other things, Defendants Windy, Murphy, Abbott, and Peterson have agreed to cease all operations of the crypto trading platform operating at beaxy.com by April 15, 2023, at 4:00 p.m. ET. This undertaking is reflected in paragraph 4(b) of their consents and paragraph V(b) of the proposed Final Judgments of Windy, Murphy, and Abbott, and paragraph III(b) of the proposed Final Judgment of Peterson. (See Exhibits 1 (Windy), 2 (Murphy), 3 (Abbott), and 8 (Peterson).) 5. Entry of the proposed Final Judgments would resolve all issues in this litigation as against Defendants Windy, Murphy, Abbott, Braverock Investments, Future Digital, Windy Financial, Future Financial, and Peterson. The SEC’s claims against Defendants Beaxy Digital, Ltd. and Artak Hamazaspyan remain pending. 6. Defendants Windy, Murphy, Abbott, Braverock Investments, Future Digital, Windy Financial, Future Financial, and Peterson do not oppose this Motion.”

• Sec. & Exch. Comm’n v. Esposito, Civil Action No. 1:16-cv-10960-ADB (D. Mass. Nov. 21, 2017)

  This case is relevant to the research request because it discusses an enforcement action by the SEC against individuals and companies for allegedly violating federal securities laws. However, the case does not specifically mention cryptocurrency companies, so it is not a direct answer to the research request.

  “Civil Action No. 1:16-cv-10960-ADB 11-21-2017 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CHRISTOPHER ESPOSITO, ANTHONY JAY PIGNATELLO, JAMES GONDOLFE, RENEE GALIZIO, LIONSHARE VENTURES LLC, and CANNABIZ MOBILE, INC., Defendants. BURROUGHS, D.J. MEMORANDUM AND ORDER The Securities and Exchange Commission (“SEC”) filed this civil enforcement action against two corporate entities and four individuals, alleging that they schemed to offer or sell securities without registration or exemption in violation of federal securities laws and regulations. [ECF No. 1] (“Complaint”).”

  “Individual defendant Christopher Esposito has also been defaulted under Fed.”

  “As the Court explained in two prior decisions in this case, see [ECF Nos. 62, 90], a prima facie case for a violation of Section 5 requires a showing that: (1) no registration statement was in effect as to the securities; (2) the defendant directly or indirectly offered to sell or sold the securities; and (3) the offer or sale was made in connection with the use of interstate transportation, communication, or the mails. See SEC v. Spence & Green Chem. Co., 612 F.2d 896, 901-02 (5th Cir. 1980).”

• Alpine Sec. Corp. v. Fin. Indus. Regulatory Auth., 2:20-cv-00794-DBB-DBP (D. Utah Sep. 7, 2021)

  “2:20-cv-00794-DBB-DBP 09-07-2021 ALPINE SECURITES CORPORATION, a Utah Corporation, Plaintiff, v. FINANCIAL INDUSTRY REGULATORY AUTHORITY, a Delaware Corporation, Defendants.”

  “BACKGROUND Alpine Securities Corporation (Alpine) is a registered broker-dealer, clearing firm, and member of FINRA.”

  “FINRA has been authorized under the Securities Exchange Act of 1934 (Exchange Act) to create rules and regulations regarding how it conducts proceedings and investigations.”

  “FINRA moved to dismiss the case on six grounds: (1) the Exchange Act’s exclusive review process strips this court of subject-matter jurisdiction; (2) Alpine lacks a private right of action to pursue claims; (3) FINRA is immune from claims arising from the performance of its regulatory functions; (4) Alpine’s due process claim fails because FINRA is not a state actor; (5) Alpine’s declaratory relief claims are meritless; and (6) Alpine admitted it was not entitled to injunctive relief.”

  “Alpine brings this action because it is concerned about FINRA’s process for conducting the disciplinary hearing against it.”

• Scottsdale Capital Advisors Corp. v. Fin. Indus. Regulatory Auth., 390 F. Supp. 3d 72 (D.D.C. 2019)

  “MEMORANDUM OPINION CHRISTOPHER R. COOPER, United States District Judge Jack Dempsey once observed that “the best defense is a good offense.””

  “For the past decade, Arizona-based securities brokerage Scottsdale Capital Advisors has been in the cross-hairs of its regulator, the Financial Industry Regulatory Authority (“FINRA”). FINRA has fined, sanctioned, and censured Scottsdale and its officers multiple times for a host of violations involving Scottsdale’s dealings in unregistered penny stocks.”

