SEC targets social media influencers over crypto scam

The US Securities and Exchange Commission has brought charges against three companies for their role in offering and selling unregistered cyrpto asset securities - Tronix (TRX) and BitTorrent (BTT) - at the same time charging some of the best known social media influencers for their role in promoting the crypto assets.

According to the SEC statement, the US financial services regulator brought charges against Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (formerly BitTorrent), all owned by Justin Sun - described as an antrepreneur.

Sun and his companies were additionally charged with "fraudulently manipulating the secondary market for TRX through extensive wash trading, which involves the simultaneous or near-simultaneous purchase and sale of a security to make it appear actively traded without an actual change in beneficial ownership, and for orchestrating a scheme to pay celebrities to tout TRX and BTT without disclosing their compensation."

The celebrities charged are mostly known for their engagement and use of social media to reach millions of followers:

•             Lindsay Lohan

•             Jake Paul

•             DeAndre Cortez Way (Soulja Boy)

•             Austin Mahone

•             Michele Mason (Kendra Lust)

•             Miles Parks McCollum (Lil Yachty)

•             Shaffer Smith (Ne-Yo)

•             Aliaune Thiam (Akon)

"The SEC's complaint, filed in US District Court for the Southern District of New York, alleges that Sun and his companies offered and sold TRX and BTT as investments through multiple unregistered "bounty programs," which directed interested parties to promote the tokens on social media, join and recruit others to Tron-affiliated Telegram and Discord channels, and create BitTorrent accounts in exchange for TRX and BTT distributions. The complaint further alleges that Sun, BitTorrent Foundation, and Rainberry offered and sold BTT in unregistered monthly airdrops to investors, including in the United States, who purchased and held TRX in Tron wallets or on participating crypto asset trading platforms. According to the complaint, each of these unregistered offers and sales violated Section 5 of the Securities Act."

"The Commission also alleges that Sun violated the antifraud and market manipulation provisions of the federal securities laws by orchestrating a scheme to artificially inflate the apparent trading volume of TRX in the secondary market. From at least April 2018 through February 2019, Sun allegedly directed his employees to engage in more than 600,000 wash trades of TRX between two crypto asset trading platform accounts he controlled, with between 4.5 million and 7.4 million TRX wash traded daily. This scheme required a significant supply of TRX, which Sun allegedly provided. As alleged, Sun also sold TRX into the secondary market, generating proceeds of $31 million from illegal, unregistered offers and sales of the token."

Gary Gensler, SEC Chair, said: "This case demonstrates again the high risk investors face when crypto asset securities are offered and sold without proper disclosure."

"As alleged, Sun and his companies not only targeted US investors in their unregistered offers and sales, generating millions in illegal proceeds at the expense of investors, but they also coordinated wash trading on an unregistered trading platform to create the misleading appearance of active trading in TRX. Sun further induced investors to purchase TRX and BTT by orchestrating a promotional campaign in which he and his celebrity promoters hid the fact that the celebrities were paid for their tweets."

Gurbir S. Grewal, Director of the SEC's Division of Enforcement, said: "While we're neutral about the technologies at issue, we're anything but neutral when it comes to investor protection."

"As alleged in the complaint, Sun and others used an age-old playbook to mislead and harm investors by first offering securities without complying with registration and disclosure requirements and then manipulating the market for those very securities. At the same time, Sun paid celebrities with millions of social media followers to tout the unregistered offerings, while specifically directing that they not disclose their compensation. This is the very conduct that the federal securities laws were designed to protect against regardless of the labels Sun and others used."

The SEC reported that all the celebrities chargted, with the exception of Cortez Way and Mahone, agreed to pay a total of more than $400,000 in "disgorgement, interest, and penalties to settle the charges, without admitting or denying the SEC's findings."