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SEC charges DeFi company for defrauding investors out of $30 million

The Securities and Exchange Commission today charged two Florida men and their Cayman Islands company for unregistered sales of more than $30 million of securities using smart contracts and so-called “decentralized finance” (DeFi) technology, and for misleading investors concerning the operations and profitability of their business DeFi Money Market.

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According to the SEC’s order, Gregory Keough, Derek Acree, and their company Blockchain Credit Partners offered and sold securities in unregistered offerings through DeFi Money Market from February 2020 to February 2021. The order finds that they used smart contracts to sell two types of digital tokens: mTokens that could be purchased using specified digital assets and that paid 6.25 percent interest, and DMG “governance tokens” that purportedly gave holders certain voting rights, a share of excess profits, and the ability to profit from DMG governance token resales in the secondary market.

According to the order, in offering and selling mTokens and DMG governance tokens, the respondents stated that DeFi Money Market could pay the interest and profits because it would use investor assets to buy “real world” assets that generated income, like car loans. However, the order finds that after publicly unveiling DMM, the respondents realized that DeFi Money Market could not operate as promised because the price volatility of the digital assets used to purchase the tokens created risk that the income generated through income-generating assets would be insufficient to cover appreciation of investors’ principal. The order finds that rather than notifying investors of this roadblock, the respondents misrepresented how the company was operating, including by falsely claiming that DeFi Money Market had bought car loans that they displayed on DeFi Money Market’s website. While the respondents controlled another company that owned car loans, DeFi Money Market never acquired an ownership interest in any of those loans. Instead, the order finds that the respondents used personal funds and funds from the other company they controlled to make principal and interest payments for mToken redemptions.

“Full and honest disclosure remains the cornerstone of our securities laws - no matter what technologies are used to offer and sell those securities,” said Gurbir S. Grewal, Director of the SEC Enforcement Division. “This allows investors to make informed decisions and prevents issuers from misleading the public about business operations.”

“The federal securities laws apply with equal force to age-old frauds wrapped in today’s latest technology,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Here, the labeling of the offering as decentralized and the securities as governance tokens did not hinder us from ensuring that DeFi Money Market was immediately shut down and that investors were paid back.”

The SEC’s order finds that the mTokens were notes and were also offered and sold as investment contracts, the DMG governance tokens were offered and sold as investment contracts, and the respondents violated Sections 5(a) and 5(c) of the Securities Act of 1933 by conducting unregistered offers and sales of both types of digital assets. The SEC’s order also finds that Respondents violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Without admitting or denying the findings in the SEC’s order, respondents consented to a cease-and-desist order that includes disgorgement totaling $12,849,354 and penalties of $125,000 each for Keough and Acree. In addition, prior to the issuance of this order, the respondents funded the smart contracts so that mToken holders could redeem their mTokens and receive all principal and interest owed.

The SEC’s investigation was conducted by Brent Mitchell, Stephanie Reinhart, and Gregory Smolar and supervised by Natalie Brunson and Ana Petrovic of the Complex Financial Instruments Unit with assistance from trial counsel Kristin Murnahan and the Enforcement Division’s Office of Investigative and Market Analytics.

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