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Case 1:19-cv-04625-NG-RER Document 7 Filed 08/12/19 Page 1 of 35 PageID #: 1148

UNITED STATES DISTRICT COURT


EASTERN DISTRICT OF NEW YORK
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SECURITIES AND EXCHANGE COMMISSION, :
:
Plaintiff, : 19 Civ.
:
- against - : ECF Case
:
REGINALD (“REGGIE”) MIDDLETON, :
VERITASEUM, INC., and :
VERITASEUM, LLC, :
:
Defendants, :
:
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PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S


MEMORANDUM OF LAW IN SUPPORT OF ITS EMERGENCY APPLICATION FOR
A TEMPORARY RESTRAINING ORDER FREEZING ASSETS
AND GRANTING OTHER RELIEF

Jorge G. Tenreiro
Victor Suthammanont
Counsel for the Plaintiff
Securities and Exchange Commission
New York Regional Office
Brookfield Place
200 Vesey Street, Suite 400
New York, NY 10281
(212) 336-9145 (Tenreiro)

August 12, 2019


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TABLE OF CONTENTS
TABLE OF AUTHORITIES ......................................................................................................... iii

PRELIMINARY STATEMENT .................................................................................................... 1

STATEMENT OF FACTS ............................................................................................................. 3

I. BACKGROUND ................................................................................................................. 3

II. DEFENDANTS’ BITCOIN BLOCKCHAIN VENTURE .................................................. 4

III. DEFENDANTS LAUNCH THE FRAUDULENT, UNREGISTERED OFFERING ........ 6

A. Defendants Marketed VERI as an Investment into Defendants’ Enterprise................. 7


B. Defendants Made Materially False Statements to VERI Investors ............................ 10
C. Middleton Manipulated the Price of VERI Tokens .................................................... 13
III. DEFENDANTS DISSIPATED INVESTOR FUNDS....................................................... 15

A. Middleton Began Dissipating Investor Funds During the ICO .................................. 15


B. Upon Learning of a Potential Commission Enforcement Action Against Them,
Defendants Transferred Digital Assets Worth More Than $2 Million to, Among
Others, a Personal Account Controlled by Middleton ................................................ 16
ARGUMENT ................................................................................................................................ 16

I. THE COURT SHOULD FREEZE DEFENDANTS’ ASSETS ........................................ 16

A. The Interests Offered and Sold in the VERI Offering Are Securities ........................ 18
B. The Commission Is Likely to Succeed on the Merits of Its Claims, or at Least an
Inference Can Be Drawn that Defendants Violated the Securities Laws ................... 22
1. Defendants Violated the Securities Laws’ Anti-Fraud Provisions ......................... 22
2. Middleton Manipulated the Price of VERI Tokens ................................................ 26
3. Defendants Offered and Sold Unregistered Securities ........................................... 27
II. THE COURT SHOULD ORDER DEFENDANTS NOT TO ALTER, DESTROY, OR
CONCEAL DOCUMENTS .............................................................................................. 28

III. THE COURT SHOULD ALLOW EXPEDITED DISCOVERY CONCERNING


DEFENDANTS’ ASSETS ............................................................................................... 28

IV. THE COURT SHOULD APPOINT A THIRD-PARTY INTERMEDIARY ................... 29

V. THE COURT SHOULD ENTER AN ORDER TO SHOW CAUSE WHY A


PRELIMINARY INJUNCTION SHOULD NOT BE ENTERED ................................... 30

CONCLUSION ............................................................................................................................. 30

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TABLE OF AUTHORITIES

Page
Cases
Aaron v. SEC, 446 U.S. 680 (1980) .............................................................................................. 22
ATSI Commc’ns Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) ........................................ 27
Basic Inc. v. Levinson, 485 U.S. 224 (1988)................................................................................. 24
Cont’l Mktg., Corp. v. SEC, 387 F.2d 466 (10th Cir. 1967) ......................................................... 21
In re Fannie Mae 2008 Sec. Litig., 891 F. Supp. 2d 458 (S.D.N.Y. 2012),
aff'd, 525 F. App’x 16 (2d Cir. 2013) ....................................................................................... 23
Official Comm. of Unsecured Creditors of WorldCom, Inc., 467 F.3d 73 (2d Cir. 2006) ............... 29
Revak v. SEC Realty Corp., 18 F.3d 81 (2d Cir. 1994) ................................................................ 19
Reves v. Ernst & Young, 494 U.S. 56 (1990)................................................................................ 18
SEC v. Amerindo Inv. Advisors Inc., No. 05 Civ. 5231 (S.D.N.Y. June 3, 2005) ........................ 29
SEC v. Arisebank, No. 18 Civ. 00186, 2018 WL 1532152 (N.D. Tex. Jan. 25, 2018)................. 30
SEC v. Byers, 637 F. Supp. 2d 166 (S.D.N.Y. 2009) ...................................................................... 29
SEC v. Cavanagh, 1 F. Supp. 2d 337 (S.D.N.Y. 1998),
aff’d 155 F.3d 129 (2d Cir. 1998)......................................................................................... 26, 27
SEC v. Chinese Consol. Benevolent Ass’n., 120 F.2d 738 (2d Cir. 1941) .................................... 28
SEC v. Edwards, 540 U.S. 389 (2004).......................................................................................... 18
SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476 (9th Cir. 1973) ........................................... 20
SEC v. Gonzalez de Castilla, 145 F. Supp. 2d 402, 416 (S.D.N.Y. 2001) ................................... 17
SEC v. Hedén, 51 F. Supp. 2d 296, 298 (S.D.N.Y. 1999) ............................................................ 17
SEC v. Infinity Grp. Co., 212 F.3d 180 (3d Cir. 2000) ........................................................... 19, 20
SEC v. Kelly, 817 F. Supp. 2d 340 (S.D.N.Y. 2011) .................................................................... 24
SEC v. Lek Secs. Corp., 276 F. Supp. 3d 49 (S.D.N.Y. 2017)...................................................... 26
SEC v. Lorenzo, 139 S. Ct. 1094 (2019) ....................................................................................... 24
SEC v. Malenfant, 784 F. Supp. 141 (S.D.N.Y. 1992).................................................................... 26
SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972)............................................... 23
SEC v. McNulty, 137 F.3d 732 (2d Cir. 1998) .............................................................................. 22
SEC v. Mgmt. Dynamics, Inc., 515 F.2d 801 (2d Cir. 1975) ........................................................ 17
SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980) .............................................................................. 28
SEC v. Norstra Energy, Inc., 202 F. Supp. 3d 391 (S.D.N.Y. 2016) ..................................... 25, 26

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SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279 (2d Cir. 2013)............................................ 22
SEC v. Philip A. Falcone, No. 12 Civ. 5057 (S.D.N.Y. Aug. 5, 2013) ........................................ 29
SEC v. PlexCorps, No. 17 Civ. 7007 (CBA) (E.D.N.Y. Dec. 1, 2017) ..................................... 28, 29
SEC v. PlexCorps, No. 17 Civ. 7007, 2018 WL 3038500 (E.D.N.Y. June 19, 2018) .................. 16
SEC v. REcoin, No. 17 Civ. 5725 (RDJ) (E.D.N.Y. Sept. 29, 2017)......................................... 28, 29
SEC v. Schiffer, No. 97 Civ. 5853, 1998 WL 307375 (S.D.N.Y. June 10, 1998) ............................ 26
SEC v. SG Ltd., 265 F.3d 42 (1st Cir. 2001) ........................................................................... 19, 20
SEC v. Shavers, No. 13 Civ. 416 (ALM), 2014 WL 4652121 (E.D. Tex. Sept. 18, 2014) .......... 19
SEC v. Softpoint, Inc., 958 F. Supp 846 (S.D.N.Y. 1997) ............................................................ 28
SEC v. Spongetech Delivery Sys., Inc., No. 10 Civ. 2031 (DLI) (JMA),
2011 WL 887940 (E.D.N.Y. Mar. 14, 2011).............................................................................. 28
SEC v. Stanard, No. 06 Civ. 7736 (GEL), 2009 WL 196023 (S.D.N.Y. Jan. 27, 2009) .............. 26
SEC v. Titanium Blockchain Infrastructure Servs., Inc., No. 18 Civ. 4315
(C.D. Cal. May 22, 2018) ......................................................................................................... 30
SEC v. Unifund SAL, 910 F.2d 1028, 1041 (2d Cir. 1990) ........................................................... 17
SEC v. W.J. Howey, 328 U.S. 293 (1946)............................................................................... 18, 20
SEC v. Zubkis, No. 97 Civ. 8086 (JGK), 2005 WL 1560489 (S.D.N.Y. June 30, 2005) ................. 29
Smith v. SEC, 653 F.3d 121 (2d Cir. 2011)................................................................................... 17
Solis v. Latium Networks, Inc., No. 18 Civ. 10255, 2018 WL 6445543
(D.N.J. Dec. 10, 2018) .............................................................................................................. 21
Tcherepnin v. Knight, 389 U.S. 332 (1967) .................................................................................. 21
Trane Co. v. O’Conner Securities, 561 F. Supp. 301 (S.D.N.Y. 1983) ........................................... 26
United Hous. Found., Inc v. Forman, 421 U.S. 837 (1975) ................................................... 18, 21
United States v. Zaslavskiy, No. 17 Cr. 647 (RJD), 2018 WL 4346339
(E.D.N.Y. Sept. 11, 2018)................................................................................................... 18, 21
Statutes
15 U.S.C. § 77b(a)(1) .................................................................................................................... 18
15 U.S.C. § 77e(a)......................................................................................................................... 27
15 U.S.C. § 77e(c)......................................................................................................................... 27
15 U.S.C. § 77q(a) ........................................................................................................................ 22
15 U.S.C. § 78c(a)(10) .................................................................................................................. 18
15 U.S.C. § 78i(a)(2) ..................................................................................................................... 26
15 U.S.C. § 78j(b) ......................................................................................................................... 22
15 U.S.C. § 78u(d)(5) .................................................................................................................... 29

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Rules
Fed. R. Civ. P. 26(d) ...................................................................................................................... 29
Fed. R. Civ. P. 65(b)(2).................................................................................................................. 30
Regulations
17 C.F.R. § 240.10b-5 ................................................................................................................... 22

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Plaintiff Securities and Exchange Commission (the “Commission”) respectfully submits

this memorandum in support of its emergency application, by proposed order to show cause, (1)

for a temporary restraining order pending a preliminary injunction and a preliminary injunction

(a) freezing defendants Veritaseum, Inc., Veritaseum, LLC (“Veritaseum”), and Reginald

Middleton’s (“Middleton,” and collectively, “Defendants”) assets, and (b) preventing Defendants

from destroying documents; (2) for expedited discovery; and (3) appointing a third-party

intermediary to whom Defendants should transfer all digital assets in their possession or control.

PRELIMINARY STATEMENT

The Commission seeks an emergency asset freeze and other relief to secure the

approximately $8 million of investor proceeds that remain from the approximately $14.8 million

Defendants fraudulently raised in an unregistered offering of digital asset securities (the

“Offering”). Defendants—a self-described financial guru based in Brooklyn and two companies

he controls—defrauded investors through misrepresentations about the unregistered securities

they offered, digital assets called “VERI Tokens,” “VERI,” or “Veritas,” which would

purportedly capitalize Defendants’ blockchain-based peer-to-peer financial market.

