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The U.S. Justice Department and SEC are urging a federal judge not to dismiss the first criminal securities fraud indictment against an initial coin offering operator, saying the cryptocurrencies he offered fit the definition of securities.
Maksim Zaslavskiy’s two ICOs were securities offerings, despite Zaslavskiy calling them currencies, the Justice Department said in a March 19 memo in the U.S. District Court for the Eastern District of New York. No federal judge has yet ruled on whether ICOs constitute securities offerings.
Because Zaslavskiy’s sale of business interests sought investments in a common scheme and promised purchasers a return on their investment, each of his ICOs was “a prototypical investment contract” and falls within the definition of a security, the DOJ said.
Zaslavskiy solicited investments in two cryptocurrencies: REcoin and Diamond, according to the DOJ. Real estate investments allegedly backed REcoin, while diamonds stored in secure locations allegedly backed Diamond, the memo said. However, Zaslavskiy owned neither real estate nor diamonds, the DOJ said.
Zaslavskiy in February asked the judge to dismiss the case for lack of subject matter jurisdiction, arguing that his ICOs weren’t securities offerings.
His attorneys, Mildred M. Whalen and Len H. Kamdang, both of the Federal Defenders of New York, Eastern District, declined to comment while they’re reviewing the latest briefs.
The DOJ brought its complaint against Zaslavskiy in October 2017, and he was indicted for securities fraud and conspiracy to commit securities fraud in November 2017. The Securities and Exchange Commission in September 2017 brought a civil complaint against Zaslavskiy and his companies, REcoin Group Foundation LLC and DRC World Inc., alleging securities fraud and the sale of unregistered securities.
The REcoin and Diamond ICOs weren’t currencies because courts have interpreted currency in the securities law context “as including only legal tender (which even the defendant concedes REcoin and Diamond were not),” the DOJ said.
Zaslavskiy calling his ICO products currencies instead of securities doesn’t matter because it’s “the substance of the transaction—not the terminology used—that determines the character of the offering,” the SEC said in a March 19 brief supporting the DOJ in the criminal case.
Judge Raymond J. Dearie, who is presiding over both the civil and criminal cases, has heard 11 securities cases since 2007, according to Bloomberg Law Litigation Analytics. Of those, three were appealed, and two affirmed. Overall, Dearie has been affirmed 84.6 percent of the time.
The case is US v. Zaslavskiy , E.D.N.Y., No. 1:17-cr-00647, memo opposing motion to dismiss filed 3/19/18 .
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