SEC, Targeting Promoters, Enters the BitConnect Fray

The SEC last week sued several alleged promoters connected with BitConnect, accusing the individuals of participating in or aiding and abetting the offering of unregistered securities in violation of Section 5 of the Securities Act of 1933 and Section 15(a) of the Securities Exchange Act of 1934, and doing so without being registered as broker-dealers, as required by the federal securities laws. See SEC v. Brown, et al., No. 21 Civ. 4791 (JGK) (S.D.N.Y. May 28, 2021). According to the SEC, between January 2017 and January 2018, BitConnect, directly and through the named defendant promoters, solicited investors to participate in its “lending program,” whereby investors invested bitcoin with BitConnect in exchange for interest payments derived from value generated by a trading bot focused on profiting from the volatility of Bitcoin. According to the complaint, BitConnect guaranteed a “high rate of return” (as high as 40% per month) with “no risk” from the “safe” investment. The SEC contends the promoters—including U.S.-based Trevon Brown (a.k.a. Trevon James), Craig Grant, Ryan Maasen, and Michael Noble (a.k.a. Michael Crypto)—used social media and other communications to plug the lending program in return for referral commissions—a percentage of each investment resulting from their individual efforts and the efforts of their referral network. The SEC alleges that successful promoters also received so-called “development funds” that they could use for themselves or pass on to investors in their network. According to the complaint, the promoter defendants named in the lawsuit earned referral commissions and development funds ranging from more than $475,000 to $1.3 million. Another defendant, who allegedly served as the liaison between Bitconnect and the promoters, earned more than $2.6 million. The SEC seeks injunctive relief, disgorgement plus interest, and civil penalties. According to the SEC, its investigation is ongoing.

BitConnect’s legal troubles began in early 2018 when various state regulators, including Massachusetts and Texas) opened investigations and proceedings on BitConnect. At the same time, numerous investors filed lawsuits in federal court in Florida against BitConnect and some of the same promoters sued by the SEC last week. Those civil cases, which were consolidated, fell victim to multiple successful motion to dismiss and currently are on appeal to the Court of Appeals for the Eleventh Circuit.

What can we infer from the timing of the SEC’s lawsuit? Perhaps not much. BitConnect has been condemned variously as a Ponzi scheme, a scam, a fraud, and evidence of the “common knowledge” that the Bitcoin market is being manipulated. BitConnect, then, would seem a likely candidate for the SEC’s attention. It may seem curious that the SEC’s complaint comes more than three years after state regulators and private litigants focused their efforts on BitConnect. That could simply be a function of the time required to conduct the investigation. In its press release contemporaneous with the filing of the lawsuit, the SEC thanked “the Cayman Islands Monetary Authority, the Hong Kong Securities and Futures Commission, the Monetary Authority of Singapore, the Ontario Securities Commission, the Romanian Financial Supervisory Authority, and the Thailand Securities and Exchange Commission.” That is a lot of helping hands. Or perhaps the SEC has other developments on its mind. There are several applications for Bitcoin exchange-traded funds (ETFs) currently pending before the SEC, and the SEC has previously denied similar applications, inter alia, because of concerns about manipulation in the market for Bitcoin. So perhaps the timing is not so curious. Then again, the conduct at issue in the SEC’s lawsuit occurred in 2017-2018, making any connection to the state of the current market for Bitcoin more tenuous. At the very least, one must keep in mind the SEC’s mission to protect investors and maintain fair, orderly, and efficient markets; the SEC’s case against BitConnect reaffirms that one cannot assume that conduct well in the past has flown below or escaped the SEC’s pursuit of its mission.