SEC Files Charges in Fraudulent Token Manipulation Scheme

The Securities and Exchange Commission (“SEC”) filed charges against Reginald “Reggie” Middleton and two entities he owns for allegedly committing a fraudulent digital token sale scheme. Courts have granted an emergency freeze of the $8 million of the funds Middleton raised in its initial coin offering (“ICO”).

The charges allege that Middleton, and his companies, Veritaseum, Inc. and Veritaseum, LLC, violated the registration and antifraud provisions of U.S. federal securities laws by marketing and selling unregistered, digital securities called VERI tokens.

Among the allegations in the complaint, the SEC alleges that Middleton knowingly misrepresented his prior business venture, claimed exaggerated and fictitious investor demand for VERI tokens, falsely claimed to have a product ready to generate revenue, manipulated the price for the tokens, traded them on an unregistered platform, and moved investor assets to his personal accounts.

Middleton, a self-proclaimed “financial guru” who claimed to predict the 2008 financial crisis and the collapse of both Lehman Brothers and Bear Stearns, founded Veritaseum, Inc. in 2014. The company marketed itself to be a revolutionary software company that would disrupt the financial markets by allowing “peer to peer exchanges of value” using the Bitcoin blockchain.

Read the full SEC Press Release here.

The SEC’s complaint states that, in 2017, Middleton announced the end of his bitcoin software and the closing of Veritaseum, Inc., and the creation of Veritaseum, LLC, claiming development of a similar software written on the Ethereum blockchain. The SEC alleges that Middleton knowingly misled investors into believing “regulatory concerns” led to the end of his venture when the true reason was a lack of ability, patents, and funding to complete the promised bitcoin software.

Brochures, Google presentations, YouTube videos and other marketing materials Middleton published claimed the Veritaseum technology was ready to go to market and would displace the broker, bank and hedge fund industries; however, at the ICO phase, none of the software functionalities were operating.

The allegations also provide that, in order to avoid securities law registration requirements, Middleton claimed the digital securities he was selling were “pre-paid fees” or “software” that he compared to gift cards. During the ICO phase, which ran from April 25, 2017 to May 26, 2017, Veritaseum, LLC sold the unregistered VERI tokens, pegged to the value of the digital asset ether (“ETH”). In the offering, 1 ETH token entitled a purchaser to 30 VERI. Based on the varying price of the ETH, purchasers spent between $1.60 and $8 per VERI token, and Middleton raised approximately 69,000 ETH or $14.8 million, at the time.

Following the ICO, it is asserted that Middleton manipulated the price of the VERI tokens by placing a series of secret trades on a digital asset forum artificially increasing the token price by 315% in a single day and made several transfers to his personal accounts.

The SEC seeks permanent injunctions, disgorgement plus interest and penalties, and a bar from offering digital securities.  Additionally, it seeks officer-and-director bar for Middleton.

Let Our Experience Work for You

The digital asset and cryptocurrency markets continue to evolve and challenge regulators, advisers, and investors. Read the Jacko Law Group, PC recent blog post “Digital Asset and Cryptocurrency Websites: The SEC Warns of Increase in Fraudulent Activity.”    

It is important that advisers who recommend these types of investments consider the risks and safeguards and complete due diligence when recommending digital currencies. 

Our attorneys can help identify potential fraud and can advise on legal and regulatory considerations regarding digital assets and cryptocurrencies. Contact our attorneys today. Let our experience work for you.

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