On July 31, 2013, the Securities and Exchange Commission (“SEC”) formally charged the enigmatic crypto-personality Richard Heart (whose real name, as I learned from the complaint, is Richard Schueler) and his three entities—Hex, PulseChain, and PulseX—with conducting unregistered offerings of crypto asset securities. These securities offerings and sales raised more than $1 billion in funds from U.S. investors and investors abroad. The SEC further charged Heart and PulseChain with fraud and misappropriating at least $12 million in funds.
Heart maintained a very active social media presence and frequently posted pictures of himself with the spoils of his work. As the SEC complaint notes, he used the funds raised from these different entities to purchase Lamborghinis and other exotic vehicles, Louis Vuitton clothing, flights on private jets, and even the world’s largest black diamond, measuring 555-carats and nicknamed “The Enigma.”
Hex was initially sold beginning in December 2019. Hex is a cryptocurrency that is marketed as “the first Certificate of Deposit (CD) or fixed deposit on a blockchain.” Owners of the token can “stake” their holdings to earn yield on those deposits. Between December 2019 and November 2020, Heart allegedly raised over 2.3 million in Ethereum, worth more than $648 million at the time. The SEC alleges that a significant portion of these Ethereum deposits were “recycled” trades. Said another way, Heart and his acquaintances continued to deposit the same Ethereum tokens over and over again in order to gain control over a significant portion of all HEX tokens. The SEC alleges that between 94%-97% of all the Ethereum transactions were made with through “recycled” transactions.
Not content with the gains from Hex, Heart then raised funds through PulseChain and PulseX (offering PLS and PLSX tokens, respectively). Between July 2021 and April 2022, Heart conducted offerings for both of these projects. Riding on the supposed success of his Hex project, Heart raised a staggering $354 million through PulseChain and another $676 million through PulseX. PulseChain is purported to be a Layer 1 blockchain and a direct competitor to Ethereum. PulseX, meanwhile, is built on the Ethereum network and is essentially a fork of Uniswap, meaning it is a decentralized crypto-trading exchange.
Throughout the complaint, the SEC harps on Hex’s staking function. Staking allowed users to lock up their Hex tokens with the promise of larger returns in the future. The mechanics of staking involves users sending their HEX tokens to the Ethereum genesis address, which is an Ethereum wallet that no one has access to. That means, tokens sent to this address are effectively forever taken out of circulation. Heart promised that any user who did this would then receive a supply of Hex tokens in the future that were greater than what they initially locked. The goal of this staking function was ultimately to inflate the price of the tokens by removing great swaths from the trading pool. In order to incentive the staking, Heart constantly touted that users could expect a future return of 38%. He also frequently made outlandish claims, such as “[Hex] was built to be the highest appreciating asset that has ever existed in the history of man.”
Heart has certainly been a polarizing figure in the cryptocurreny industry. His best strength was at a promoter, and he frequently published content across a variety of social media platforms in support of his various projects. Throughout these posts, Heart became more and more ostentatious with his luxury purchases, whether it be exotic cars, rare watches, or flashy clothing. Many users began to suspect where Heart had garnered that wealth from, especially considering this PulseChain and PulseX projects never quite took off. The SEC notes that, as of June 30, 2023, PLS and PLSX tokens “are practically worthless” and Hex’s value has dropped 98.4% from its all-time high.
