SEC Consent Orders 11/29/2018 re:
In the Matter of Floyd Mayweather Jr., Respondent, Nov. 29, 2018, SEC Release No. 33-10578; Administrative Proceeding File No. 3-18906
In the Matter of Khaled Khaled, Respondent, Nov. 29, 2018, SEC Release No. 33-10579; Administrative Proceeding File No. 3-18907
Rensel et al. v. Centra Tech, Inc., et al, No. 1:17-cv-24500 (SD Florida) – Class Action
Celebrities As Paid Promoters:
On November 1, 2017, the SEC issued a Public Statement entitled, SEC Statement Urging Caution Around Celebrity Backed ICOs. drafted by the SEC Division of Enforcement and the SEC Office of Compliance Inspections and Examinations. It was the position of the SEC that pursuant to Section 17b of the Securities Act of 1933 [15 USC §77q], the actions of promotion by celebrities and others to encourage the public to buy investments may violate the Act if the promoter does,
” … not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.” [See 15 USC §77q(b)]
This Public Statement was preceded by their DAO Report dated July 25, 2017, which reviewed in depth the activity of the promoters, Slock.it, of DAO Tokens that the SEC alleged were (unregistered) ‘securities’ pursuant to the Securities Act of 1933, that the DAO Trading Platform allegedly met the requirements of an (unregistered) ‘exchange’ pursuant to the Securities Exchange Act of 1934, and that those who offer and sell securities must comply with the federal securities laws.
In regard to the alleged paid promotions by Mayweather and Khaled, both Respondents agreed to Cease-and-Desist Orders pursuant to Section 8A of the Securities Act of 1933 [15 U.S. Code § 77h-1], significant monetary fines and penalties, that these penalties could not be used as an offset against any future investor damage awards, and the penalties were not dischargeable in bankruptcy pursuant to Section 523 of the bankruptcy Code, 11 USC §523.
Floyd ‘Crypto’ Mayweather:
Findings:
In this Administrative Proceeding, the Respondent, Floyd Mayweather Jr, consented to the entry of a Cease-and-Desist Order with penalties, pursuant to Section 8A of the Securities Act of 1933 [15 U.S. Code § 77h-1]. From about July through September 2017, the respondent promoted three ICOs (that the SEC were alleged were securities) on his Instagram, Twitter and Facebook accounts without disclosing that he was paid approximately $300,000.00 for the promotions.
In April 2018 the SEC filed a civil action against Centra alleging fraud, and the DOJ filed criminal charges.
The SEC further alleged that the most recent activity for Centra Tech in late 2017 promoted an ICO for Centra Tokens, (“CTR”) to raise capital for the Centra multi-blockchain Debit Card, and Smart and Insured Wallet. On August 23, 2017, the respondent posted on his Twitter account, “You can call me Floyd Crypto Mayweather from now on […] #ICO starts tomorrow! Smart contracts for sports?!”
Each of these promotions occurred after the SEC DAO Report warning but were prior to the SEC publishing the Nov. 1, 2017, Public Statement above.
Cease and Desist Order – Disgorgement, Interest, Civil Penalty, and Barred from Promotions:
Mayweather shall pay (1) disgorgement of $300,000.00, (2) prejudgment interest of $14,775.67, and (3) a civil money penalty of $300,000.00 for a total of $614,775.67. In addition, for a period of three years the Respondents shall be barred from accepting paid security promotions, and shall continue to cooperate with the SEC investigation of this matter.
No Penalty Offset:
To preserve the deterrent effect of the civil penalty, Mayweather agreed that he could not argue that he was entitled to offset or reduction of any award of compensatory damages by the amount of any part of the civil penalty in any Related Investor Action.
No Bankruptcy Discharge:
In the final paragraph, the SEC order states that for the purpose of the exceptions to bankruptcy discharge, the findings were true and admitted by Mayweather, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Mayweather was a debt for the violation of the federal securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19), and was an exception to discharge.
Disgorgement, interest, civil monetary penalties, no damages offset and no bankruptcy dischargability are fairly standard covenants in such SEC Orders. But the alternative could have been much worse, and in some cases include referral to the DOJ for criminal prosecution.
‘DJ Khaled’:
Findings:
In this Administrative Proceeding, the Respondent, Khaled Khaled, consented to the entry of a Cease-and-Desist Order with penalties, pursuant to Section 8A of the Securities Act of 1933 [15 U.S. Code § 77h-1]. From about July through September 2017, the respondent also promoted the Centra Token without disclosing that he was paid $50,000.00 for the promotions.
These promotions occurred after the SEC DAO Report warning and were instrumental in the SEC publishing the Nov. 1, 2017, Public Statement.
Cease and Desist Order – Disgorgement, Interest, Civil Penalty and Barred from Promotions:
Khaled shall pay (1) disgorgement of $50,000.00, (2) prejudgment interest of $2,725.72, and (3) a civil money penalty of $100,000.00 for a total of $152,725.72. In addition, for a period of two years the Respondent shall be barred from accepting paid security promotions.
No Penalty Offset:
To preserve the deterrent effect of the civil penalty, Khaled agreed that he could not argue that he was entitled to offset or reduction of any award of compensatory damages by the amount of any part of the civil penalty in any Related Investor Action.
No Bankruptcy Discharge:
In the final paragraph, the SEC order states that for the purpose of the exceptions to bankruptcy discharge, the findings were true and admitted by Khaled, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Khaled was a debt for the violation of the federal securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19), and was an exception to discharge.
Wild-Wild West ‘Crypto Saloon’:
Disgorgement, interest, civil monetary penalties, no damages offset, paid promotions bar and no bankruptcy dischargability are fairly standard covenants in such SEC Orders. But the alternative could have been much worse, and in some cases include referral to the DOJ for criminal prosecution, as the DOJ already did against Centra.
Investors have also filed a Class Action against Centra Tech, Inc., the celebrity promoters, Mayweather and DJ Khaled, and others on December 13, 2017. To date the case has progressed to the point where the plaintiffs have filed an Amended Complaint on October 9, 2018 against 10 named defendants. It remains to be seen whether Mayweather and Khaled will cross-claim against any of the other defendants, and / or allege indemnification, for any alleged civil monetary and reputation damages they may prove they have incurred from the promotion schemes. This case has a long way to go.
The lesson learned is that investors and the well-armed ‘Marshal SEC’ remain ever watchful for fraudulent and unregistered securities activity – especially by the gamblers and carpetbaggers that frequent the wild-wild west ‘Crypto Saloon’. Get-Rich-Quick Cowboys with money to burn, Beware!! But if you still decide to stack your tokens and take a seat at the table, the ballad of The Gambler by Kenny Rogers is a prescient warning.
Commentary by Attorney Timothy F. Mills, Editor / Action Cyber Times™ © 2018 All Rights Reserved.
Action Cyber Times™ provides resources for cybersecurity, data privacy, compliance, breach reporting and risk management, intellectual property theft, and the utilization of emerging technologies such as artificial intelligence, machine learning, blockchain DLT, advances in cryptographic applications, and more.
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