  “Its most recent suit failed in the District Court for the District of Maryland and then at the Fourth Circuit Court of Appeals for lack of subject-matter jurisdiction.”

  “A. Regulatory Background The Securities Exchange Act of 1934 (“Exchange Act”) authorizes the Securities and Exchange Commission (“SEC”) to register self-regulatory organizations (“SROs”).”

• Soc. Life Network, Inc. v. Peak One Opportunity Fund, L.P., 21-21373-Civ-GAYLES/TORRES (S.D. Fla. Feb. 13, 2023)

  “First, Social Life alleges that the loan agreements it entered into with the Fund are void because the agreements violate Section 29(b) of the Securities Exchange Act of 1934. Second, Social Life alleges that the loan agreements are void because the agreements violate Section 517.12(1) of the Florida Securities and Investor Protection Act.”

  “As amended, Section 29(b) of the Exchange Act provides that every contract “made in violation of any provision of this chapter or of any rule or regulation thereunder . . . shall be void . . . as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract.” 15 U.S.C. § 78cc(b) (emphasis added). Like the ubiquitous Section 10(b) lawsuit, Social Life maintains that Section 29(b) provides it with an implied cause of action for recission of the loan agreements.”

  “The Supreme Court has established that, where an implied cause of action exists under the Exchange Act, an implied statute of limitations generally governs the time within which a plaintiff must bring its implied cause of action.”

• Commodity Futures Trading Comm’n v. McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018)

  “Reuters Staff, The Coincheck Hack and the Issue With Crypto Assets on Centralized Exchanges , Jan. 29, 2018 (“Hackers have stolen roughly 58 billion yen ($532.6 million) from Tokyo-based cryptocurrency exchange Coincheck Inc., raising questions about security and regulatory protection in the emerging market of digital assets.”); Alex Hern, A History of Bitcoin Hacks , The Guardian, Mar. 18, 2014 (“25,000 bitcoins were stolen from their wallet after hackers compromised the Windows computer they were using. Even at the time, that sum was worth more than $500,000; it would now be worth a little less than £10m.”).”

  “The CFTC, and other agencies, claim concurrent regulatory power over virtual currency in certain settings, but concede their jurisdiction is incomplete. See App. C, CFTC Chair, Congressional Testimony (“[C]urrent law does not provide any U.S. Federal regulator with such regulatory oversight authority over spot virtual currency platforms [not involving fraud] operating in the United States or abroad.”); cf.”

  “Potential Virtual Currency Regulation Until Congress acts to regulate virtual currency the following alternatives appear to be available: 1. No regulation.”

• Commodity Futures Trading Comm’n v. McDonnell, 18-CV-361 (E.D.N.Y. Mar. 6, 2018)

  “As their value has increased, online exchanges have become more accessible allowing more members of the public to trade and invest in virtual currencies. While there are many Bitcoin exchanges around the world, Coinbase has been the dominant place that ordinary Americans go to buy and sell virtual currency.”

  “T. Gorman, Blockchain, Virtual Currencies and the Regulators, Dorsey & Whitney LLP, Jan. 11, 2018 (“As the CFTC recently admitted, U.S. law does not provide for ‘direct comprehensive U.S. regulation of virtual currencies. To the contrary a multi-regulatory approach is being used.'”).”

  “See, e.g., SEC v. Plexcorps, 17-CV-7007 (E.D.N.Y.”

• All. for Fair Bd. Recruitment v. Sec. & Exch. Comm’n, No. 21-60626 (5th Cir. Oct. 18, 2023)

  “In rejecting the nondelegation challenge, the court discussed the relationship between SROs and the SEC, noting that “[i]n case after case, the courts have upheld this arrangement, reasoning that the SEC’s ultimate control over the rules and their enforcement makes the SROs permissible aides and advisors.” Id. at 229 (citations omitted). The case weighs against petitioners’ assertions regarding private nondelegation and says nothing at all about state action. Accordingly, we hold that Nasdaq is not a state actor subject to constitutional constraints. B. Petitioners argue in the alternative that the SEC’s involvement with and approval of Nasdaq’s Rules render the Rules subject to constitutional scrutiny.”

