US SEC files first lawsuit against a Defi Project for $30 Million Fraud

The US Securities and Exchange Commission (SEC) has charged two Florida men, Gregory Keough, Derek Acree, and their Cayman Island company, Blockchain Credit Partners against unregistered offerings and sales of over $30 million through the Defi system and smart contracts. Additionally, the respondents are also accused of misleading investors concerning the operations and profitability of the Defi Money Market (DMM).

DMM guaranteed interest & profits

The company executives were illegally offering two types of tokens, mToken and DMG, for an entire year, starting from February 2020 to February 2021, through the Defi Money Market (DMM). mToken offered  6.5 percent interest on the purchase of specified digital assets; it was also used to buy “real world” assets that generated income, like car loans. DMG, a governance token allowed voting right, the share of excess profit, profit from the resale in the secondary market. Both tokens guaranteed interest rates as well as profits through the Defi Money Market.

The SEC order points out that the interest and profit guarantees backed by the DMM system are fraudulent, concerning the high price volatility of the digital assets, that were being used to accumulate and hold more tokens. Furthermore, the commission highlighted that the Defi project had insufficient generated income through its volatile digital assets, which in turn put the investors at risk of not getting back their promised returns.

The accused not only failed to inform the investors, rather they covered it up by manipulating the company’s operation process. They also falsified the car loan information, claiming that DMM had bought car loans that they displayed on the website. Whereas, the accused had ownership of the car loans company, i.e., the Defi Money Market never acquired the “real world” asset ownership that was guaranteed.

“The federal securities laws apply with equal force to age-old frauds wrapped in today’s latest technology,” said Daniel Michael, unit chief of the SEC’s enforcement division.

Settlement of nearly $13 Million

The SEC has filed the lawsuit under Sections 5(a) and 5(c) of the Securities Act of 1933, that the respondents violated by conducting unregistered sales of both types of digital tokens.

The commission also filed the respondents under 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. The respondents have agreed to a settlement, and pay back over $12.8 million in disgorgements and penalties of $125,000 each, without having to plead guilty.