I’ve been highly critical of cryptocurrency. It doesn’t act like a currency: people are not using it to actually buy goods and service (at least not legal goods and services). The world of coin offerings has been the wild west. In many instances, the sponsors are just ignorant of the securities law implications of their coin offering structures. Others are scams or turn quickly into scams.
The most recent coin offering to come crumbling down is the CTR Token sponsored by CentraTech. The SEC charged Sohrab Sharma and Robert Farkas with masterminding the fraudulent Initial Coin Offering.
What was the case for using Centra? I read through the whitepaper and it’s full of nothing. There is some nonsense abut currency conversion and storing coins in the Centra Wallet. As near as I can tell the only thing Centra Token did was get the boxer Floyd Mayweather to endorse it.
Centra Tech claimed that it was producing a debit card backed by Visa and MasterCard that would allow you to instantly convert hard-to-spend cryptocurrencies into U.S. dollars. The SEC alleges that Centra had no relationships with Visa or MasterCard.
Sharma and Farkas stated that funds raised in the Initial Coin Offering would help Centra Tech build a suite of financial products. This turned it into a securities offering because the offering claimed that token holders would be paid “rewards” of 0.8% of the total revenue that Centra earned from Centra Card transactions. That makes the ICO a securities offering.
This goes back to the Howey definition of a “investment contract” as “investment in a common enterprise with the expectation of profit to be derived through the essential managerial efforts of someone other than the investor.” If it meets the definition of “investment contract” its a security.
“Endorsements and glossy marketing materials are no substitute for the SEC’s registration and disclosure requirements as well as diligence by investors.” – Steve Peikin, co-director of the SEC’s Division of Enforcement.
My Favorite part of the fraud is the use of fictional executives. “Michael Edwards” was listed as the Chief Executive Officer and Co-Founder of Centra, with an impressive LinkedIn profile. He had an M.B.A. from Harvard University and an extensive career in banking, most recently as a Senior VP at Wells Fargo. Edwards was not a real person. A photo of Edwards used in an early version of Centra’s website was that of a Canadian professor of Physiology and Pathophysiology with no relationship to the company. Later versions of the marketing materials included instead a picture of one of Defendant’s relatives purporting to be of “Edwards.”
The big surprise is that it took the SEC this long to build a case. The New York Times put together a profile of the company in October that was full of red flags.
Several weeks ago Sharma and Farkas received subpoenas from the SEC about the Centra ICO. I would assume that they realized their time was short. According to the SEC’s complaint, Farkas made flight reservations to leave the country around April 1. That must be what put the SEC and the Department of Justice on an accelerated schedule. Farkas was arrested before he was able to board his flight. Sharma was also arrested.
As of March 30, Centra’s bank accounts were depleted and most of its employees had been terminated according to the SEC complaint.
Sources:
- SEC Halts Fraudulent Scheme Involving Unregistered ICO
- SEC Complaint Against Sharma and Farkas
- CentraTech White Paper
- Fraudulent initial coin offering that raised $32 million halted by SEC by IAWatch
- SEC Charges Startup Co-Founders with Fraudulent Initial Coin Offering By Aisha Al-Muslim
- SEC Swoops on Centra Tech ICO Scam
- Pump and Dump Cryptocurrency
- How Floyd Mayweather Helped Two Young Guys From Miami Get Rich