Two men and their company have been charged by the Securities and Exchange Commission in what the agency says is its first case involving decentralized finance technology, or DeFi.
In a press release, the SEC said Florida residents Gregory Keough and Derek Acres and their Cayman Islands-based firm, Blockchain Credit Partners, sold more than $30 million of unregistered securities by using smart contracts to sell two types of digital tokens. Keough and Acres allegedly misled investors about the operations and profitability of their business, known as DeFi Money Market.
The SEC said that from February 2020 to February 2021, Keough and Acres were selling mTokens that paid 6.25 percent interest and DMG “governance tokens” that were purported to give holders rights to vote and share excess profits.
The two men were said to have told investors that they could pay the interest and profits because investor assets would be used to purchase “real world” assets, such as car loans, that could generate income. According to the SEC, Keough and Acres realized they could not deliver on their promise due to the price volatility of the digital assets. Instead of notifying investors about this issue, the two are accused of falsely claiming that DeFi Money Market had purchased car loans, and allegedly used personal funds and funds from another company to pay off 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.
The SEC said that Keough and Acres were found to have 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 found that they 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.
Keough and Acres did not admit or deny the SEC’s findings, but they did agree to a cease-and-desist order that includes penalties of $125,000 each. Under the order, they will also return over $12.8 million in profits gained through the alleged violations. In addition, they funded the smart contracts so that mToken holders could receive all of the principal and interest they were owed.