On April 1, 2018, the FBI arrested Sohrab (Sam) Sharma and Robert Farkas, two co-founders of Centra Tech, Inc., for securities fraud and wire fraud crimes in connection with a cryptocurrency initial coin offering (ICO) that raised at least $32 million through material misrepresentations and omissions. The FBI and SEC later arrested and charged the third Centra co-founder, Raymond Trapani, on April 20, 2018. Centra’s arrests and charges are the first serious criminal actions taken against ICO founders and promoters. Even before the arrests and criminal charges, Taylor-Copeland Law was pursuing a civil suit on behalf of aggrieved investors against Centra in the Southern District of Florida, where he has been appointed co-lead counsel.
The Chief of the SEC Enforcement Division’s Cyber Unit, Robert A. Cohen, alleged “that the Centra co-founders went to great lengths to create the false impression that they had developed a viable, cutting-edge technology.” He warned that “investors should exercise caution about investments in digital assets, especially when they are marketed with claims that seem too good to be true.” The SEC’s complaint alleges that Centra made false claims of partnerships with Visa and MasterCard, fraudulent claims that Centra held state licenses, used fictional executive biographies to promote Centra, and falsely claimed that investors would be paid a dividend.
The SEC’s complaint uses Centra’s public statements, marketing materials, and even text messages to form its claims. In September 2017, after Centra’s co-founders realized that their misstatements about the Visa and MasterCard partnerships may be in violation of securities laws, they began texting each other, “Everything gotta get cleaned up.” “Anything that doesn’t exist current[ly] we need to remove […] do it asap.” In October 2017, Visa sent Centra a cease-and-desist notice after Centra’s website continued to reference a partnership with Visa.
The co-founders falsely appropriated photos and created fake LinkedIn profiles for their fictional management executives. Sharma messaged Trapani that he “had one girl contact me lol [and] she said take my picture off your site.” Sharma sent Trapani a picture of another fake team member and asked, “U know anyone [t]hat looks like this guy… I need someone who kinda looks like him[.] I can’t just change him now People are gonna be like wtf.”
The SEC’s complaint makes four separate claims that Centra violated U.S. securities laws. It also seeks permanent injunctions against the co-founders’ offering of unregistered securities, the return of ill-gotten gains plus interest and penalties, a permanent bar for each of the co-founders from serving as an officer or director of any public company, and a permanent prohibition for the co-founders from participating in offering digital or other securities.
The SEC and FBI actions signal the increased regulatory focus on crypto-currencies and token sales. They are also a reminder that aggrieved crypto-currency investors have a number of remedies available to them under U.S. law, including civil suits to recover losses sustained as a result of fraud or violations of Securities laws.