• U.S. Sec. & Exch. Comm’n v. Sierra Brokerage Servs., Inc., 712 F.3d 321 (6th Cir. 2013)

  “The Securities and Exchange Commission filed this civil enforcement action against twelve Defendants, alleging that they violated registration, disclosure, and anti-fraud provisions of federal securities law. The SEC moved for summary judgment against the Defendants, and the Defendants made a cross-motion for summary judgment.”

  “In Count I, the SEC claimed that Tsai violated Sections 5(a) and 5(c) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77e(a), (c), by trading securities in interstate commerce without filing registration statements. In Counts VIII and IX, the SEC alleged that Tsai failed to disclose his beneficial ownership of securities in violation of Section 13(d) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78m(d)(1)-(2), and Rules 13d–1(a) and 13d–2(a) thereunder, 17 C.F.R. § 240.13d–1,–2, and that Tsai violated Section 16(a) of the Exchange Act, 15 U.S.C. § 78p(a), and Rule 16a–3 thereunder, 17 C.F.R. § 240.16a–3. The SEC moved for summary judgment against Tsai on Counts I, VIII, and IX; Tsai made a cross-motion for summary judgment.”

• Hodl Law, PLLC v. Sec. & Exch. Comm’n, 22-cv-1832-L-JLB (S.D. Cal. Jul. 28, 2023)

  Plaintiff claims that the SEC has pursued civil enforcement action against a defendant for trading in crypto assets, alluding that the Ethereum Network is a security in SEC v. Wahi, 2023 WL 3582398, *1, 22-cv-1009 (W.D. Wash. July 21, 2022), but the court in Wahi did not determine whether the crypto assets at issue were securities. Instead, Wahi indicates nothing more than what Plaintiff asserts, that the SEC is filing lawsuits against individuals trading in crypto currency under the Securities Act.”

  “Plaintiff’s claim is not ripe under the constitutional ripeness doctrine. The crux of Hodl Law’s complaint is that the SEC has not made a final decision with regard to whether the Ethereum Network and Ether DCU’s are securities under the Securities Act, but this does not constitute a substantial controversy between Hodl Law and the SEC to warrant issuance of a declaratory judgment.”

  “Whether the Ethereum Network and Ether DCU’s are securities is a purely legal question not fit for review “until the scope of the controversy has been reduced to more manageable proportions, and its factual components fleshed out, by concrete action applying the regulation to the claimant’s situation in a fashion that harms or threatens to harm him.””

• Securities and Exchange Comm. v. Cavanagh, 155 F.3d 129 (2d Cir. 1998)

  “Nos. 98-6111, 98-6119, 98-6129 Argued: July 17, 1998 Decided September 2, 1998 The Securities and Exchange Commission brought action against multiple defendants for violations of the registration and antifraud provisions of the federal securities laws. The United States District Court for the Southern District of New York, Denise Cote, J., entered a preliminary injunction, and the defendants appealed.”

  “The SEC alleged that the defendants violated Sections 5 and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77e 77q(a); Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1997).”

  “The district court found that the SEC established a substantial likelihood of success in proving that Levy — along with the other defendants — violated Section 5 of the Securities Act of 1933 by selling and offering to sell unregistered securities.”

  “An asset freeze requires a lesser showing; the SEC must establish only that it is likely to succeed on the merits.”

• Securities and Exchange Commission v. Crofters, Inc., 351 F. Supp. 236 (S.D. Ohio 1972)

  “It has brought this action under Section 20(b) of the Securities Act of 1933, 15 U.S.C. § 77t(b) and Section 21(e) of the Exchange Act of 1934, 15 U.S.C. § 78u(e). The jurisdiction of this Court is properly invoked pursuant to Section 22(a) of the 1933 Act, 15 U.S.C. § 77v(a) and Section 27 of the 1934 Act, 15 U.S.C. § 78aa. SEC seeks to enjoin pursuant to its five count complaint, allegedly fraudulent and deceptive practices committed by the nineteen corporate and individual defendants. These statutory provisions are nearly identical and both confer broad equitable powers upon this Court.”

  “Count I of the complaint, directed against all of the defendants except LCM Corporation and Lore, alleges violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), in the offer and sale of securities, in the form of corporate promissory notes. Specifically these defendants are charged with misrepresenting to the purchasers that the notes in question were rated prime by the National Credit Office (hereinafter N.C.O.), a division of Dun Bradstreet.”

Relevant Statutes