About That Tout...

“The average professional in this country wakes up in the morning, goes to work, comes home, eats dinner, and then goes to sleep, unaware that he or she has likely committed several federal crimes that day. Why? The answer lies in the very nature of modern federal criminal laws, which have exploded in number but also become impossibly broad and vague.” – Harvey Silverglate, Three Felonies a Day: How the Feds Target the Innocent

I’m simultaneously fascinated and troubled by the seemingly random enforcement of laws in the US. As a paranoid chicken, my worst nightmare is to be falsely accused of a crime, let alone inadvertently doing something illegal while simultaneously getting on the wrong side of an aggressive prosecutor looking to make an example out of me. I’ve known that Mr. Silverglate’s book has existed for many years, but I could never read it – it would paralyze me.

It’s through this lens that I watch with stupefied awe as social media influencers beclown themselves by lending their names and reputations to obvious cryptocurrency pump-and-dump schemes, or, as they are more commonly known, shitcoin rug pulls.

Gather ‘round my fellow chickens – I’m going to speak a little bluntly here. The purpose of shitcoin rug pulls is to steal money from people. Stealing money from people is bad. Stealing money from people is immoral. Stealing money from people is a crime – everywhere! Without the critical role of influencers, whether they are in on the plan or not, far fewer people would fall for such schemes. The literal definition of “influencer” is “a person who inspires or guides the actions of others.”  

Recognizing the power of influencers to impact investing decisions, the Securities and Exchange Commission (SEC) has clear anti-touting laws on the books and has brought charges against celebrities for running afoul of them. Basically, the laws state that if you are being compensated to tout a security, you have to disclose that fact and how much you are receiving for your services. Naturally, doing so makes an influencer less influential, which defeats the purpose of bringing an influencer into your scheme in the first place.

I can hear the crypto maxis screaming: “Not so fast, chicken! Bitcoin is not considered a security! It isn’t regulated by the SEC! While the SEC’s stance that cryptocurrencies are commodities and not securities is formally limited to bitcoin and ether, it almost certainly applies to all other cryptos as well.” 

And while technically that’s true (and I’ll have more to say about it at the end of this piece), the SEC has claimed oversight of initial coin offerings (ICOs) – which used to be a thing, until the SEC claimed oversight of them – and has been busy closing the barn door from the excesses of 2017. Included in the recent dragnet of better-late-than-never charges brought by the SEC are several celebrities found to have been violating the anti-touting laws. These include boxer Floyd Mayweather, Jr., music producer DJ Khaled, and actor Steven Segal.  

Most recently, the SEC stretched their oversight a little further, charging the operator of coinschedule.com with failing to disclose compensation it received for glowing profiles of the “digital asset securities” it published on its website.

The thing I found most interesting about this case couldn’t be found in the press release itself. Instead, I read with interest a separate statement published by SEC Commissioners Hester Pierce and Elad Roisman (both of whom were appointed by Trump). They wanted the SEC to use this case to be more definitive about what defines a security. To wit:

“We agree with our colleagues that touting securities without disclosing the fact that you are getting paid, and how much, violates Section 17(b).  We nevertheless are disappointed that the Commission’s settlement with Coinschedule did not explain which digital assets touted by Coinschedule were securities, an omission which is symptomatic of our reluctance to provide additional guidance about how to determine whether a token is being sold as part of a securities offering or which tokens are securities.

There is a decided lack of clarity for market participants around the application of the securities laws to digital assets and their trading, as is evidenced by the requests each of us receives for clarity and the consistent outreach to the Commission staff for no-action and other relief.” 

To me, this statement indicates two things. First, there’s open friction between the new head of the SEC, Gary Gensler, and the two conservative holdovers from the last administration. No surprise there, I suppose. Second, Gensler appears determined to increase the scope of SEC oversight beyond ICOs, a position with which I suspect Pierce and Roisman don’t agree.

In the end, does it really matter who is doing the enforcing? It certainly didn’t matter to John McAfee.

You see, this is the ultimate response to the security versus commodity debate – theft is theft, and if you participate in what is essentially a conspiracy to commit theft (even as a celebrity endorser), you can be charged with several crimes. Perhaps not surprisingly, one of those crimes is conspiracy!

You’ll notice that McAfee and his buddy were charged by the US Attorney for the Southern District of New York (SDNY), not the SEC. The press release routinely makes use of the phrase “commodities or securities” (emphasis added). There’s no turf war here. A prosecutor decided crimes were committed and she found plenty of existing laws on the books to formalize her case.

In particular, comments by FBI Assistant Director William F. Sweeny, Jr., who partnered with the SDNY on this case, drive home my point:

“As alleged, McAfee and Watson used social media to perpetrate an age-old pump-and-dump scheme that earned them nearly two million dollars. Additionally, they allegedly used the same social media platform to promote the sale of digital tokens on behalf of ICO issuers without disclosing to investors the compensation they were receiving to tout these securities on behalf of the ICO. When engaging in illegal activity, simply finding new ways to carry out old tricks won’t produce different results. Investment fraud and money laundering schemes carry a strict penalty under federal law.”

Could things be any clearer? Somehow crypto enthusiasts have convinced themselves to believe “the SEC currently doesn’t regulate cryptocurrencies as securities” means “it’s the Wild West and no rules apply.” How silly.

Sadly, McAfee recently took his own life in a Spanish jail cell after receiving word that he would be extradited to the US to face these charges. It was an unfortunate end to a bizarre, flamboyant, and often controversial life.

In a country where citizens can commit several crimes a day without even knowing it, it probably isn’t smart for celebrities with millions of followers on social media to openly and flagrantly do so online, thus creating a permanent electronic record of their deeds in the process. I simply can’t fathom how any of these people sleep at night.

But then again, I’m just a humble chicken. What do I know?

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