Among other things, Defendants knowingly misled investors about Defendants’ prior

business ventures and the use of Offering proceeds, touted outsized—but fictitious—demand for

VERI, and claimed to have a product ready to generate millions in revenue, when no such

product existed. Middleton also placed a series of manipulative trades in VERI Tokens in the

open market to increase its price and induce investors to buy more tokens, and dissipated and

commingled Offering proceeds with his own assets. And in just the last two weeks, after they

learned that a Commission enforcement action against them was likely, Defendants transferred

over $2 million of the remaining investor proceeds, at least in part to fund other endeavors.
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Starting in approximately April 2017, Defendants began fraudulently selling VERI

Tokens in an unregistered Offering. To induce purchases of nearly 2 million VERI at prices

ranging from approximately $1.60 and $8 per VERI, Defendants told potential investors that

Veritaseum had developed “ready to ship” products that would replace brokers, banks, and hedge

funds, and generate millions in cash flows. Defendants also assuaged investors’ concerns that

Defendants could “dump” their own 98 million or so VERI into the markets, stating they would

use unsold VERI only for sales to “buy-side institutions.” Defendants also touted business deals

that had supposedly netted $35 million in VERI purchases after the initial phase of the Offering.

As Defendants knew, these statements were all false. Defendants had no products “ready

to ship” and had no basis to claim that they had software that would generate millions of dollars

in revenue. Defendants also did not sell anywhere near the $35 million in VERI they claimed

had been sold after the initial Offering phase. Nor did they limit their sales of VERI to

institutional buyers; they instead sold their remaining VERI to anyone willing to buy it, largely

individuals in secondary market transactions. They also used it to compensate employees, pay

debts, and for other matters—all uses that would have raised red flags for investors.

Moreover, after the initial phase of the Offering, Middleton placed a series of secret,

manipulative trades in VERI on a digital asset trading platform, artificially increasing VERI’s

price by approximately 315% during just one day of trading. Middleton then deceptively touted

the price increases and returns, calling it “value recognition.” Finally, Middleton also

misappropriated for his own personal use approximately $520,000 of Offering proceeds.

On July 30 and July 31, 2019, after Commission staff informed Defendants’ counsel that

they may recommend a Commission enforcement action, Defendants moved over $2 million in

remaining investor assets from a blockchain address they controlled to other addresses, and used

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at least a portion of those funds to purchase precious metals. Defendants, moreover, refused

Commission staff’s request to voluntarily cease transfers pending the resolution of this matter,

even though Defendants have spent over $600,000 in precious metal purchases and transferred at

least another $600,000 of Offering proceeds to individuals and accounts abroad.

The Commission thus seeks an asset freeze to protect the remaining investor funds from

further dissipation until this enforcement action is resolved. Without an asset freeze, the

Commission is unlikely to be able to collect on any disgorgement order the Court may order,

thus stymieing any ultimate effort to potentially return collected funds to investors. To further

preserve the status quo, the Commission seeks a document preservation order and expedited

discovery as to Defendants’ financial assets, the appointment of a qualified third party as an

independent intermediary to whom Defendants should be ordered to transfer all digital assets in

their possession or control, and an order requiring Defendants to show cause why a preliminary

injunction, continuing any emergency relief, should not be entered.

STATEMENT OF FACTS

I. BACKGROUND

An initial coin offering or “ICO” is a fundraising event in which an entity offers

participants a unique “coin” or “token” issued on a blockchain in exchange for consideration

(often in the form of “cryptocurrency”—most commonly Bitcoin and Ether (“ETH”)—or fiat

currency). See Decl. of Pat Doody, dated August 12, 2019 (“Doody Decl.”) at ¶¶ 9-11.1

1
A blockchain is a type of distributed ledger, or peer-to-peer database spread across a network,
that records all transactions in the network in theoretically unchangeable, digitally recorded data packages
called blocks. Each block contains a batch of records of transactions, including a timestamp and a
reference to the previous block, linking the blocks together in a chain. The system relies on cryptographic
techniques for secure recording of transactions. A blockchain can be shared and accessed by anyone with
appropriate permissions. The Bitcoin blockchain is an example of a “non-permissioned,” or public and
open-access blockchain. Anyone can download the Bitcoin open-source software and join.

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The token may entitle its holders to certain rights related to a venture underlying the

ICO. These tokens may also be made available on online platforms and become tradable for

other digital assets or fiat currencies. Id. at ¶¶ 11. To participate in ICOs, investors are generally

required to transfer funds (often cryptocurrency) to the issuer’s blockchain address or other

account. The issuer will then distribute its unique “tokens” to the participants’ unique addresses

on the blockchain. Id. Often, the coins are traded on secondary markets. Id.

II. DEFENDANTS’ BITCOIN BLOCKCHAIN VENTURE

Middleton began marketing potential business opportunities, purportedly based on the

Bitcoin blockchain, to investors in Veritaseum, Inc., sometime around late 2013. Middleton

claimed in social media posts and websites that he had developed a technology that would

revolutionize the financial markets by permitting “peer to peer exchanges of value” using a

blockchain and eliminating third parties and time lags in financial transactions. Exs. 1 & 2.2

In an early marketing brochure for this software (“Brochure 1”), which he initially called

“UltraCoin” (the “Bitcoin Software”), Middleton stated that “UltraCoin enables individuals &

corporations (the Davids) of all sizes and incomes to level the playing field with Global

institutions (the Goliaths) such as Multi-national banks!” Ex. 1 at 4. Brochure 1 explained that

Veritaseum, Inc.’s “Potential Market LITERALLY Boggles the Mind!” in that “We Get a

Potential Market of . . . $225,520,000,000,” which could yield “well over a BILLION dollars in

annual cashflow [sic],” such that “UltraCoin is valued over $20,000,000,000.” Id. at 14.

“Permissioned” or private blockchains require permissioned servers to be approved to participate on the


network or to access particular information on the blockchain. Blockchains or distributed ledgers can also
record what are called smart contracts, which essentially are computer programs designed to execute the
terms of a contract when certain triggering conditions are met. Declaration of Victor Suthammanont,
dated August 12, 2019 (“Decl.”), submitted herewith at ¶ 10 n.1.
2
Citations to “Ex.” are to the exhibits to the Declaration of Victor Suthammanont. Citations to
exhibits to other declarations include the declarant’s last name along with the referenced exhibit number.

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Brochure 1 stated that Veritaseum, Inc. was “the only one with a functional product, not to

mention the only one ready to bring a product to market,” and had a “Renown [sic] CEO proven

to have the pulse of both finance and technology market booms and busts.” Id. at 16.

Another brochure (“Brochure 2”) touted potential access to “$1.635+ Quadrillion –

Literally the Market of All Money,” touted increasing “Cumulative Revenues” as “The Shape

Every Investor Wants to See,” and stated that Veritaseum was “Ready to go to market! NOW!”

Ex. 2. A third brochure (“Brochure 3”) stated that “With Veritaseum, one can literally tweet an

entire trade, or click a Friend on Facebook to take the other side of a short Goldman long

Facebook trade.” Brochure 3 said that the Bitcoin Software offers the “ability to do practically

everything your bank and brokerage offers through your browser.” Ex. 3 at 13. The three

brochures, authored by Middleton, bore his name and picture and the “Veritaseum” logo.

Middleton knew that many of the statements in these brochures were false. Middleton

was working on software to emulate swap transactions. Ex. 35 at 737:16-738:19. But it was not

true that the Bitcoin Software was “ready to go to market now,” that it presently permitted users

to make trades by clicking on buttons on Facebook, or that it was a substitute for banks or

brokerages. Nor did the Bitcoin Software permit Veritaseum, Inc. to access trillions of capital

markets or achieve billions in yearly cash flows. Moreover, although Middleton had filed certain

patent applications concerning the Bitcoin Software, they were never approved by any

jurisdiction in which they were filed. Indeed, in August 2015, Middleton received a preliminary

opinion stating that the Bitcoin Software “lack[ed] novelty.” Ex. 4.

Starting in at least May 2014 through approximately October 2016, Middleton raised a

minimum of $520,000 from the sales of “Class B” shares of stock in Veritaseum, Inc. and from

investors in “Colored Coins,” see Declaration of Roseann Daniello (“Daniello Decl.”) ¶ 15, a

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particular way of encoding encrypted assets on the Bitcoin blockchain—all, presumably, to fund

his development of the Bitcoin Software. Beginning in early 2017, Middleton announced the

end of his Bitcoin Software venture due to “regulatory concerns.” Ex. 5 at 4. In reality,

Middleton’s venture had failed because he lacked the ability to deliver on the lofty promises he

had made, in part because the project ran out of money. Ex. 35 at 737:16-738:19.

III. DEFENDANTS LAUNCH THE FRAUDULENT, UNREGISTERED OFFERING

Instead of telling potential investors the truth about why the Bitcoin Software had not

developed into a product worth “$20,000,000,000” as he had previously touted, Middleton began

to rebrand his pitch in early 2017, stating that he was going to implement the product on the

Ethereum blockchain. Beginning on April 3, 2017, Middleton issued a series of tweets from an

account in the name of “Veritaseum UltraCoin,” announcing it was “ground zero” for the

“Veritas Offering.” Ex. 6 at 73. In subsequent pre-ICO Tweets (Ex. 6 at 70, 72), Middleton

directed investors to: (i) a Google “crowdsale presentation” (the “Google Presentation”), Ex. 7

(video file entitled “Google Docs Veritaseum”); (ii) a series of YouTube videos explaining

“Why buy Veritas?” Ex. 7 (file entitled “2017.04.03 What Does a Veritas Purchase Do- It

Provides the Keys to the Peer-to-Peer Economy!”); and (iii) a “Token Offering Summary,”

which he also made available on Veritaseum’s website. Ex. 8, Ex. 9 at 6 (the “Term Sheet”).

The Term Sheet explained that 51 of 100 million VERI Tokens were available for sale

from April 25 through May 26 in a purported “ICO,” at a rate of 30 VERI for one token of the

digital asset “ETH,” with some discounts applicable during the first days of the ICO. Given the

fluctuating price of ETH, the cost of VERI ranged from $1.60 to $8.00. Ex. 8.

Defendants continued selling VERI after the purported end of the ICO, through at least

February 2018, during which time the Defendants sold an additional approximately 27,000 VERI

Tokens. Ex. 28, App’x B. All Offering sales after May 26, 2017, were purportedly offered at a
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10% premium to the last five listed prices on the digital asset trading platform EtherDelta, e.g.,

Ex. 10, with prices ranging from as little as $4,400 to as much as $1.89 million (in December of

2017), the equivalent of sales of between 45 to 8,555 VERI Tokens. Ex. 28, App’x B. In total,

Defendants raised approximately $14.8 million in investor proceeds during the Offering, in

approximately 69,000 ETH, and sold approximately 1.9 million VERI Tokens.

A. Defendants Marketed VERI as an Investment into Defendants’ Enterprise

The substance of Defendants’ marketing of the VERI Tokens makes plain that they were

offering investors the chance to participate in a common enterprise from which they could

reasonably expect to profit from Defendants’ efforts—or “to make money,” as Middleton put it

on YouTube. Decl. at ¶ 20(e)(i); Ex. 7. This is so, notwithstanding Defendants’ strained efforts

to avoid the securities laws’ application by using oblique language when referring to VERI

purchasers and by attempting to disclaim that they were not offering securities due to “regulator

issues.” E.g. Decl. ¶ 20(e)(ii); Ex. 7.

The Term Sheet stated that purchasers would receive a “20% Disc[ount] day 1” of the

Offering and that there was a “maximum investment cap” of 1,720,000 ETH—a cap that

Middleton alternatively referred to in a YouTube video as “$160,000,000” U.S. Dollars. Ex. 8.

