The SEC Has an Opportunity You Won’t Want to Miss - HoweyCoin; The USOA Files Another Crypto Offering Case

by Dorsey & Whitney LLP

SEC Office of Investor Education

The first part of the headline above was written by the U.S. Securities and Exchange Commission’s Office of Investor Education (slightly modified). The second part of the headline shows what can happen to investors if they don’t follow the warning from the Office of Investor Education.

The SEC Office of Investor Education part of the headline announces its site which creates a mock offering for digital coins called, an adoption of the Supreme Court’s landmark case on what constitutes a security, SEC v. W.J. Howey, Inc., The site details the offer for the coins, promises 1% or more per day returns, contains a white paper and shows pictures of the team backing the offer – everything one might expect to find in a fraudster’s offer. Ultimately it redirects the viewer to the Office of Investor Education., and the related website, is a most creative way to illustrate to those surfing the internet the ultimate dangers of many of the crypto currency offers available to the public (here). Ultimately, of course, investors must make their own decision but for those who look at HoweyCoins and miss the point – and that would be difficult – they should consider the case discussed below and be thankful that they found HoweyCoins before they found CentraCoins which are the subject of the criminal case below that is paralleled by an action brought earlier by the SEC, discussed here.

USAO Charges Three with Fraudulent Crypto Offering

The second part of the headline above refers to the latest crypto currency case by the Manhattan U.S. Attorney’s Office. All things crypto currency continue to be a focus of interest. Crypto coins, offerings of securities tied to coins and the trading of crypto currencies draw significant interest. In many instances this interest becomes the focus of fraudulent schemes as illustrated by the latest case brought in this area by the Manhattan U.S. Attorney’s Office.

Following the arrests of Shrab Sharma, Raymond Traponi and Robert Farkas, who allegedly were engaged in a crypto currency offering supposedly tied to a bank and Visa and Mastercard credit cards, the FBI seized 91,000 Ether units that had been obtained from victims of a fraudulent ICO. The seizure was made pursuant to a court issued search warrant. The tokens are currently valued at about $60 million. U.S. v. Sharma, No. 1:18-cr-00340 (S.D.N.Y. ).

Defendants Sharma, Traponi and Farkas co-foundered Centra Tech. Previously, Messrs. Sharma and Trapan worked at a luxury car rental company in Florida. The three men began soliciting investors to purchase securities in the form of digital tokens issued by their firm in July 2017. The offering was conducted in the form of an initial coin offering or an ICO. Investors were told in written materials that:

Experienced executive team:The company had an experienced executive team lead by CEO Michael Edwards who had over 20 years of experience;

Centra Card:Centra Tech had formed partnerships with Bancorp, Visa and Mastercard to issue Centra Cards licensed by Visa and Mastercard that supposedly permitted users to spend different types of crypto currency to make purchases; and

Licenses in 38 states:That the company had money transmitter and other licenses in 38 states.

Each of the claims was false as illustrated by a series of text messages. Mr. Sharma, for example, sent a text message to Mr. Trapani on July 31, 2017 which discussed the fact that Centra did not have an actual partnerships with the bank or the credit card companies. The text went on to note that they needed to establish a banking relation, a tie to one of the credit cards and that “I wish we just knew someone.”

The statements about an experienced management team and CEO Edwards were also false. A text message from Mr. Sharma to Mr. Trapani dated July 29, 2017 stated in part that they “Need to find someone who looks like Michael” and need “Team Photos.”

Similarly, the claim about the licenses in 38 states is false. A text message Mr. Sharma had with Defendants Trapani and Farkas on August 30, 2017 stated in part that that they “Gotta apply for all licenses” and “Should I even say this.”

Defendants are charged in a four count indictment with: one count of conspiracy to commit securities fraud; one count of conspiracy to commit wire fraud; one count of securities fraud; and one count of wire fraud. The case is pending. The SEC filed a parallel civil enforcement action earlier. SEC v. Sharma, Civil Action No. 1:18-cv-02909 (S.D.N.Y. Filed April 2, 2018).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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