SEC Charges Nader Al-Naji with Fraudulent Crypto Asset Scheme Involving BitClout

SEC Charges Nader Al-Naji with Fraud and Unregistered Offering of Crypto Asset Securities

The Securities and Exchange Commission today charged Nader Al-Naji with perpetrating a multi-million-dollar fraudulent crypto asset scheme involving a social media platform called BitClout and its native token of the same name (herein, “BTCLT”).

According to the SEC’s complaint, starting in November 2020, Al-Naji raised more than $257 million from unregistered offers and sales of BTCLT, while falsely telling investors that proceeds would not be used to compensate him or other BitClout employees. In reality, the complaint alleges, Al-Naji spent more than $7 million of investor funds on personal expenditures like rental payments for a Beverly Hills mansion and extravagant cash gifts to family members.

The SEC’s complaint further alleges that, to avoid regulatory scrutiny, Al-Naji portrayed BitClout as a decentralized project with “no company behind it … just coins and code,” and launched the project using the pseudonym “Diamondhands” to further create the illusion that the project was autonomous when he was actually behind the project. In addition, Al-Naji allegedly secured a letter from a prominent law firm opining, based on his mischaracterizations of the nature of his project, that BTCLT were not likely to be deemed securities under federal law. At the same time, Al-Naji allegedly secretly told certain investors that he was engaged in this subterfuge to avoid compliance with the law.

Would the SEC’s Cybersecurity Controls Claims against R.R. Donnelley Survive the District Court’s Analysis in Solar Winds?

Meanwhile, the SEC filed its much broader cybersecurity case against Solar Winds Corporation and its Chief Information Security Officer last October in the Southern District of New York. That matter included fraud charges but also alleged corporate violations of Section 13(b)(2)(B) and Rule 13a-15.

Section 13(b)(2)(B)

On July 18th, the District Court issued an order largely granting the defendants’ motion to dismiss. In their motion, the defendants argued that an issuer’s “system of internal accounting controls” could not reasonably be interpreted to cover a company’s cybersecurity controls such as its password and VPN protocols. The court said Solar Winds was “clearly correct”.

Essentially no part of the court’s Section 13(b)(2)(B) analysis worked out in the SEC’s favor.

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Could anyone reasonably think the SEC’s claims against R.R. Donnelley as to Section 13(b)(2)(B) would have survived this treatment? We just don’t see how.

Fake Job Interviews Are Securities Fraud

We talked in 2022 about reports that Wells Fargo & Co. did fake job interviews for fake diversity purposes. Wells Fargo had rules saying that “diverse candidates” had to be interviewed as part of the hiring process for certain jobs. Sometimes a job would open up, and a manager would offer it to a White man, but in order to comply with the rule, he would need to interview a woman or person of color before filling the job. So he’d call in a Black woman, interview her, and then immediately toss her resume in the garbage and give the job to the White man anyway.

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Here is the ruling. This is why I like to say that “everything is securities fraud,” that every bad thing that a public company does is also securities fraud. Wells Fargo did a bad thing. But the badness of the thing is uncertain, amorphous, hard to quantify: People were harmed, but not in ways that the legal system can easily reduce to money.

But the financial system can: The bad thing that Wells Fargo did cause its stock to drop, which is a good rough measure of how bad it was. The shareholders perform the socially useful service of measuring the badness of Wells Fargo’s behavior and making it legible to the legal system. And then they — no, I’m kidding, mostly their lawyers — get paid.

White Male Boards Explain to Investors Why Diversity Is Elusive

One Nasdaq-listed company blames its lack of board diversity on an inability to find a “suitable” contender. Another says a “rigorous and intrusive” licensing process has hampered its efforts to add a diverse board member. A third says it doesn’t know whether it has a woman, minority or LGBTQ+ director because it didn’t want to ask for privacy reasons.

These are among the reasons companies are giving for why they don’t have—or even know if they have—a diverse board under Nasdaq rules that required thousands of firms to have at least one woman, minority or LGBTQ+ director by the end of 2023 or to explain their situations. Nasdaq Inc. can delist companies that fail to comply with the requirements endorsed by the Democratic-led Securities and Exchange Commission and facing a conservative court challenge.

Trump Likes the Idea of a Federal Bitcoin Reserve. Don’t Laugh.

Now enter Bitcoin. Senator Cynthia Lummis of Wyoming has introduced a bill to have the Treasury create a $67 billion (at current value) stockpile of the cryptocurrency, and Republican presidential nominee Donald Trump supports the idea, saying it would be “a permanent national asset to benefit all Americans.” The bill may not be a serious piece of legislation — it is highly unlikely to pass — but it raises a serious question: Under what circumstances is governmental purchases of cryptocurrency be justified?

California DMV Puts 42M Car Titles on the Avalanche Blockchain in Digitization Push

California’s Department of Motor Vehicles (DMV) digitized 42 million of car titles on the Avalanche (AVAX) network as part of development to modernize the state’s title transfer process with software development firm Oxhead Alpha.

Users will soon be able to claim their digital titles via the DMV’s application, track and manage them without getting to the office, according to an Avalanche blog post. The time to transfer vehicle titles drops to a few minutes using blockchain rails in the backend from two weeks via the traditional process, a DMV spokesperson said in an email.

NFT Artists Sue SEC to Head Off Regulation of Digital Art Sales

Two artists sued the Securities and Exchange Commission to protect their digital artwork sold in the form of non-fungible tokens from regulatory oversight.

The SEC’s flawed interpretation of the US Supreme Court’s 1946 ruling in SEC v. W.J. Howey, which defined an investment contract, expands the agency’s power beyond what Congress authorized, the artists said in a complaint filed Monday in the US District Court for the Eastern District of Louisiana. The financial regulator applied Howey in two lawsuits against NFT sellers last year, arguing in both cases that the sale of NFTs constituted an investment contract, the complaint notes.

But the SEC hasn’t clarified when the sale of an NFT is considered a securities offering, the complaint said. “At this point, only a court can set the record straight,” the plaintiffs argued.