The Term Sheet further touted the Veritaseum “Team,” spoke of the “Risks” of the purchase of

VERI and explained that the “Use of digital assets” would be “Research and Development 30%;

Sales . . . 30%; Operations 13%; Legal: 10%; Reserves: 10%, DAO liquidity provisions: 7%.”

Id. In a YouTube video, Middleton explained that there was no minimum purchase amount and

told people how to buy the token, explaining on the Veritaseum website that “there will be an

explicit link for the crowd sale . . . a page for Ethereum purchases, for ETH, Ethereum, there is a

page for purchasing through Bitcoin, and we are strongly considering” accepting fiat currencies.

Ex. 7 (video file “2017.04.03 What_is_the_Minimum_Purchase_Needed_to_Buy_Veritas”).


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During the ICO phase of the Offering, Defendants additionally:

 Prefaced a series of YouTube videos by touting Middleton’s expertise in predicting


significant events in the financial markets, Decl. ¶ 20(h); Ex. 7;

 Noted on the Veritaseum website and in a blog post that “[t]hose who invested in
bitcoin at its inception and held on enjoyed 1,450% return” and that “Ethereum and
Dash” had “outperformed bitcoin in ROI,” but that VERI was “the best of both
worlds,” such that “Veritaseum seeks to maximize economic profit, not just the value
of the token for actual or potential investors,” and so, accordingly, “today’s roughly
$3.30 purchase of VERI Tokens could yield ($3.30 x 5,000%) = $165,” Exs. 11, 12;

 Explained in the first of a series of YouTube videos introducing VERI that investors’
“purchase of Veritas goes directly to fund the transformation of finance” and that
“when you purchase Veritas, you create, you fund, the decentralization of this central
authority”; and that “since Veritas should be or will be a scarce commodity, the more
people that come in, the more entities that come in, the more users of Veritas, the
greater the demand for Veritas and the more valuable the Veritas is,” Decl. ¶ 20(b);
Ex. 7 (video file titled “2017.04.03 What Does a Veritas Purchase Do- It Provides the
Keys to the Peer-to-Peer Economy!);

 Touted in a May 19, 2017 YouTube video “30,000x” returns in the ICO space, and
answered an interviewer’s question about how to make money with Veritas by
saying: “There’s a couple of ways . . . you redeem [the token] to Reggie Middleton
or Veritaseum . . . or you can take this token and you can buy access to one of the
financial machines . . . or you can take the token and you can speculate, which is not
what we are selling or recommending, but speculation is speculation, so if you think
it’s going to go up, just like a Walmart card . . . you think a Walmart gift card might
be worth more, you can do it. Walmart is not selling you a security, you are choosing
to speculate on it.” Decl. ¶ 20(e)(iii); Ex. 7 (video file titled “2017.05.19 Tokens,
30,000x Returns & Transformational Blockchain Tech Investing”);

 Stated in a series of posts on the website “Bitcoin Forum” that Veritaseum was
“going to try very hard to bring the hedge fund community in with me as buy side
investors,” and that “[n]ot too long after the end of our offering [Middleton] will go
on a very aggressive valuation tour, valuing and evaluating most prominent concerns
and the platforms they are written on top of, in this space,” Ex. 15 at 1;

 When asked by a user question in another YouTube video about how many VERI
Tokens were needed “If I want to invest in Veritaseum DAO [Decentralized
Autonomous Organization] for a synthetic cryptocurrency index type fund, how many
[VERI Tokens] do I need[?],” Middleton answered: “I don’t know if the word invest
is appropriate. . . .we are not selling investments, I’ve said that often and I’m going to
say that over and over and over, because, I could get in a lot of trouble if it appears
that we are selling investments, and I am not, we are selling technology, the
technology will allow you to make peer to peer investments . . . the [VERI] Tokens

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will be . . . the medium for participating in the DAO, you send the tokens to the DAO,
ok, the DAO would then give you a pro-rata exposure, depending on how many you
share, and it will do its thing, after our pre-determined period . . . it will then divvy up
and give pro-rata profits and losses to all . . . VERITAS token holders,” Decl.
¶ 20(d)(i), Ex. 7 (video file titled “2017.04.24 Last Minute Q&A, AMA for The
Veritaseum Token Offering”);

 Linked readers of Bitcoin Forum to an article on another website that stated: “Aimed
for usual customers, Veritas are still not protected from speculation, especially in the
long run perspective. It will continue to be a tradeable token. Nevertheless, buying
Veritas tokens now during the ICO could be a great investment ‘in the future’ while
enjoying the services they provide. In any case, it is a win-win deal,” Exs.16, 16A;

 Stated on Veritaseum’s website that he’d “given a lot of thought to the topic of
valuation with regards to investment”; that he had “an excellent public track record
over the last 10 years, and even more of a record in private performance”; that he had
“decided to focus [his] expertise and experience on the burgeoning digital token
ecosystem by creating a Digital Asset Valuation Framework and issuing tokens to
support it”; that investment returns in the digital asset space were comparable to those
in equity markets but the former “outperform equity markets by a wide margin”; and
concluding that “our token offering is actually ongoing now,” Ex. 13;

 Stated “at the end of the day, if you produce a superior product and it’s recognized by
your constituency, [it] is manifested in a higher token price,” Ex. 11 at 5;

 Told investors that they could expect to trade the VERI Tokens on “exchanges” and
that he “will also push for the larger exchanges[,]” Exs. 14, 17; and

 Explained in a May 24 YouTube video, after it had become clear that VERI had not
sold anywhere near the 51 million tokens offered for sale, that “it is not about how
much that will come from a token sale, it should be about how much value is
generated—what we produce in terms of revenues, in terms of margins, in terms of
profits, in terms of market share, and in terms of furthering the economic interest of
our stakeholders, which are those who use Veritaseum,” Ex. 7 (video file “2017.05.24
Preview_Veritaseums_Upcoming_Dash_Valuation_Research_w_Interview_of_Its_C
EO”).

Given the foregoing, it is no surprise that investors routinely let Middleton know that

they viewed VERI as an investment into a common enterprise from which they could profit

through Middleton’s efforts. One investor asked for “clear instructions [on] how can we invest

in your project,” Ex. 18, and another told Middleton he wanted to hold “the veritas token as an

investment for the long term” and asked if the token would be listed on trading platforms (to

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which Middleton replied yes). Ex. 14. Another investor asked if it was better to buy VERI

during the ICO phase or “wait[] until the services and products becomes available.” Middleton

responded: “One would presume that if we are successful, said success would increase the price

of our offerings in tertiary markets . . . I know it seems like I’m talking on [sic] riddles, but

please understand that regulatory concerns loom, thus we all need to be careful . . . .” Ex. 19.

Defendants continued to make statements to investors that led them to reasonably expect

to profit from purchasing VERI after the ICO phase of the Offering. For example, on July 3,

2017, Middleton tweeted that VERI rose 65% since the announcement of a purported deal with

the Jamaica Stock Exchange (“JSE”). Ex. 6 at 23. On July 7, Middleton responded to a Bitcoin

Forum user’s argument that purchasing VERI was risky because Defendants held 98% of the

supply. Middleton noted that the supply was being used only for deals such as the JSE deal,

which had “caused VERI price to more than double,” and stated that he had “many more deals in

the pipeline” and “expect[ed] a pop with each deal.” Ex. 20 at 7-8. Later in July, he argued that

the “execution of management and the team play a prominent role” in the value of VERI, which

was “evident in our marketing materials,” such that “the value of the team is what you are

purchasing VERI.” Ex. 20 at 3. Throughout June and July, Middleton also repeatedly touted the

increase in value of VERI on Twitter. Ex. 6 at 16-17, 22-23, 34, 36, 40, 46-47.

B. Defendants Made Materially False Statements to VERI Investors

As stated above, Middleton deceived the public about the VERI Token from the outset,

when he told potential investors that he had abandoned the Bitcoin Software project because of

“regulatory concerns.” Ex. 5 at 4. During the Offering, Defendants made numerous additional

misstatements and omissions with respect to VERI.

First, the VERI offering documents contained many of the same materially misleading

statements and omissions made in the Bitcoin Software brochures. The Google Presentation, for
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example, was nearly identical to Brochure 2, and contained a link to Brochure 3, claiming that

users of the supposed software could already effect trades with clicks from their phones. Decl.

¶ 20(g)(ii) Exs. 3; 7. The Google Presentation also falsely stated that the new “platform is

functional now as beta” even though the only “platform” that was anywhere near “functional”

was the Bitcoin Software, and not an Ethereum-based product. Ex. 7. The Google Presentation,

like Brochure 2, described the platform as a “Decentralized Autonomous Organization,” or

“DAO,” and stated that Veritaseum could “disintermediate $1.635+ Quadrillion” in financial

transactions and “match nearly any bank, exchange or brokerage’s investor.” Exs. 2 & 7.

Second, during the Offering several investors expressed concerns about potential dilution

and a decrease in VERI’s price given that Middleton held approximately 98% of VERI Tokens

(and that he would have held 49% even if Defendants had sold every VERI offered in the

Offering’s ICO phase). To assuage these concerns, Middleton repeatedly stated that VERI not

sold during the ICO phase were to be used only for bulk sales to institutions and high-net-worth

individuals interested in employing VERI in connection with its supposed products. On May 3,

on Bitcoin Forum, Middleton responded to this concern, stating: “Unsold tokens go to our

reserve to sate future demand. Our project is ultimately aimed at the buy side of Wall Street . . .

We expect to sell tokens in large blocks to buyside [sic] institutions such as hedge funds, pension

funds, family offices and high net worth individuals as well as advisory firms considerably.” Ex.

15 at 2. On June 7, 2017, Middleton wrote a similar email to an investor. Ex. 24.

Third, Defendants misled investors about the true demand for VERI and about business

deals Veritaseum was purportedly entering into after the Offering’s ICO phase, to give the

impression that Middleton was creating “value” for VERI holders. On June 19, 2017, Middleton

tweeted: “#Veritaseum FYI, $34,873,719 worth of $VERI has been sold to institutions, HNW,

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etc. since 6/1, and VERI price > ~6x[.]” Ex. 6 at 34. Between July 3 and July 5, Middleton

stated that he had entered into two big global deals: one with a major stock exchange and a

second with an “UHNW” (ultra-high-net-worth individual) who had purchased $1 million of

VERI. Id. at 22-23. Middleton also tweeted that a “[c]ustomer made large $VERI purchase,

retaining us to ‘VERItize’ medical biz, explore business processes thru blockchain.” Id. at 16.

On June 16, he tweeted: “Expect more demand for $VERI as institutions/startups come

on board.” Ex. 6 at 36. That same day, Middleton also tweeted, “Who’s investigating bulk

$VERI purchase: expanding airline, medical marijuana startup, electric motorcycle startup.” Id.

On June 30, Middleton stated that he had “made three deals in the last 24 hours, one was with

one of the largest stock exchanges in the Caribbean . . . one was a UHNW individual (starting

with $1-$1.5M purchase), and one with a sovereign nation.” Ex. 20 at 10. On July 7, Middleton

falsely stated on Bitcoin Forum that the “biggest visible distribution from ‘reggie’s wallet’ of

[VERI] tokens thus far would be the proposed [Caribbean stock exchange] deal.” Id. at 8.

As Defendants knew or recklessly disregarded, all of these statements were materially

misleading, if not outright false. First, users could not use Veritaseum to effect trades with their

phones, and there was no functional, Ethereum blockchain-based beta app or products that VERI

holders could use with their ERC-20 tokens. And no user could enter into any contract with a

third party with VERI. Nor did Middleton have any basis to state that his (non-existent) products

would tap into “quadrillions” of funds or replace financial institutions anytime in the foreseeable

future, if ever. His statements were aimed at profiting from potential investors’ lack of

familiarity, but keen interest in, the nascent FinTech industry, and nothing more.

