Last week, the SEC brought an enforcement action against Xue Samuel Lee and Brenda Indah Chunga (a/k/a “Bitcoin Beautee”), alleging a crypto-related “HyperFund” Ponzi scheme that defrauded investors of over $1.7 billion. The complaint alleges that membership interests in the scheme constituted securities, and asserts claims for the offer and sale of unregistered securities and the fraudulent sale of securities in violation of the Securities Act of 1933, and securities fraud in violation of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Although the scheme referenced Cryptocurrency, it actually relied on ordinary securities fraud – and the type of false promises of immediate large profits made famous by Charles Ponzi himself. But the SEC has emphasized the Cryptocurrency nexus of this typical Ponzi scheme as a reason for greater regulation of the Digital Assets industry.
The SEC alleges multiple fraudulent statements and conduct employed to lure new members to HyperFund, including:
Falsely representing that investors could triple their investment in 600 days, and that such returns were backed by a crypto-mining operation that did not, in fact, exist;
Hiring an actor to impersonate a CEO in an attempt to convince investors that HyperFund was launching a “virtual world” platform in which it would develop new crypto assets characterized as “native tokens”;
Offering “rewards” pegged to a crypto asset whose valuation plummeted to $0.00001949.
Notably, the SEC views the HyperFund case as a Digital Assets industry problem – not as a typical Ponzi Scheme. In bringing the enforcement action, the Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, stated: “This case illustrates yet again how noncompliance in the crypto space facilitates schemes where promoters capitalize on the promise of easy money, without providing the detailed investor protection disclosures required by the registration provisions of the federal securities laws.”[1] Mr. Grewal’s comments indicate that the SEC will continue to aggressively bring cases for failure to register Digital Assets and staking offerings, because the SEC believes that the lack of detailed disclosures for these investments promotes fraudulent schemes.
The SEC action comes on the heels of a federal criminal indictment and information against Lee and Chunga, respectively, and a criminal indictment against Rodney Burton, another HyperFund promoter. The criminal actions highlight that the SEC and the U.S. Attorneys’ Offices continue to take an aggressive stance against crypto-based fraud schemes. These actions signal that the regulatory bodies believe that the current securities laws should be applied beyond their text to safeguard against fraud in the Digital Asset space. And that the SEC will continue to bring enforcement actions against Digital Assets that promise interest returns without registering as a security. Nevertheless, in less clear-cut fraud cases than HyperFund, it remains unclear whether Courts will hold that the current regulatory regime applies broadly to the Digital Asset industry.
Sadis & Goldberg has a dedicated practice focused on Digital Assets and Blockchain Technology. We are available to discuss all digital asset and blockchain litigation matters, investments, or fund formation. If you have any questions about the HyperFund action or any other digital assets issue, please contact Douglas Hirsch (dhirsch@sadis.com), Sam Lieberman (slieberman@sadis.com), Frank Restagno (frestagno@sadis.com), or Scott Ferrier (sferrier@sadis.com).
