SEC Puts the Freeze on $8 Million

Is Your Healthcare Provider Keeping Your Communications Compliant?
August 14, 2019
Emails Are Top Reason For Breaches Related To Healthcare Data
August 28, 2019
Show all

SEC Puts the Freeze on $8 Million

SEC freezes $8 million in assets in an emergency action to prevent bad apples from further squandering investor proceeds

The Securities and Exchange Commission (SEC) has filed a complaint and issued an emergency asset freeze against Reginald “Reggie” Middleton of Brooklyn, NY and two entities under his control, Veritaseum, LLC, and Veritaseum, Inc. The Commission alleges that the defendants defrauded investors by selling digital securities to investors and manipulating the market for those securities.

The defendants raised $14.8 million in 2017 and 2018. However, recently, Middletown transferred what the SEC calls “a significant amount” of those funds into his own account. To stop the further asset dissipation, the SEC secured an emergency freeze to preserve the remaining $8 million of the original $14.8 million raised.

Should investors trust a self-described “financial guru?”

Not necessarily. The SEC’s complaint, filed in federal court in Brooklyn, NY, alleges that Middleton, a self-described “financial guru,” marketed and sold securities called “VERI” tokens on the internet. He reached out to potential investors with an opportunity to participate in an initial coin offering (ICO), following with post-ICO offers and sales.

The defendants fed investors a host of misrepresentations and omissions. These included: oversized – but fictitious – claims of investor demand for VERI, stimulated by a series of self-placed manipulative trades to boost activity and prices; and claims that the product was ready to generate revenue when no such product existed. Meanwhile, Middleton misappropriated investors assets during the ICO phase of the offering, moving funds into his personal account.

According to Marc P. Berger, Director of the SEC’s New York Regional Office, once the Commission learned “about Middleton’s transfer of funds, we took quick action to prevent the further dissipation of investor assets,” freezing the remaining $8 million.

Exploiting investors through an unregistered offering

In an unregistered, fraudulent offering (from April 25, 2017, to May 26, 2017), the defendants sold 51 million of the 100 million VERI they had minted on the Ethereum blockchain they controlled. They pegged VERI’s value to the digital asset ether (ETH) on a 30-to-1 scale, which permitted investors to buy VERI during the offering’s ICO phase at 1/30th of ETH, or $1.60 to $8.

To skirt the federal securities laws’ registration requirements, Middleton attempted to portray VERI as “pre-paid fees” or “software,” likening VERI to gift cards. In reality, they were securities. As Middleton’s statements indicated, “today’s roughly $3.30 purchase of VERI tokens could yield ($3.30 x 5,000%) = $165” and that “purchase of Veritas goes directly to fund” the business. Middleton also told potential investors that Veritaseum had products ready to go to market that would replace brokers, banks, and hedge funds. He told investors concerned about the company’s dumping of unsold VERI into the market after their purchases not to worry, promising that unsold VERI would only be offered to “buy-side institutions.” Investors also were touted to fictitious deals purportedly netting $35 million, that increased VERI’s price.

According to the SEC, there were no products “ready to ship” that would net millions in revenue or replace financial institutions. Defendants never sold anywhere near the $35 million in VERI they claimed. Nor did they limit their post-ICO sales to institutional buyers. Instead, they continued to sell any remaining VERI to anyone who would buy it—largely individuals and in the secondary market. Adding insult to injury, they used VERI to compensate employees, pay debts, and to cover personal expenses.

In August 2018, the defendants began using proceeds to purchase precious metals. They told investors these commodities supported new tokens called VeGold, which were redeemable for physical precious metal or ETH. ETH proceeds from VeGold sales flowed directly to a Middleton account at an online digital asset trading platform.

What did the SEC do to stop the theft of investor cash?

Froze assets. On July 30, 2019, Commission staff informed the defendants’ counsel an enforcement action would be forthcoming. The next day, the defendants moved more than $2 million of the remaining proceeds from a blockchain address they controlled into other addresses and used a portion of those funds to purchase more precious metals. When the SEC’s counsel requested the defendants stop taking more money out of the accounts, they declined to comply through their counsel.

The SEC took further action. Middleton and the Veritaseum companies are charged with violating the registration and antifraud provisions of the U.S. federal securities laws. Middleton is further charged with violating the antifraud provisions for his manipulative trading. The SEC is seeking permanent injunctions, disgorgement plus interest and penalties, and a bar from offering digital securities. In addition, the SEC seeks an officer-and-director bar for Middleton.

What is the cost of financial guru-dom?

Investors hope, of course, that the cost to Middleton and Veritaseum will be significant, with a clawback of potential remaining funds beyond the $8 million – if they exist. Compliance, of course, appears to be nowhere in the picture, or, perhaps, complicit? But that’s not the case for your organization, of course, which is where Patrina can help. For more than 25 years, Patrina has helped compliance professionals like you stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. You could pay fines and restitution. Or you could call me at 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 records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.