In addition, Defendants never sold any material amount of VERI Tokens to “institutions,”

let alone limit post-ICO phase sales to such entities or to “ultra-high-net-worth” individuals. In

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fact, from the day after the ICO “closed” on May 26, 2017 through February 2018, the

Defendants sold approximately 27,000 VERI to any investor who would buy them, without

regard to whether they were an “institution,” whether they were “high-net-worth” individuals, or

how they intended to use the purchased VERI. See Ex. 28, App’x B. Defendants also used

VERI Tokens to pay developers and other employees, and to exchange Colored Coins.

Finally, the foregoing statements about Defendants’ purported business deals were also

false. There was simply no factual basis for Middleton’s statements that about $34 million and

$1 million in VERI were sold as a result of business deals. Moreover, although one individual

(“Investor One”) did loan Veritaseum $1 million in exchange for VERI, she never hired

Middleton to ‘VERItize’ anything. And while a Caribbean stock exchange entered into a

memorandum of understanding with Middleton, it never bought or agreed to buy a single VERI

Token—there was no “visible distribution” of VERI Tokens with respect to that deal.

But the misstatements achieved the effect Defendants surely sought. After Middleton’s

statements about the $34 million and $1 million in VERI sold, the price of VERI rose markedly

from $80.06 to $153.60, and from $85.31 to $204.80, respectively. In all, Defendants’

misstatements to the market had a marked effect on the price of VERI, which rose exponentially

from its ICO phase sales prices of $1.60 to $8.00 to over $300.00 by the end of July 2017.

C. Middleton Manipulated the Price of VERI Tokens

On May 31, 2017, Middleton emailed an employee (“Employee One”) the “EtherDelta

exchange address” and “0xfB9063AD5E9Fa8EB91A1E1cD71CBdF6d765eCAff.” Doody Decl.

Ex. 5. On May 31, 2017, Middleton also posted on Bitcoin Forum that he was “Testing

EtherDelta as a method of distributing post-Offering Veritas tokens.” Ex. 25 at 6. The first six

trades of VERI ever made on EtherDelta occurred that day—six sales of VERI at the set price of

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0.1 ETH per VERI Token—and were all conducted by Middleton using the fB903 address via the

EtherDelta smart contract. Doody Decl. ¶ 17.4

On June 1, 2017, Middleton emailed Employee One a spreadsheet, commenting that “the

EtherDelta market is not accurate because of the very, very low volume. I will try to push more

volume in.” Ex. 26. Middleton went on to say that, looking at the total value of his

approximately 98 million VERI Tokens “brings a smile” to his face and that “[t]his time next

month, I’ll probably have all (as in every single) hip hop and rap star/producer beat in net

worth.” Id. On June 2, a user posted on Bitcoin Forum that the “EtherDelta exchange price for

VERI/ETH [was] going the wrong way at the moment.” Ex. 20 at 5 (post no. 33). Middleton

responded on June 3: “We set up the EtherDelta VERI ticker as an experiment. Please be aware

that EtherDelta has very little traffic and liquidity.” Id.

On June 4, 2017, Middleton caused fB90 to make 52 purchases of VERI on EtherDelta.

See Doody Decl. ¶ 19. Of those transactions, 42 constituted instances where Middleton offered

to purchase VERI Tokens at prices he set that were accepted by the seller(s). Id. The other 10

3
An “address” on a particular blockchain is typically referenced by an alphanumeric string such as
the one above, and is also referred to as the “public key” to that particular set of data on the blockchain.
Access to the “private key” (another alphanumeric string) that matches that address allows “access” to
that address on a blockchain to, for example, make transfers of digital assets to and from that address. In
this brief, addresses are referred to by the first four characters after “0x,” or “fB90” in this example.
4
Middleton controlled fB90, as evidenced not only by his email to Employee One and by the fact
that the test trades correspond to his testimony and statements on Bitcoin Talk, but also because two
addresses related to the VERI ICO repeatedly sent funds to and from fB90. Sales during the ICO phase
used two different “collection addresses” to receive the ETH investors sent to purchase VERI. The ICO
smart contract then caused a separate address, 82c4, an address referenced as the “address that sends the
VERI” in an email from Middleton to Employee One on May 31, to send VERI to investors. The ICO
phase collection addresses sent that ETH to a separate address, 7dad, which was also used to collect ETH
from VERI purchasers who did not use the VERI automated smart contract to purchase VERI. Middleton
admitted that was the only person with access to the collection addresses, Ex. 37 at 1318:18-1319:14, and
7dad is referenced in another email from Middleton to Employee One on June 3, 2017. Doody Decl., Ex.
7. The 7dad address sent 551 ETH to the fB90 address. Finally, after the trading on June 4, fB90 sent the
VERI purchased at inflated prices from EtherDelta back to 82c4. In addition, fB90 sent approximately 70
ETH back to both 82c4 and 7dad. See generally Doody Decl. ¶¶ 18.

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constituted instances where Middleton caused fB90 to accept offers to sell VERI Tokens at

prices that were set by the seller(s). Id. To effect these transactions, Middleton caused fB90 to

spend nearly 337 ETH (over $82,000 worth at the time) to purchase 4,769 VERI in various-sized

transactions at an average premium of 51% to the last non-fB90-traded price. Id. By the end of

the day, the price of VERI on EtherDelta had increased 315% as a result of the trading by fB90,

which constituted 82.6% of the volume of EtherDelta VERI trading on June 4. Id. at ¶¶ 20, 22.

On June 7, 2017, Middleton emailed Employee One, noting that each VERI was now

worth $79.55. He wrote: “This means the argument can be made that we’re multi-billionaires if

we can push enough liquidity through EtherDelta and deliver on our value proposition.” He then

listed his net worth at $2.36 billion based on his $2.34 billion worth of VERI Tokens. Ex. 27.

Middleton also issued a number of tweets touting VERI’s increased prices. On June 5, he

tweeted “price up 5x” and “3rd highest in volume” with respect to VERI trading on EtherDelta,

and directed users to EtherDelta to buy VERI. Ex. 6 at 47. On June 7, he tweeted that VERI

was the “most successful offering in the history of the nascent crypto industry, up 1893% since

last week.” Id. On June 9, he tweeted: “Veritas software sold for $1.71 per token on 1st day of

sale. Most recent transaction was $65.40, 4,783% in 40 days. Value recognition?” Id. at 40.

III. DEFENDANTS DISSIPATED INVESTOR FUNDS

A. Middleton Began Dissipating Investor Funds During the ICO

Defendants never disclosed to investors during the Offering, in the Term Sheet or

otherwise, that Middleton would pay himself a “salary.” But, from the outset of the Offering,

Middleton nevertheless began spending proceeds for his own personal use. Between May 12 and

July 19, 2017, Defendants converted some Offering proceeds into approximately $285,000. See

Daniello Decl. ¶ 18. Defendants commingled much of these funds with Middleton’s own funds,

and spent a portion of these funds on a mixture of Middleton’s personal expenses (about

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$135,000) and Veritaseum’s expenses (about $50,000). Id. at 22. Defendants misappropriated

nearly the entire $1 million they received from Investor One on personal expenses, including a

$100,000 campaign contribution, with only approximately another $100,000 spent on

Veritaseum’s business. See Daniello Decl. ¶¶ 25-27, Exs. 15, 16. Defendants then paid Investor

One back half of her loan using investor proceeds from the Offering. See Ex. 38 at 54:23-55:6.

Defendants also transferred at least $600,000 of proceeds to contractors and other, unknown

destinations outside of the United States. Daniello Decl. ¶¶ 28, 30, 32(b) & Exs. 11; 17. Finally,

Middleton has also purchased at least $610,000 of gold and other precious metals with VERI

Offering proceeds and selling the interest in these assets to third parties. Decl. ¶¶ 88-92.

B. Upon Learning of a Potential Commission Enforcement Action Against


Them, Defendants Transferred Digital Assets Worth More Than $2 Million
to, Among Others, a Personal Account Controlled by Middleton

On July 26, 2019, and again on July 30, 2019, Commission staff provided Defendants’

counsel that they would likely recommend that the Commission approve filing an enforcement

action against Defendants. Decl. ¶ 85. On July 30 and 31, Middleton began transferring 10,000

ETH (worth approximately $2.3 million) of investor funds to other digital asset addresses, and

some (750 ETH worth approximately $172,500) to Middleton’s personal account at a digital

asset trading platform. Doody Decl. ¶¶ 30-33. Middleton then refused, through counsel, to

voluntarily stop the additional dissipation of investor assets. Id. ¶¶ 87.

ARGUMENT

I. THE COURT SHOULD FREEZE DEFENDANTS’ ASSETS

“The Second Circuit repeatedly has emphasized the exceedingly light burden that the

SEC must overcome in seeking a temporary asset freeze order.” SEC v. PlexCorps, No. 17 Civ.

7007, 2018 WL 3038500, at *2 (E.D.N.Y. June 19, 2018). “A freeze of assets is an ancillary

remedy that merely ‘assures that any funds that become due can be collected,’ . . . including

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disgorgement of profits, penalties, . . . and possibly prejudgment interest.” SEC v. Gonzalez de

Castilla, 145 F. Supp. 2d 402, 416 (S.D.N.Y. 2001) (quoting SEC v. Unifund SAL, 910 F.2d

1028, 1041 (2d Cir. 1990)). An asset freeze simply “functions like an attachment.” Unifund,

910 F.2d at 1041. To obtain an asset freeze, “[t]he SEC need show only that ‘an inference can be

drawn that the party’” against whom the order is sought committed a violation. PlexCorps, 2018

WL 3038500, at *2 (quoting Smith v. SEC, 653 F.3d 121, 128 (2d Cir. 2011)). This standard is

lower than the required showing for the Commission to obtain a preliminary injunction against

future securities law violations. See Unifund, 901 F.2d at 1041 (holding that “an ancillary

remedy” of an asset freeze “may be granted, even in circumstances where the elements required

to support a traditional SEC injunction have not been established”); SEC v. Hedén, 51 F. Supp.

2d 296, 298 (S.D.N.Y. 1999) (holding that an asset freeze requires “a lesser showing” than a

preliminary injunction against future securities law violations).5

As explained below, the Commissions is likely to succeed on the merits of its claims that

Defendants have violated the antifraud and registration provisions of the Securities Act and the

Exchange Act and rules thereunder, and that Middleton engaged in manipulative trading. At a

minimum, an inference can be drawn from the evidence that Defendants violated the law. A

temporary restraining order freezing assets is therefore warranted to protect investors from

further harm and to preserve the status quo pending a preliminary injunction hearing, particularly

in light of the evidence that Defendants are dissipating investor assets.

5
Because the Commission is “not . . . an ordinary litigant, but . . . a statutory guardian charged
with safeguarding the public interest in enforcing the securities laws,” its burden to secure temporary or
preliminary relief is less than that of a private party. SEC v. Mgmt. Dynamics, Inc., 515 F.2d 801, 808 (2d
Cir. 1975). The Commission need not show irreparable harm, a balance of equities in its favor, or that
remedies at law are unavailable. Id.; see also Smith v. SEC, 653 F.3d 121, 127 (2d Cir. 2011); Unifund,
910 F.2d at 1036.

