Bad month for Chinese traders and digital token issuers

October was a bad month for Chinese traders and digital token issuers, a good month for the Securities and Exchange Commission (SEC).

In action number one, the SEC filed an emergency action and obtained an asset freeze against 18 traders allegedly scheming to manipulate more than 3,000 U.S.-listed securities for over $31 million in illicit profits.

Is it stock manipulation pure and simple?

Yes, according to the SEC. The SEC’s complaint alleges the traders, primarily based in China, manipulated the prices of thousands of thinly traded securities by faking the appearance of trading interest and activity in those stocks. This “movement” enabled the traders to profit by artificially boosting or depressing stock prices. To drive down a stock’s price prior to buying larger amounts at that artificially low price, the SEC alleges that the traders placed multiple small sell orders through multiple accounts. Once they accumulated their position, the traders flipped the script, placing several small buy orders to push prices up to then sell at a profit.

The SEC’s complaint filed in federal court in Boston charges the traders with violating and aiding and abetting violations of the antifraud provisions of the securities laws. In addition to the asset freeze and other emergency relief obtained, the SEC seeks disgorgement of ill-gotten gains plus interest, penalties, and injunctive relief.

“We allege,” says Joseph G. Sansone, Chief of the SEC’s Market Abuse Unit, “that defendants engaged in an extensive manipulation scheme and went to great lengths to evade detection, placing trades in over one hundred separate accounts at several different brokerage firms and submitting falsified documents to open new accounts in the names of others. Despite their efforts, the SEC staff was able to uncover the connections between these seemingly unrelated accounts and expose the defendants’ coordinated pattern of illicit trading.”

In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts announced criminal charges against two of the traders, Jiali Wang and Xiaosong Wang.

Should investors be wary of new blockchain offerings?

It is always good to be diligent. For example, the SEC also just put a halt to an alleged $1.7 billion unregistered digital token offering. The Commission filed an emergency action and obtained a temporary restraining order against two offshore entities it alleges conducted an unregistered, ongoing digital token offering in the U.S. and overseas that raised more than $1.7 billion in investor funds.

Can you avoid federal securities law by calling your product “cryptocurrency?”

No, not according to the SEC. In January 2018, Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc. began raising capital to finance the companies’ business, which included the development of their own blockchain, the “Telegram Open Network” or “TON Blockchain,” and the mobile messaging application Telegram Messenger.

The defendants sold approximately 2.9 billion digital tokens called “Grams” at discounted prices to 171 initial purchasers worldwide. More than one billion Grams were sold to 39 U.S. purchasers.

At its blockchain launch (no later than October 31, 2019), Telegram promised to deliver the Grams to the initial purchaser. At that time, these purchasers and Telegram would be able to sell billions of Grams into U.S. markets. However, according to the SEC complaint, the defendants allegedly failed to register their offers and sales of Grams, in violation of the registration provisions of the Securities Act of 1933, because they are securities.

“We have repeatedly stated that issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token,” says Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”

According to Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement, the SEC’s “emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold.” We allege that the defendants have failed to provide investors with information regarding Grams and Telegram’s business operations, financial condition, risk factors, and management that the securities laws require.”

The SEC’s complaint, filed in federal district court in Manhattan, charges both defendants with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act and seeks certain emergency relief, as well as permanent injunctions, disgorgement with prejudgment interest, and civil penalties.

Regulatory compliance scores this October:

Chinese bad actors: 0.

SEC regulators: 2

Do these bad actors make a case for compliance?

Of course, they do. It is difficult, but not impossible to stand in the way of system-wide organization corruption. That’s where Patrina comes in. For more than 25 years, Patrina has been helping compliance professionals like you keep track of “bad apples,” and stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture & file storage, and compliant records archiving specifically designed for the financial services community. Be smart. Be covered.Let’s talk.