Case No. 1:17-cv-05725, USDC for the Eastern District of New York (Brooklyn)
Securities and Exchange Commission Civil Enforcement Action
Summary:
By Complaint dated September 29, 2017, the SEC filed an emergency civil action in the United States District Court for the Eastern District of New York against defendants, REcoin Group Foundation LLC (“REcoin”), DRC World Inc., a/k/a Diamond Reserve Club (“Diamond”), and Maksim Zaslavskiy (“MZ”). The SEC sought temporary and permanent injunctions to stop the defendants alleged activity,
“ … from engaging in illegal unregistered securities offerings and ongoing fraudulent conduct and misstatements designed to deceive investors in connection with the sale of securities in so-called “Initial Coin Offerings” (“ICOs”).”
Allegations:Â
Pursuant to Section 20 of the Securities Act [15 U.S.C. § 77t(b)] and Sections 2l(d)(l) & (d)(5) of the Exchange Act [15 U.S.C. § 78u(d)(l) &(d)(5)], the SEC alleged that in just two months MZ, who was the President and sole owner of REcoin and Diamond, had raised at least $300,000.00 from investors through various material misrepresentations and deceptive acts relating to supposed investments in digital “tokens” or “coins” offered by REcoin and Diamond during the ICOs. Each ICO was to be backed by real estate investments via REcoin, and diamonds via Diamond. Investors in the REcoin ICO would receive returns from the real estate investments, and 10-15% returns for those investing in the Diamond ICO.
The SEC further alleged that the tokens or coins were offerings for securities without a registration statement or exemption. Â However, in reality neither the coins, the real estate investments nor the diamonds ever existed and those investors that transferred funds received nothing from the ICOs.
Statutory Violations:
The SEC alleged the Defendants were engaged in and continued to engage in ongoing securities fraud and violations of:
Section l 7(a)(l)-(3) of the Securities Act of 1933 (“Securities Act’) [15 U.S.C. § 77q(a)(l)-(3)], Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. § 78j(b)], and Rule 10b-5(a)-(c) thereunder [17 C.F.R. § 240.10b-5(a)-(c)], and,
without a registration statement the Defendants engaged in the unlawful offer or sale of securities in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a), 77e(c)], and
Defendant Zaslavskiy aided and abetted REcoin and Diamond to violation of Sections 5(a), 5(c), and 17(a) of the Securities Act, and of Section l0(b) of the Exchange Act and Rule 10b-5 thereunder.
Relief Sought by the SEC:
- An Order temporarily and preliminary, and a Final Judgment permanently restraining and enjoining the Defendants from any future direct or indirect participation in any offering of unregistered securities;
- An Order temporarily and preliminarily freezing all of Defendants assets;
- An Order temporarily and preliminarily enjoining and restraining Defendants from destroying, altering, concealing or otherwise interfering with the access of the Commission to relevant documents;
- An Order temporarily and preliminarily directing the repatriation of any assets Defendants may have transferred abroad;
- An Order providing that the Commission may take expedited discovery;
- An Order directing Defendants to file a verified accounting;
- An Order directing Defendant Zaslavskiy to surrender to the Clerk of the Court all passports that he holds and prohibit him from traveling outside the United States until such time as the Court finds that he has provided a verified accounting and repatriated assets;
- A Final Judgment directing each of the Defendants to disgorge all ill-gotten gains, including prejudgment interest thereon;
- A Final Judgment permanently barring Defendant Zaslavskiy from serving as an officer or director of any public company;
- A Final Judgment prohibiting Defendant Zaslavskiy from participating in any offering of digital securities; and
- A Final Judgment directing the Defendants to pay civil money penalties;
Proceedings:
On November 13, 2017, the Court granted the Preliminary Injunction, Asset Freeze and other interim relief.
On December 19, 2017, the United States Attorney’s Office for the Eastern District of New York filed a Motion to Intervene, as a criminal complaint had been filed November 21, 2017, also in the same court. (USA v Zaslavskiy, 1:17-mj-00934). That was followed on January 17, 2018, by a Motion to Stay the civil proceedings during the pendency of the criminal action. Defendants filed memoranda in opposition.
On January 31, 2018, the Court granted the DOJ Motion to Intervene and the Motion to Stay in its entirety. Hence, at the present time of this writing this SEC matter is dormant pending resolution of the DOJ proceeding.
Please see the companion blog posts:
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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