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A. The Interests Offered and Sold in the VERI Offering Are Securities

Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act define

“security” to include “investment contract[s].” 15 U.S.C. §§ 77b(a)(1), 78c(a)(10). The interests

offered and sold in VERI Tokens—whether termed “tokens,” “coins,” “pre-paid fees,” or

whatever else—were securities under SEC v. W.J. Howey, 328 U.S. 293 (1946). The Howey test

asks whether there was an investment of money in a common enterprise with a reasonable

expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Id.

at 301; see also SEC v. Edwards, 540 U.S. 389, 393 (2004). This definition embodies a “flexible

rather than a static principle, one that is capable of adaptation to meet the countless and variable

schemes devised by those who seek the use of the money of others on the promise of profits.”

Howey, 328 U.S. at 299; see also Reves v. Ernst & Young, 494 U.S. 56, 60-61 (1990) (Congress

crafted “a definition of ‘security’ sufficiently broad to encompass virtually any instrument that

might be sold as an investment”). As the Supreme Court has recognized, “Congress intended the

application of these [securities] statutes to turn on the economic realities underlying a

transaction, and not on the name appended.” United Hous. Found., Inc v. Forman, 421 U.S. 837,

849 (1975). Here, all three Howey factors are met.

First, Defendants solicited and received payments of “money” in exchange for VERI

when they directed purchasers to remit ETH and Bitcoin, and suggested they would accept, and

later did accept, U.S. Dollars. Like the victims of the REcoin ICO, the purchasers of VERI

Tokens were “able to invest in [the tokens] through [their] websites using . . . , virtual currency

or [ ] online funds transfer services,” which suffices to meet the first Howey prong. United

States v. Zaslavskiy, No. 17 Cr. 647 (RJD), 2018 WL 4346339, at *5 (E.D.N.Y. Sept. 11, 2018)

(first alteration added); see also SEC v. Shavers, No. 13 Civ. 416, 2014 WL 4652121, *1 (E.D.

Tex. Sept. 18, 2014) (holding that an investment of Bitcoin meets the first prong of Howey).
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Second, investors assets were pooled for Veritaseum’s supposed business and investors

were led to believe that their fortunes would rise and fall together, and with Defendants’. In the

Second Circuit, a common enterprise can be established by showing “horizontal commonality,”

i.e., “the tying of each individual investor’s fortunes to the fortunes of the other investors by the

pooling of assets, usually combined with the pro-rata distribution of profits.” Revak v. SEC

Realty Corp., 18 F.3d 81, 88 (2d Cir. 1994) (emphasis added). Courts that have found

commonality recognize that it is sufficient that “each investor was entitled to receive returns

directly proportionate to his or her investment stake,” “either for direct distribution or as an

increase in the value of the investment.” SEC v. SG Ltd., 265 F.3d 42, 46-47, 51 (1st Cir. 2001)

(finding horizontal commonality); accord SEC v. Infinity Grp. Co., 212 F.3d 180, 188 (3d Cir.

2000) (finding horizontal commonality where the “return on investment was to be apportioned

according to the amounts committed by the investor” and was “directly proportional to the

amount of that investment”). Although the Second Circuit has not held that pro-rata distributions

are required to find commonality, pro-rata sharing of profits exists here.

Here, Defendants told potential investors that Veritaseum would be investing proceeds

from the VERI Offering into the costs of running and developing the Veritaseum business. Exs.

8, 9 at 4.6 Indeed, the Offering was described as a “crowdsale” to “fund” Defendants’ business.

E.g. Exs. 11 at 5; 15 at 1 (post no. 62). Moreover, the fortunes of VERI Token purchasers would

rise and fall together. Each investor’s profits from the Veritaseum venture—even if measured by

the use he or she gave the VERI Token—depended on the number of tokens they purchased. See

6
The investments here also satisfy the “strict vertical commonality” test because investors’
fortunes in the VERI Tokens were tied to Defendants’ profits. See Revak, 18 F.3d at 87 (in the absence of
horizontal commonality, strict vertical commonality may be sufficient). Defendants claimed that they
were working hard to bring “value” to the VERI Tokens because it was in their own interest to do so,
Ex.16 at 1 (post no. 42), and indeed distributed VERI Tokens to Veritaseum employees as bonus
compensation. Ex. 37 at 1353:3-7.

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SG Ltd., 265 F.3d at 51 (finding horizontal commonality and recognizing that it is sufficient that

“each investor was entitled to receive returns directly proportionate to his or her investment

stake,” “either for direct distribution or as an increase in the value of the investment”); see also

Infinity Grp. Co., 212 F.3d at 188-89. All VERI Token investors thus shared in the risks of the

venture because the projects Defendants promised to develop could prove to be worthless,

thereby decreasing the value of the VERI Tokens, or the projects could be successful, resulting

in returns to all VERI Token holders as promised by Defendants. The commonality prong of the

Howey test is therefore established.

Third, purchasers of the VERI Tokens were led to reasonably expect profits, and,

specifically, that these profits would derive from the entrepreneurial and managerial efforts of

Middleton and his “team.” Defendants, for example, noted the potential 5,000% returns from a

purchase of VERI, Ex. 11, touted the returns of assets in the digital asset space over equities,

e.g., id., and encouraged one investor to speculate on the price of VERI appreciating should

Defendants’ efforts succeed. Ex. 19. Investors were also told that the VERI Tokens would be

listed on major digital asset platforms, Ex. 17, and that the team would seek investors in

Veritaseum that could be expected to cause “pop[s]” in VERI Tokens’ price, Ex. 20 at 8.

The foregoing more than suffices to meet Howey’s last prong, where the essential inquiry

is “whether the efforts made by those other than the investor are the undeniably significant ones,

those essential managerial efforts which affect the failure or success of the enterprise.” SEC v.

Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir. 1973); see also Cont’l Mktg., Corp. v.

SEC, 387 F.2d 466, 470-71 (10th Cir. 1967) (promoters’ efforts to “develop” a “structure into

which investors entered” was part of efforts to increase the value of the investment).

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Defendants have sought to recast the interests they sold as “pre-paid fees” for their

supposed “products and services.” But the economic substance of these transactions makes clear

that this label makes no difference. In analyzing whether something is a security, “form should

be disregarded for substance.” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967); see also

Forman, 421 U.S. 837, 849 (1975). Analogously, “simply labeling an investment opportunity as

‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract—a security—

into a currency.” Zaslavskiy, 2018 WL 4346339, at *7.

Here, even if Middleton is to be believed that his intent at the time of the VERI Offering

was to issue VERI Tokens to develop products that would require the use of the tokens in a

blockchain-based ecosystem—a claim belied by the evidence discussed above—building such an

ecosystem would have required Defendants’ efforts before any VERI Tokens could be used

within it. Defendants’ supposed plan that the tokens would, one day, be useful in that ecosystem

that they had not built does not alter the nature of Defendants’ promise to investors. Defendants

offered and sold the investment opportunity to profit from their development of that ecosystem.

Defendants’ fund-raising effort to obtain capital—even assuming an intention to build that

ecosystem—bears all the hallmarks of a securities offering. Accordingly, at least one court has

already rejected the argument that because tokens could have theoretical “utility” they are

withdrawn from the broad ambit of instruments that the securities laws are meant to capture. See

Solis v. Latium Networks, Inc., No. 18 Civ. 10255, 2018 WL 6445543, at *3 (D.N.J. Dec. 10,

2018) (denying motion to dismiss unregistered sales claim, noting that “[n]otwithstanding the

functionality of the . . . tokens (i.e., to pay for labor on [the issuer’s] platform), the Complaint

details myriad ways in which ‘Defendants led investors . . . to expect a profit from the purchase

of . . . tokens.”). Plainly, Defendants’ self-serving rebranding of the VERI Token in a way that

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ignores the asset’s economic reality is insufficient to defeat the inference of success on the merits

that the evidence presented compels.

B. The Commission Is Likely to Succeed on the Merits of Its Claims, or at Least


an Inference Can Be Drawn that Defendants Violated the Securities Laws

1. Defendants Violated the Securities Laws’ Anti-Fraud Provisions

Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5

thereunder collectively prohibit fraud in connection with the offer, sale, and purchase of

securities. 15 U.S.C. §§ 77q(a) and 78j(b); 17 C.F.R. § 240.10b-5. To prove that Defendants

violated Section 17(a), Section 10(b), and Rule 10b-5, the Commission must generally show that

Defendants: (1) made false and misleading statements or omissions of material fact, or

otherwise employed a device, scheme or artifice to defraud, or engaged in any transaction,

practice, or other course of business which operated as a fraud or deceit; (2) engaged in such

behavior in connection with the offer, purchase, or sale of securities; (3) used the mails or an

instrumentality of interstate commerce; and (4) acted with the requisite scienter. Section 10(b)

of the Exchange Act and Rule 10b-5 require a showing that the defendant acted with scienter,

Aaron v. SEC, 446 U.S. 680, 695 (1980), which may be shown by reckless conduct, see, e.g.,

SEC v. McNulty, 137 F.3d 732, 741 (2d Cir. 1998). A showing of negligence suffices to

establish a violation of Sections 17(a)(2) and 17(a)(3). SEC v. Pentagon Capital Mgmt. PLC,

725 F.3d 279, 285 (2d Cir. 2013). The Commission is likely to establish each of these elements

of its securities fraud claims, or at least an inference can be drawn that Defendants’ conduct

satisfies each of these elements.7

7
Middleton’s role as CEO and sole owner of Veritaseum suffice to impute his liability for
securities fraud to Veritaseum. See, e.g., SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1089 n.3 (2d
Cir. 1972). The Commission is therefore likely to establish each element of its securities fraud claims
against Veritaseum based on Middleton’s conduct, described below, or at least an inference can be drawn
that Veritaseum’s conduct thus satisfies each element.

22
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Defendants “made” the misstatements at issue. There is no question that Defendants

made the statements at issue. Veritaseum, Inc.’s name and logo appear on the Term Sheet, Ex. 8,

and Veritaseum, LLC’s name appeared on Veritaseum’s website during the VERI ICO, see Ex.

11. Middleton, as the sole owner of both Veritaseum entities, was the “ultimate authority” over

these statements, and “made” the oral statements in YouTube videos and Twitter posts, and was

therefore the “maker” for purposes of Janus Capital Grp., Inc. v. First Derivative Traders, 131

S. Ct. 2296 (2011). See, e.g., In re Fannie Mae 2008 Sec. Litig., 891 F. Supp. 2d 458, 473

(S.D.N.Y. 2012), aff'd, 525 F. App’x 16 (2d Cir. 2013) (“In the post-Janus world, an executive

may be held accountable where the executive had ultimate authority over the company’s

statement; signed the company’s statement; ratified and approved the company’s statement; or

where the statement is attributed to the executive.”).

Falsity. As detailed above, many of the statements Defendants made in connection with

the VERI Offering were plainly false. Veritaseum did not have the product that Defendants

claimed it had, and Middleton’s prior venture had failed not due to regulatory concerns but

because he exhausted the cash available to develop the enterprise. Defendants also didn’t sell the

more than $35 million in VERI Tokens they claimed to have sold after the Offering’s ICO phase,

and Defendants did not limit their use of the over 98 million VERI Tokens they had for “bulk”

sales to “institutional” purchasers. See generally supra at 10-13.

Materiality. The misstatements and omissions at issue are material. A statement or

omission is material if there is a substantial likelihood that a reasonable investor would consider

such information important in making an investment decision or if the information would

significantly alter the total mix of available information. Basic Inc. v. Levinson, 485 U.S. 224,

231-32 (1988). A reasonable investor would want to know if Veritaseum’s business prospects

23
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were false or exaggerated, given that, as Defendants themselves touted, the existence of such

business prospects would inure to the benefit of VERI Token investors. And investors explicitly

asked Middleton questions about what he would do with the remaining 98 million VERI Tokens

not sold during the VERI ICO, see Ex. 15 at 2, because it was important to them to know that

Defendants could not depress the price of their investments by dumping tokens into the market.

