Categories: ICO

Prosecutors Can Pursue First Criminal Fraud Case Involving An ICO, Judge Rules

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What began one year ago as a civil action brought by the SEC against a ICO founder accused of defrauding his clients has transformed into the first criminal fraud proceeding against an ICO - all thanks to a judge's ruling that the charges brought by the DOJ can proceed.

Regular readers may remember when we reported last September that the SEC was seeking to ban businessman Maksim Zaslavskiy from participating in any future crypto-related endeavors and also levy a hefty fine, after buyers of two ICOs organized by Zaslavskiy claimed that he had swindled them out of hundreds of thousands of dollars. While the proceedings against Zaslavskiy were initially strictly civil, at some point during the intervening months, the DOJ decided to get involved. And now, it's seeking what would be the first criminal conviction of an ICO fraudster in the US. Zaslavskiy allegedly launched two ICOs claiming that the tokens would be backed by diamonds and real estate. But his buyers soon learned that the underlying assets never existed. Zaslavskiy was initially accused by the SEC of defrauding his clients of $300,000 via two ICO schemes. The FBI has frozen his assets and those belonging to his companies, REcoin Group Foundation and DRC World. Zaslavskiy's investors never received their digital tokens, and there is no evidence that he ever spent the money buying the underlying assets that he had promised.

Here's more from our original post:

According to the SEC's complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) were told (presumably by Zaslavskiy) that they could expect sizeable returns from the companies' operations,when neither had any real operations to speak of.

While the SEC had initially hoped to bust Zaslavskiy for selling unlicensed securities (the SEC ruled in July 2017 in a report on the collapse of the DAO, a type of crypto-based crowdfunding vehicle, that ICO tokens were indeed securities, and as such much be registered with the agency), the DOJ soon decided to press charges of securities fraud. However, Zaslavskiy's legal team filed a motion to dismiss the case in March based on the argument that the tokens involved were, in fact, currencies, and therefore securities laws should not apply.

Now, a federal judge has ruled that the prosecution can move forward - though it will ultimately be up to a jury to decide whether the ICO tokens in question should be considered securities by law, Bloomberg reported.

The New York case, which prosecutors said was the first criminal prosecution of its kind, involves Maksim Zaslavskiy. The Brooklyn businessman was charged with conspiracy and two counts of securities fraud for his role in allegedly defrauding investors in two initial coin offerings. He’d argued that the ICOs at issue weren’t securities but instead currencies. Zaslavskiy also said securities law was too vague to be applied to initial coin offerings.

In his ruling Tuesday, the judge said it will ultimately be up to the jury to decide whether the ICO at issue was a security, but the allegations in the indictment would support such a finding. The judge’s decision focused on the particulars of Zaslavskiy’s alleged ICOs, and not on other ICO transactions, but if upheld on appeal, the ruling could have broader ramifications.

"Per the indictment, no diamonds or real estate, or any coins, tokens, or currency of any imaginable sort, ever existed -- despite promises made to investors to the contrary," Dearie said in his ruling. "Simply labeling an investment opportunity as a ‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract -- a security -- into a currency."

The case could have serious repercussions for the still-thriving ICO industry. Per Reuters, Dearie’s opinion and other filings in the case did not cite any previous court decisions, and back in March, another federal judge in Brooklyn ruled that ICO tokens could also be regulated by the CFTC. Crypto regulation in the US is still in the early stages of development, and much of the case law remains to be determined.

But one thing is for certain: blockchain stalwarts will be closely watching the outcome of this case. A date for a trial has not yet been set, and it's unclear whether Zaslavskiy's attorneys will attempt to reach a settlement. If we had to guess, we'd imagine that Zaslavskiy's attorneys would push for a trial. That's because, with all of the conservative pro-business judges being appointed by the Trump administration (including Brett Kavanaugh, who is expected to be confirmed to the Supreme Court), the businessmen and women running these ICOs have a solid chance of winning a favorable ruling on appeal, even asmore than half of the ICOs launched last year have already failed.


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