FBI, Justice Department Want Case Against Alleged ICO Fraudster To Move Forward

March 22, 2018

What started out as an investigation by the U.S. Securities and Exchange Commission is now a criminal case, and the U.S. government is determined for the alleged mastermind to be brought to justice.

Legal wrangling continues in the U.S. related to a first-of-its-kind action taken by the U.S. Securities and Exchange Commission regarding ICOs.

Last fall, it filed a civil complaint against the organizer of the REcoin Group Foundation and DRC World ICOs with defrauding investors and violating U.S. federal securities laws.

The FBI followed in October with a criminal complaint. The alleged mastermind behind the ICOs, Maksim Zaslavskiy, was indicted and arrested on the FBI’s charges in November.

Zaslavskiy cried foul, and in February, he filed documents with the courts requesting that the charges be dismissed. The U.S. Justice Department, which is handling the criminal case, had until Monday to respond to the dismissal request.

It did, asking to submit a lengthier document outlining why this case must move forward.

Let’s discuss.

The charges

We reported the news about the SEC in September, noting that the regulator wasted no time in swooping in and shutting down the ICOs for REcoin and DRC World, which were held in August.

Specifically, the SEC charged businessman Zaslavskiy and his companies with selling unregistered securities. Investors were allegedly duped into buying the tokens on the promise that they could expect “sizeable returns from the companies’ operations when neither has any real operations,” according to the SEC.

Zaslavskiy allegedly touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate.”  Alleged misstatements to REcoin investors included that the company had a “team of lawyers, professionals, brokers, and accountants” that would invest REcoin’s ICO proceeds into real estate when in fact none had been hired or even consulted.

Caught in a lie?

The FBI noted in its filing that the truth came to light after Zaslavskiy had to give testimony to the SEC. For the REcoin ICO, he admitted to raising only $300,000 despite his claims on Reddit that he’d raised “over $1.5 million.”

The FBI’s complaint noted:

“…neither the defendant nor Diamond had purchased any diamonds nor identified any storage locations, as touted in the whitepaper and the Reddit Release, and there was no insurance taken out on the non-existent diamonds. Similar to the REcoin ICO, contrary to what was stated in the whitepaper, the Reddit Release and email communications to investors, the defendant admitted in his SEC testimony that no tokens or coins had ever been developed with respect to Diamond…”

I’m legitimate!

Zaslavskiy has been adamant that the allegations lodged against him are not true. In his motion to dismiss, Zaslavskiy maintains several points, including the following:

  • The tokens were cryptocurrencies that are exempt from U.S. securities laws just as fiat currency is exempt
  • The securities fraud charges, as applied to cryptocurrencies, are void for unconstitutional vagueness.

When the REcoin ICO was launched, early investors were offered a 15% discount on tokens. In the court filings, it was noted that as an added measure of security, the REcoin token would itself be hedged by ownership of real estate.

Therefore, if token holders in the ecosystem for some reason decided not to recognize the value of the tokens, the tokens themselves would have some measure of intrinsic value.

The filing went on to state:

To be clear, Maksim Zaslavskiy never intended to defraud potential adopters of their money. His was a sincere vision and he intended to create a new more efficient token economy for the benefit of society. As his project continued to progress, he soon realized that his vision was not feasible and he refunded nearly all of the money he had raised in the ICO to his adopters to make them whole.

Next steps

The SEC requested that its matter be essentially put on hold as the criminal case against Zaslavskiy works its way through the courts.

In its filings in response to Zaslavskiy’s dismissal request, the Justice Department wants to file what is called an “oversized memoranda of law.” The department acknowledged that the court’s rules limit memoranda to 25 pages unless a party receives leave to exceed the limit.

The Justice Department’s filing states:

“The defendant raises a number of arguments in his brief regarding the dismissal of the indictment. The government does not have the benefit of a reply and intends to provide the Court with a complete picture of the facts that are directly relevant to both, the facial attack on the indictment and to constitutional vagueness. Of course, we are cognizant of the need to keep the brief concise and will keep our response as short as possible.”

No date was available as of press time as to when the court would respond.

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