Moreover, the dramatic increase in prices subsequent to certain of Defendants’ misstatements,

Ex. 6 at 40 (Tweet noting “4,783%” price increase), is additional evidence of the materiality of

those lies to investors. Indeed, investors reacted to Middleton’s statements and to the increases

in VERI prices, including touting the “quadrillions” to which Defendants claimed to have access,

and “5x profits” in VERI since the end of the ICO phase of the Offering.

Defendants engaged in a scheme to defraud. Defendants engaged in a scheme to defraud

that included not only the statements alleged here, but also the misappropriation of funds and the

manipulative trades to artificially increase the value of VERI Tokens on EtherDelta. The

dissemination of known false statements are all the types of “inherently deceptive” acts sufficient

to constitute a scheme in violation of Rules 10b-5(a) and 10b-5(c). See, e.g., SEC v. Lorenzo,

139 S. Ct. 1094, 1101 (2019); SEC v. Kelly, 817 F. Supp. 2d 340 (S.D.N.Y. 2011).

Scienter. Defendants acted with the requisite scienter. First, Middleton was the CEO of

Veritaseum. Accordingly, he knew the true state of affairs when making his false statements

concerning the amount of VERI sold, the nonexistence of the business deals he touted, and the

status of Veritaseum’s technology. In sworn testimony given to the Commission, Middleton

admitted that he understood his statements about VERI could have an effect on the price of

VERI. Ex. 34 at 347:2-11. He nevertheless made statements, for example, touting fictitious

24
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sales of millions in VERI, purported deals that in testimony he claimed not to be able to

remember. E.g., Ex. 37 at 1438:10-12.

Middleton’s scienter with respect to manipulative trading is also apparent. First, he

emailed Employee One about his desire to push liquidity into EtherDelta. Second, he traded at

large premiums to the previous trades prices many times, expending over $80,000 to buy VERI

Tokens despite already holding 98 million of them. Middleton, who held himself out as a

financial expert, would have understood the effect that his trading would have on the price of the

token. Third, as Middleton himself explained, the price increase in VERI would permit him to

sell at least a portion of his remaining VERI at inflated prices, making him a “multi-billionaire.”

The statements were made in the offer and sale of securities, and “in connection with”

with the purchases of securities. Defendants’ statements were made both in the offer and sale

and in connection with the purchase or sale of securities because they were made to induce

purchases of VERI Tokens. Defendants’ statements about Veritaseum’s business ventures and

the supposed deals Defendants, Exs. 6 at 23; 20 at 7-8, were entering into had an “obvious

purpose . . . to cause investors to purchase [VERI] securities.” SEC v. Norstra Energy, Inc., 202

F. Supp. 3d 391, 398 (S.D.N.Y. 2016).

Defendants obtained Money and Property. Defendants obtained money and property in

the offer and sale of securities by virtue of their false statements because, without those false

statements, investors would have never given Defendants the monies that Defendants obtained

during the VERI Offering.8

8
There can be no doubt here that the jurisdictional interstate commerce element is met, because
Defendants conducted the VERI Offering and made materially fraudulent statements respecting VERI on
the Internet. See, e.g., Norstra Energy, Inc., 202 F. Supp. 3d at 399-400; SEC v. Stanard, No. 06 Civ.
7736 (GEL), 2009 WL 196023, at *25 (S.D.N.Y. Jan. 27, 2009).

25
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2. Middleton Manipulated the Price of VERI Tokens

Section 9(a)(2) of the Exchange Act makes it unlawful to effect “a series of transactions in

. . . any security . . . creating actual or apparent trading in such security, or raising or depressing the

price of such security, for the purpose of inducing the purchase or sale of such security by others.”

15 U.S.C. § 78i(a)(2). “The central purpose of section 9(a) is not to prohibit market transactions

which may raise or lower the price of securities, but to keep an open and free market where the

natural forces of supply and demand determine a security’s price.” SEC v. Malenfant, 784 F. Supp.

141, 144 (S.D.N.Y. 1992) (quoting Trane Co. v. O’Conner Securities, 561 F. Supp. 301, 304

(S.D.N.Y. 1983) (internal citations omitted)). As one court in this Circuit explained in ordering the

continued freeze of a defendant’s assets, Section 9(a)(2)’s intent element is satisfied where the

transactions affecting a stock price are carried out to serve the manipulator’s pecuniary interest,

which is “‘one of the hallmarks of manipulation.’” SEC v. Schiffer, No. 97 Civ. 5853, 1998 WL

307375, at *5 (S.D.N.Y. June 10, 1998) (quoting SEC v. Cavanagh, 1 F. Supp. 2d 337, 376

(S.D.N.Y. 1998), aff’d 155 F.3d 129 (2d Cir. 1998)).

Because market manipulation “can involve facts that are ‘solely within the defendant’s

knowledge,’ the Second Circuit has recognized that the plaintiff ‘need not plead manipulation to

the same degree of specificity as a plain misrepresentation claim.’” SEC v. Lek Secs. Corp., 276

F. Supp. 3d 49, 57 (S.D.N.Y. 2017) (quoting ATSI Commc’ns Inc. v. Shaar Fund, Ltd., 493 F.3d

87, 102 (2d Cir. 2007)). Evidence of trades made “to paint a false picture of legitimate market

interest in the stock” is sufficient to establish manipulative intent. Id. at 57.

In Schiffer, the court continued an asset freeze and ordered the preservation of documents

based on evidence that the defendant monitored the price of the stock at issue, directed trades in

accounts not readily traceable to him, spoke of “giv[ing] . . . a boost” to the price, and made

trades that in fact increased the price of the stock. 1998 WL 307375, at *5 & n.29. Here, the
26
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evidence of manipulation is even more powerful given that, as described above, Middleton spoke

of “pushing liquidity” into EtherDelta in the days before he conducted more than 50 purchases of

VERI at an average 50% premium, his trades increased VERI’s price by 315%, and he touted

VERI’s volume and price increases on Twitter, without mentioning his own trading. All of this

served Middleton’s pecuniary interest, as he was the holder of 98% of the remaining VERI Tokens

and continued to sell them post-ICO in private transactions at prices explicitly pegged to the prices

on EtherDelta. See supra at 13-15. At a minimum, the evidence permits an inference that

Middleton manipulated the VERI Tokens.

3. Defendants Offered and Sold Unregistered Securities

Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a), 77e(c), prohibit any

person from selling a security through interstate commerce “[u]nless a registration statement is in

effect as to [such] security,” or from offering to sell or offering to buy a security “unless a

registration statement has been filed as to such security.” To establish a prima facie case for a

Section 5 violation, the Commission must prove: “first, that no registration statement was in

effect as to the securities; second, that the defendant sold or offered to sell these securities; third,

that there was a use of interstate transportation, or communication, or of the mails in connection

with the sale or offer of sale.” Cavanagh, 1 F. Supp. 2d at 361.

Here, there is no dispute that no registration statement was in effect as to the VERI

Tokens when they were sold, Decl. ¶ 54, and that the Internet was used to sell them. And each of

the Defendants offered and sold securities to potential and actual investors both because

Middleton was behind the entire VERI Offering scheme and because Veritaseum was supposedly

the enterprise towards which the VERI Offering proceeds would be directed. See, e.g., SEC v.

Murphy, 626 F.2d 633, at 650-51 (9th Cir. 1980) (“[T]hose who ha[ve] a necessary role in the

transaction are held liable as participants.”) (collecting cases); SEC v. Softpoint, Inc., 958 F.
27
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Supp 846, 859-60 (S.D.N.Y. 1997) (“The prohibitions of Section 5 . . . sweep[] broadly to

encompass ‘any person’ who participates in the offer or sale of an unregistered, non-exempt

security.”); SEC v. Chinese Consol. Benevolent Ass’n., 120 F.2d 738, 740-41 (2d Cir. 1941)

(defendant violated Section 5(a) “because it engaged in selling unregistered securities” issued by

a third party “when it solicited offers to buy the securities ‘for value’”).

II. THE COURT SHOULD ORDER DEFENDANTS NOT TO ALTER, DESTROY,


OR CONCEAL DOCUMENTS

To preserve documents the Commission may seek, the Commission seeks an order

prohibiting Defendants from altering, destroying, or concealing documents, including documents

concerning the allegations of the Complaint or Defendants’ assets or finances. Such orders are

routinely granted “to preserve the status quo until a final resolution of the merits.” SEC v.

Spongetech Delivery Sys., Inc., No. 10 Civ. 2031 (DLI) (JMA), 2011 WL 887940, at *5 (E.D.N.Y.

Mar. 14, 2011) (citing Unifund, 910 F.2d at 1040 n. 11); see also Order, SEC v. REcoin, No. 17 Civ.

5725 (RDJ) (E.D.N.Y. Sept. 29, 2017) (“RECoin TRO”) (Ex. A hereto) (ordering defendant

accused of unregistered fraudulent ICO not to destroy documents); Order, SEC v. PlexCorps, No.

17 Civ. 7007 (CBA) (E.D.N.Y. Dec. 1, 2017) (“PlexCorps TRO”) (Ex. B hereto) (same). In this

case, such an order is particularly warranted given that Defendants have been less than forthcoming

with the Commission about the blockchain addresses under their control. Decl. ¶¶ 65-84.

III. THE COURT SHOULD ALLOW EXPEDITED DISCOVERY CONCERNING


DEFENDANTS’ ASSETS

The Commission seeks an order allowing expedited asset discovery to enable the

Commission to locate Defendants’ assets, including funds that the Defendants recently dissipated by

transferring them to non-parties, and effectuate any asset freeze order the Court enters. In this case,

where Defendants have continued to move assets while refusing to turn over to the Commission a

full list of the blockchain addresses they control, an order expediting discovery is particularly

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necessary. The Court should therefore permit such limited expedited discovery under Federal Rule

of Civil Procedure 26(d). See Fed. R. Civ. P. 26(d) (allowing a party to seek discovery “from any

source before the parties have conferred as required by Rule 26(f) . . . when authorized . . . by court

order”); SEC v. Zubkis, No. 97 Civ. 8086 (JGK), 2005 WL 1560489, at *3 (S.D.N.Y. June 30,

2005) (noting that the court’s temporary restraining order had granted expedited discovery); REcoin

TRO at ¶ XI (granting expedited discovery); PlexCorps TRO at ¶ XI (same).

IV. THE COURT SHOULD APPOINT A THIRD-PARTY INTERMEDIARY

The Exchange Act gives the Court broad equitable authority to “grant[] any equitable

relief that may be appropriate or necessary for the benefit of investors.” 15 U.S.C. § 78u(d)(5).

Courts have held, for example, “that within that broad authority lies the power to approve a plan of

distribution proposed by a federal receiver.” SEC v. Byers, 637 F. Supp. 2d 166, 174 (S.D.N.Y.

2009) (citing Official Comm. of Unsecured Creditors of WorldCom, Inc., 467 F.3d 73, 81 (2d Cir.

2006)). In order to effectuate the purposes of the federal securities laws, courts have approved

the appointment of independent monitors who can oversee a firm’s activities and thus protect

against further improper conduct. See, e.g., SEC v. Amerindo Inv. Advisors Inc., No. 05 Civ.

5231 (S.D.N.Y. June 3, 2005); SEC v. Philip A. Falcone, No. 12 Civ. 5057 (S.D.N.Y. Aug. 5,

2013); see also SEC v. Arisebank, No. 18 Civ. 00186, 2018 WL 1532152 (N.D. Tex. Jan. 25,

2018) (appointing temporary receiver on ex parte application in case where defendants raised

funds from investors through ICO); SEC v. Titanium Blockchain Infrastructure Servs., Inc., No.

18 Civ. 4315 (C.D. Cal. May 22, 2018) (same).

Here, a qualified third-party intermediary (the “Independent Intermediary”) is necessary

to protect VERI investor funds, particularly given the practical inability of “freezing” assets

located on a blockchain to which Defendants and only Defendants have the “private key” to

access. To help preserve the status quo and in recognition of the fact that Defendants could
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easily skirt asset freeze orders with respect to digital assets, the Commission requests that the

Court appoint an Independent Intermediary, who the Defendants can propose and who is not

unacceptable to Commission staff. The Defendants should be ordered to transfer all digital

assets in their possession or control to an address directed by the Independent Intermediary, with

whom Defendants should be ordered to cooperate fully, as reasonably required, and who should

be ordered to certify in writing, within five (5) days after receiving the digital assets, that the

above-listed action has been taken and that the digital assets will be securely held in escrow

pending further direction by the Court.

V. THE COURT SHOULD ENTER AN ORDER TO SHOW CAUSE WHY A


PRELIMINARY INJUNCTION SHOULD NOT BE ENTERED

To avoid any expiration ofthe temporary restraining order after fourteen days under Federal

Rule of Civil Procedure 65(b)(2), the Commission seeks an order requiring Defendants to show

cause why a preliminary injunction, imposing the same relief set forth in any temporary restraining

order the Court issues, should not be entered at a date and time set by the Court. The Commission

can then present its evidence at a preliminary injunction hearing on notice.

CONCLUSION

For the foregoing reasons, the Court should grant the Commission's emergency

application.

Dated: New York, New York


August 12, 2019
Jorge enreiro
Victor Suthammanont
Attorneys for Plaintiff
SECURITIES AND EXCHANGE
COMMISSION
New York Regional Office
200 Vesey Street, Suite 400
New York, New York 10281
(212)336-9145 (Tenreiro)
TenreiroJ@sec.gov

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EXHIBIT A
Case
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Document Filed08/12/19
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Page21ofof14
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98

UNITED STATES DISTRICT COURT


EASTERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff, 17 Civ. 5725(RJD)(RER)

- against -

RECOIN GROUP FOUNDATION,LLC,DRC


WORLD INC. a/k/a DIAMOND RESERVE CLUB,
and MAKSIM ZASLAVSKIY,

Defendants.

ORDER TO SHOW CAUSE,TEMPORARY RESTRAINING ORDER,AND ORDER


FREEZING ASSETS AND GRANTING OTHER RELIEF

On the Emergency Application (the "Application") of Plaintiff Securities and Exchange

Commission (the "Commission")for an order:

(1) Directing Defendants REcoin Group Foundation, LLC ("REcoin"), DRC World, Inc.

a/k/a Diamond Reserve Club ("Diamond") and Maksim Zaslavskiy ("Zaslavskiy")

(collectively,"Defendants") to show cause why an order should not be entered,

pending a final disposition of this action:

(a) Preliminarily enjoining Defendants from violating Section 17(a) of the Securities

Act of 1933 ("Securities Act")[15 U.S.C. § 77q(a)], Section 10(b) of the

Securities Exchange Act of 1934("Exchange Act")[15 U.S.C. § 78j(b)], and Rule

lOb-5 issued thereunder [17 C.F.R. § 240.10b-5], and from participating in any

offerings of unregistered securities or otherwise violating Sections 5(a)and 5(c)

of the Securities Act [15 U.S.C. §§ 77e(a), 77e(c)];

(b) Freezing Defendants' assets;


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/s/(RJD)
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EXHIBIT B
Case 1:17-cv-07007-CBA-RML
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m
y.®.vmm&reoime.miY.
imi

^ BEC^-2BI7 ^
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK rfUUKLYN OFFICE

SECURITIES AND EXCHANGE COMMISSION,


-^ooi
Plaintiff, 17 civ. ( )

- against - ECF Case

PLEXCORPS
(a/k/a and d/b/a PLEXCOIN and SIDEPAY.CA),
DOMINIC LACROIX and
SABRINA PARADIS-ROYER,

Defendants,

j^oposEd]order to show cause,temporary restraining order,


AND ORDER FREEZING ASSETS AND GRANTING OTHER RELIEF

On the Emergency Application (the "Application") of Plaintiff Securities and Exchange

Commission (the "Commission")for an order:

(1) Directing Defendants PlexCorps (a/k/a and d/b/a PlexCoin and SidePay.Ca)

("PlexCorps"), Dominic Lacroix ("Lacroix"), and Sabrina Paradis-Royer ("Paradis-

Royer")(collectively,"Defendants") to show cause why an order should not be

entered, pending a final disposition ofthis action:

(a) Preliminarily enjoining (i) Defendants from violating Section 17(a) ofthe

Securities Act of 1933 ("Securities Act")[15 U.S.C. § 77q(a)], Section 10(b) of

the Securities Exchange Act of 1934("Exchange Act")[15 U.S.C. § 78j(b)], and

Rule lOb-5 promulgated thereunder[17 C.F.R. § 240.10b-5], and (ii) Lacroix and

PlexCorps from participating in any offerings of unregistered securities or

otherwise violating Sections 5(a) and 5(c) of the Securities Act [15 U.S.C.

§§ 77e(a), 77e(c)];
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(b) Freezing Defendants' assets;

(c) Ordering Defendants to transfer to the registry ofthis Court all assets, funds, and

other property held in foreign locations in their name, or for their benefit or under

their direct or indirect control, or over which they exercise control or signatory

authority obtained as a result ofthe activities alleged in the Complaint; and

(d) Prohibiting Defendants from destrojdng, altering, or concealing documents in

their possession, custody, or control, including documents concerning the

allegations in the Complaint or the assets or finances of Defendants;

(2) Pending adjudication ofthe relief described in paragraph(1)above, an order:

(a) Temporarily restraining Defendants from violating the aforementioned statutes

and rules;

(b) Temporarily freezing Defendants' assetsi , / A

(c) Temporarily ordering Defendants tp transfer to the registry ofthis Court all assets, .,

funds, and other property held in foreign locations in their name,or for their
^ {yt.
benefit or under their direct or indirect control, or over which they exercise yitucohps
control or signatory authority obtained as a result ofthe activities alleged in the

Complaint;

(d) Temporarily prohibiting Defendants from destroying, altering, or concealing

documents in their possession, custody, or control, including documents

conceming the allegations in the Complaint or the assets or finances of

Defendants;

(e) Providing that the Commission may take expedited discovery in preparation for a

hearing on this Order to Show Cause; and


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(f) Directing Defendants to provide a full verified accounting of assets within three

(3) business days or within such extension oftime as the Commission staff agrees

to.

The Court has considered:(1)the Complaint filed by the Commission on December 1,

2017;(2)the Local Rule 6.1 Declaration of Jorge G. Tenreiro executed on December 1, 2017;

(3)the Declaration of David H. Tutor executed on December 1, 2017, and the exhibits thereto;

and (4)the Commission's Memorandum of Law in Support of Its Ex Parte Emergency

Application for an Order to Show Cause, Temporary Restraining Order, and Other Relief^dated
December U2017. C^) (L
<5V\ 'f
Based upon the foregoing documents, the Court finds that a proper showing, as required

by Section 20(b)of the Securities Act, Section 21(d)of the Exchange Act, and Rule 65 of the

Federal Rules of Civil Procedure, has been made for the relief granted herein, for the following

reasons:

1. It appears from the evidence presented that Defendants have violated Sections

17(a) ofthe Securities Act, Section 10(b) ofthe Exchange and Rules lOb-5 thereunder, and that

Defendants Lacroix and PlexCorps further have engaged in the offering of unregistered securities

and have violated Sections 5(a) and 5(c) of the Securities Act, and it appears likely that the

Commission will prevail on the merits ofits claims under these provisions.

2. It appears from the evidence that Defendants may have obtained more than $15

million in proceeds from their unlawful activities, that Defendants have already transferred at

least $900,000 of those funds from a U.S. Dollar-denominated account controlled by a U.S.-

based entity known as Stripe, that at least $810,000 ofthose funds remain in accounts at Stripe,
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and that at least some ofthose funds are currently under Defendants' control in addresses on

cr>ptographically-secured ledgers or "blockchains."

3. It appears that an order freezing Defendants' assets, as specified herein, is

necessary to preserve the status quo and to protect the Court's ability to award reliefin the form

of disgorgement ofill-gotten gains, prejudgment interest and civil penalties.

4. It appears that an order directing Defendants to transfer to the registry ofthis

Court all assets, funds, and other property held in foreign locations in their name, or for their

benefit or under their direct or indirect control, or over which they exercise control or signatory

authority and obtained as a result ofthe conduct alleged in the Complaint, is necessary to

preserve the status quo,to ensure compliance with the asset freeze imposed on Defendants, to

protect the integrity ofthis litigation, and to protect the Court's ability to award relief in the form

of disgorgement ofill-gotten gains, prejudgment interest and civil penalties.

5. It appears that Defendants or their associates have already contemplated

destroying evidence relating to the allegations in the Complaint and that an order prohibiting

Defendants from destroying, altering, or concealing records of any kind, including documents

conceming the allegations in the Complaint or the assets, finances, or business operations of

Defendants, is necessary to ensure compliance with the asset freeze imposed on Defendants and

to protect the integrity of this litigation.

6. Good and sufficient reasons have been shown why a procedure other than by

notice of motion is necessary. It is therefore appropriate for the Court to issue this Order to

Show Cause ex parte so that prompt service on appropriate financial institutions can be made,

thus preventing the dissipation of assets.


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7. This Court has jurisdiction over the subject matter ofthis action and over

Defendants, and venue properly lies in this District.

NOW,THEREFORE,

IT IS HEREBY ORDERED that Defendants show cause to this Court at 16 .-DO

A .m. on the day of 2017,in Room l/Jh^ofthe United States


Courthouse, , Brooklyn, New York 11201, why this Court should

not enter an Order pursuant to Rule 65 ofthe Federal Rules of Civil Procedure, Section 20(b)of

the Securities Act, and Section 21(d)of the Exchange Act preliminarily enjoining Defendants

form violating Sections 17(a) ofthe Securities Act, Section 10(b) ofthe Exchange and Rules

lOb-5 thereunder, and preliminarily enjoining Lacroix and PlexCorps from engaging in the

offering of unregistered securities or otherwise violating Sections 5(a) and 5(c) ofthe Securities

Act.

11.

IT IS FURTHER ORDERED that Defendants show cause at that time why this Court

should not also enter an Order directing that, pending a final disposition ofthis action.

Defendants and each oftheir financial and brokerage institutions, agents, servants, employees,

and attorneys, and those persons in active concert or participation with them who receive actual

notice ofsuch Order by personal service, facsimile service, telephonic notice, email notice, any

other means permitted in Section XIII ofthis Order, or otherwise, and each ofthem, hold and

retain within their control and otherwise prevent(except to the extent this Order requires any

transfers assets to the United States) any withdrawal, transfer, pledge, encumbrance, assignment,

dissipation, concealment or other disposal (including the use of any credit cards or any other
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incurring of debt) ofany assets, funds, or other property (ineluding money, virtual currency or

other digital asset, real or personal property, securities, commodities, choses in action or other

property of any kind whatsoever, in whatever form such assets may presently exist and wherever

located) of, held by, or under the control of Defendants, whether held in their name or for their

direct or indirect beneficial interest, and directing each ofthe financial or brokerage institutions,

debtors and bailees, or any other person or entity holding such assets, funds or other property of

Defendants to hold or retain within its or his control and prohibit the withdrawal, removal,

transfer or other disposal of any such assets, funds or other properties, including without

limitation all assets, funds, or other properties held in Defendants' name, held by Defendants, or

under Defendants' control, including but not limited to the assets listed on Sehedule A.

III.

IT IS FURTHER ORDERED that Defendants show cause at that time why this Court

should not also enter an Order that directs that, pending the final disposition ofthis action,(a)

Defendants shall immediately transfer all funds and assets obtained, direetly or indirectly, from the

activities described in the Commission's Complaint that are now located outside the jurisdiction of

this Court,to the registry of this Court;(b) with respect to all funds or assets outside the jurisdiction

ofthis Court that are repatriated by Defendants, such assets shall become subject to the restriction

described in paragraph II, above; and (c) with respect to any other asset owned and/or controlled by

Defendants that is now located outside the jurisdiction ofthis Court(including, but not limited to,

monies, securities, real or personal property, virtual curreney or other digital asset), the Defendants

with ownership or control over the asset shall immediately identify the location ofsuch asset, the

price paid or consideration given, and the date upon which it was purchased or obtained.
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IV.

IT IS FURTHER ORDERED that Defendants show cause at that time why this Court

should not also enter an Order, pending the final disposition ofthis action, enjoining and

restraining them, and any person or entity acting at the direction of or on behalf of either or both

ofthem,from destroying, altering, or concealing all documents, books, and records that are in

the possession, custody, or control of Defendants, their respective agents, servants, employees,

and attorneys, and those persons in active concert or participation with them,including

documents that concern the allegations in the Complaint or Defendants' assets, finances, or

business operations.

V.

IT IS FURTHER ORDERED that, pending a hearing and determination ofthe

Commission's Application, Defendants are temporarily restrained from violating Section 10(b)

ofthe Exchange and Rules 1 Ob-5 thereunder, by using the mails or any means or instrumentality

ofinterstate commerce, directly or indirectly:

(a) to employ devices, schemes, or artifices to defraud;

(b) to make untrue statements of material fact or omit to state material facts necessary in

order to make the statements made,in light of the circumstances under which they

were made, not misleading; and/or

(c) to engage in acts, practices, and courses of business which operate or would operate

as a fraud or deceit.

IT IS FURTHER ORDERED that, as provided in Federal Rule of Civil Procedure

65(d)(2), the foregoing paragraph also binds the following who receive actual notice ofthis

Order by personal service or otherwise:(a) Defendants' officers, agents, servants, employees.


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and attorneys; and (b)other persons in active concert or participation with Defendants or with

any described in (a).

VI.

IT IS FURTHER ORDERED that, pending a hearing and determination ofthe

Commission's Application, Defendants are temporarily restrained from violating Section 17(a)

ofthe Securities Act, by using the mails or any means or instrumentality of interstate commerce,

directly or indirectly:

(a) to employ devices, schemes or artifices to defraud;

(b) to obtain money or property by means of an untrue statement of a material fact or

omit to state a material fact necessary in order to make the statements made,in light

of the circumstances under which they were made, not misleading; and/or

(c) to engage in transactions, practices or courses of business which operate or would

operate as a fraud or deceit upon the purchaser.

IT IS FURTHER ORDERED that, as provided in Federal Rule of Civil Procedure

65(d)(2), the foregoing paragraph also binds the following who receive actual notice ofthis

Order by personal service or otherwise:(a) Defendants' officers, agents, servants, employees,

and attorneys; and (b)other persons in active concert or participation with Defendants or with

any described in (a).

VH.

IT IS FURTHER ORDERED that, pending a hearing and determination ofthe

Commission's Application, Lacroix and PlexCorps are temporarily restrained from engaging in

the offering of unregistered securities or violating Sections 5(a) or 5(c) ofthe Securities Act, by:
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(a) without a registration statement in effect as to that security, making use ofthe means

and instruments oftransportation or communications in interstate commerce and of

the mails to sell securities through the use of means of a prospectus; and/or

(b) making use ofthe means and instruments oftransportation or communication in

interstate commerce and ofthe mails to offer to sell through the use of a prospectus,

securities as to which no registration statement has been filed.

IT IS FURTHER ORDERED that, as provided in Federal Rule of Civil Procedure

65(d)(2), the foregoing paragraph also binds the following who receive actual notice ofthis

Order by personal service or otherwise:(a) Lacroix's and PlexCorps' officers, agents, servants,

employees, and attorneys; and(b)other persons in active concert or participation with Lacroix or

PlexCorps or with any person described in (a).

VIII.

IT IS FURTHER ORDERED that, pending a hearing and determination ofthe

Commission's Application, Defendants and each oftheir financial and brokerage institutions,

agents, servants, employees, and attorneys, and those persons in active concert or participation

with them who receive actual notice ofsuch Order by personal service, facsimile service,

telephonic notice, email notice, any other means permitted in Section XIII ofthis Order, or

otherwise, and each ofthem, hold and retain within their control and otherwise prevent any

withdrawal, transfer, pledge, encumbrance, assignment, dissipation, concealment or other

disposal (including the use of any credit cards or any other incurring of debt) of any assets,

funds, or other property(including money, virtual currency or other digital asset, real or personal

property, securities, commodities, choses in action or other property of any kind whatsoever, in

whatever form such assets may presently exist and wherever located) of, held by, or under the
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control of Defendants, whether held in their name or for their direct or indirect beneficial

interest, and directing each ofthe financial or brokerage institutions, debtors and bailees, or any

other person or entity holding such assets, funds or other property of Defendants to hold or retain

within its or his control and prohibit the withdrawal, removal, transfer or other disposal of any

such assets, funds or other properties, including without limitation all assets, funds, or other

properties held in Defendants' name, held by Defendants, or under Defendants' control,

including but not limited to the assets listed on Schedule A.

IX.

IT IS FURTHER ORDERED that, pending a hearing and a determination ofthe

Commission's Application,(a) Defendants shall immediately transfer all funds and assets obtained,

directly or indirectly, fi^om the activities described in the Commission's Complaint that are now

located outside the jurisdiction ofthis Court, to the registry ofthis Court;(b)with respect to all

funds or assets outside the jurisdiction ofthis Court that are repatriated by Defendants, such assets

shall become subject to the restriction described in paragraph 11, above; and (c) with respect to any

other asset owned and/or controlled by Defendants that is now located outside the jurisdiction of

this Court(including, but not limited to, monies,securities, real or personal property, or

cryptocurrency), the Defendants with ownership or control over the asset shall immediately identify

the location ofsuch asset, the price paid or consideration given, and the date upon which it was

purchased or obtained.

X.

IT IS FURTHER ORDERED that, pending a hearing and determination ofthe

Commission's Application, Defendants are enjoined and restrained, and any person or entity ■

acting at the direction ofor on behalf of either or both ofthem is enjoined and restrained, from

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destroying, altering, or concealing all documents, books, and records that are in the possession,

custody, or control of Defendants, their respective agents, servants, employees, and attomeys,

and those persons in active concert or participation with them, including documents that concern

the allegations in the Complaint or Defendants' assets, finances, or business operations.

XI.

IT IS FURTHER ORDERED that discovery is expedited as follows: pursuant to Rules

26, 30, 31, 33, 34, 36 and 45 ofthe Federal Rules of Civil Procedure, and without the

requirement of a meeting pursuant to Fed. R. Civ. P. 26(f), and without regard to the limitations

of Federal Rules of Civil Procedure 30(a)(2), 30(d), 31(a)(2), and 33(a)(1):

(1) the Commission may take the depositions on two(2)calendar days' notice by email,

facsimile or otherwise, of Defendants and non-party witnesses; and

(2) the Commission may obtain the production of documents within three(3)days from

service by email, facsimile or otherwise of a request or subpoena,from the

Defendants or any other persons or entities, including non-party witnesses.

Service of any discovery requests, notices, or subpoenas may be made by personal

service, facsimile, email, overnight courier, or first-class mail.

XII.

IT IS HEREBY FURTHER ORDERED that, pending a hearing and determination of

the Commission's Application, within three(3)business days ofthe issuance ofthis Order, each

Defendant shall each make a sworn verified written accounting to this Court, under penalty of

perjury, in the manner set forth below. The sworn accounting shall cover the period from July 1,

2017 to the present.

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The sworn accounting shall reflect(1)all assets, funds and property, including virtual

currency or other digital asset, received, directly or indirectly, from anyone who invested in,

provided loans to, or otherwise gave, directly or indirectly, assets, funds or property to any

Defendant;(2)the amount ofsuch funds or value ofsuch assets;(3)the location or blockchain

address of where such funds were put and for each location provide the name and address ofthe

bank or other financial institution, the account name,the account number and the approximate

date on which the funds were placed at the location;(4)the uses to which such funds were put;

and (5)the amounts ofany remaining assets or funds described in Section XII(3) ofthis Order

and their location and for each location provide the blockchain addresses and/or name and

address ofthe bank or other financial institution, the account name,the account number and the

approximate date on which the funds were placed at the location.

XIII.

IT IS FURTHER ORDERED that a copy ofthis Order and the papers supporting the

Commission's Application be served upon Defendants (or their attorney who agrees to accept

service on their behalf) on or before December 4, 2017, by personal delivery, facsimile,

overnight courier, international express mail, first-class mail to Defendants' attorney Jean-

Francois Hudon, Hudon Avocats,417 rue Saint-Pierre, Bureau 700, Montreal, QC H2Y 2M4

Canada, or to Defendants at 355 rue Gaudias-Villeneuve, Quebec City, QC G2N 0K8,Canada,

or to Defendants at 815 boulevard Lebourgneuf, Bureau 400, Quebec City, QC G2J OCl,

Canada, or to Defendants via email at doom.lacroix@hotmail.com, account@plexeoin.com. or

sabrina.paradis@hotmail.fr.

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XIV.

IT IS FURTHER ORDERED that Defendants shall deliver any opposing papers in

response to the Order to Show Cause no later than ^2017,at 5:00 p.m.
Service shall be made by that date and time by emailing the papers to tenreiroj@sec.gov and

receiving a reply email confirming receipt or by sending the papers by overnight courier service

to the New York Regional Office ofthe Commission at Brookfield Place, 200 Vesey Street,

Suite 400, New York, New York 10281, Attn: Jorge G. Tenreiro, or such other place as counsel

for the Commission may direct in writing. The Commission shall have until i'XtJt S"
,2017, at 5:00 p.m., to serve, by the most expeditious means available, any reply papers upon

Defendants or their counsel, if counsel shall have made an appearance in this action.

s/Carol Bagley Amon

UNITED STATES/DISTKiaT Jl/DGE

Issued at: Q.m>


I . > 2017
JBrooklyn, New ]r ork

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Schedule A

FINANCIAL INSTITUTION ACCOUNT NUMBER (Last 4 Digits) OR


IDENTIFYING INFORMATION

Account with owner email address


Stripe
doom.lacroix@hotmail.com
Account with owner email address
Stripe
sabrina.paradis@hotmail.fr
Account with owner email address
Stripe
account@plexcoin.com
0x722fd3bd3f5156e5fc352elf211173e5f7732cef
Ethereum Blockchain Address

0x2576ba9bb62e75dcd3eb6ca880bcl26c435ffflf
Ethereum Blockchain Address

lHJiV9emxcJmLXyk47HBqXeP2BeRZVPEzi
Bitcoin Blockchain Address

14