Please Note My Objection for the Record; Tezos Litigation and the SEC
In the recent days, I have seen more and more chatter from people speculating about what’s going on in the Tezos Litigation (In re Tezos Securities Litigation, 3:17-cv-06779, N.D. Cal. 2018.) and the involvement with the United States Securities Exchange Commission (“herein referred as SEC”). To simplify the misinformation being spread in the Tezos telegram chat group, people are claiming that the SEC is investigating Tezos. This topic has been getting more attention especially in light of the recent SEC complaint (lawsuit) against Kik Interactive Inc, also known as Kin Foundation (“herein referred as Kin”) filed on June 4, 2019. (See U.S. Securities and Exchange Commission v. Kik Interactive Inc., 19-cv-5244, S.D.N.Y, 2019.) Another fact that has been feeding this speculation is that crypto-currency exchanges like Poloniex, Bittrex, and Gate.io have all recently de-listed certain crypto-currency for trading among its USA customers.(Gate.io removed Tezos as a crypto-currency that could be traded by USA customers.) Based on all this chatter in the telegram group, I felt compelled to write this article.
(Note: This article will not examine whether I believe Tezos is a security or not under the Howey test (See Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946)). This article is just about Tezos and the SEC.)
First, let’s clear the air in differentiating between the Tezos litigation and the Kin litigation. The Tezos litigation was filed by private party plaintiffs whereas the Kin litigation was filed by the SEC acting as plaintiff. The big difference here, is in the plaintiffs. In one case (Tezos litigation), you have private parties and the other, you have a governmental entity. This difference is crucial to note because the potential outcomes are vastly different. Now, you might ask, how are the outcomes different? Well, by looking at the complaints specifically the prayers of relief, you will see the difference.(prayer of relief is what you’re asking the court to do to make you whole from the damages you suffered, i.e; remedy)
In Tezos litigation the plaintiffs are asking for:
A. For an order declaring that this action is properly maintained as a class action pursuant to Federal Rule of Civil Procedure 23, and certifying Plaintiff as the Class representative;
B. For an order awarding Plaintiff and the members of the Class the remedy of rescission of their investment to the Tezos ICO including appreciation of the contributed bitcoin and ethereum, and/or awarding compensatory damages in favor Plaintiff and the Class against all Defendants, jointly and severally, for all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
C. Awarding Plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees, expert fees, witness fees and electronic discovery fees as permitted by law;
D. Granting such other and further relief as this Court may deem just and proper. (See In re Tezos Securities Litigation, 3:17-cv-06779, N.D. Cal. 2017, pages 22–3).
Now, let’s take a look at the SEC’s prayer for relief in their complaint:
I. Permanently restraining and enjoining Defendant Kik Interactive Inc. from, directly or indirectly, violating Section 5(a) and (c ) of the Securities Act [15 U.S.C. § 77e(a), § 77e(c)];
II. Ordering Defendant Kik Interactive Inc. to disgorge all ill-gotten gains or unjust enrichment derived from the activities set forth in this Complaint, together with prejudgment interest thereon;
III. Ordering Defendant Kik Interactive Inc. to pay a civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)]; and
IV. Granting such other and further relief as this Court may deem just, equitable, or necessary in connection with the enforcement of the federal securities laws and for the protection of investors. (See U.S. Securities and Exchange Commission v. Kik Interactive Inc., 19-cv-5244, S.D.N.Y, 2019, pages 48–9).
The key difference to note in the prayer of reliefs for both complaints, is point B in the Tezos prayer of relief and point I in the SEC complaint. More specifically, in the Tezos complaint, the plaintiffs, in short, are asking for a remedy of refunding their investment money and any damages they suffered because of the loss of investment money (asking for money), while the SEC prayer for relief is asking for a remedy of permanently shutting down the Kin crypto-currency. One complaint is asking for money and the other complaint is asking to completely shut down the crypto-currency.
See the difference? (Note: keep in mind that just because the Tezos litigation is being litigated by private parties, that doesn’t necessarily mean that the SEC will not involve itself in the future with Tezos. At any moment, the SEC can interject itself in the litigation or keep its current course of inaction.)
Users in the Tezos telegram chat group have been claiming that the SEC is investigating Tezos and they are using an article posted on Reuters back in February 9th, 2018 to support their claim. (Yes, I know, the article is over a year old and we are still talking about it.) The article was written by Anna Irrera and she claimed that, “[a] top U.S. securities regulator says it cannot release documents related to the cryptocurrency project Tezos because doing so could interfere with an investigation or enforcement activities, according to a document seen by Reuters on Friday.” (See https://www.reuters.com/article/us-bitcoin-tezos/sec-says-releasing-tezos-documents-could-hurt-enforcement-activities-idUSKBN1FT2VI )
The article went on saying that the document stated, “the U.S. Securities and Exchange Commission denied a public information request from a lawyer representing class-action plaintiffs who say they were defrauded by Tezos’ $232 million fundraiser in July” (Id.) The article went on further stating that the document viewed by Reuters, “said an exemption allows it to withhold records if their release might “interfere with enforcement activities.” But it added that use of the provision should not be taken to mean any legal violations had occurred.” (Id.)
The person that provided Reuters the document was “[t]he class-action lawyer, David Silver” (Id.) Shortly after this Reuter’s article was posted, coindesk.com posted a similar article written by Stan Higgins. Mr. Higgins went on further stating, “[a]ccording to a copy of the letter obtained by CoinDesk, the U.S. securities regulator withheld “information concerning Tezos” citing Exemption 7(A), which allows for exemptions in the case of enforcement activities.” (See https://www.coindesk.com/sec-denies-foia-request-controversial-tezos-ico)
Mr. Higgins went on saying, “[i]n Silver’s interpretation, the letter proves that the SEC is actively investigating the blockchain project, which has been roiled by a governance crisis in recent months.” (Id.)
(Before publishing this story, I have reached out to Mr. Silver to see if he has any updates or would like to clarify. As of yet, I have not received a response and will update this article if I receive a response from him.)
Now, that you have the sufficient background, I think you might know where I am going with this article and it’s mainly to prove Anna’s last sentence in her article and how it still holds true a year after the fact. What you might have noticed in the Reuters and Coindesk articles is that the authors do not provide any proof of Mr. Silver’s claims besides stating that the authors were shown the contents of the letter. The authors are asking you to trust what they have published without showing any proof and this has led to the misinformation, especially without any updates.
Who is David Silver? He is a Florida attorney that filed the 2nd lawsuit against the Tezos Foundation in federal court in Florida, which was consolidated into the present lawsuit in California. He represents the “Gaviria Group”, and although he was not chosen as lead counsel for the lawsuit in California, he still represents the “Gaviria Group” in the California lawsuit. The “Gaviria Group” are co-plaintiffs in the California lawsuit (not lead plaintiffs) that are moving the Court to certify all plaintiffs in the current lawsuit to become a “class” to proceed with a class-action lawsuit. (See In re Tezos Securities Litigation, 3:17-cv-06779, N.D. Cal. 2017, page 5.)
Ok, now that you have a little more background information, let’s get to the point of this article. Is the SEC investigating Tezos? Based on my public record’s request return from the SEC, the answer is no. Now, if you take a closer look at the what I requested from the SEC, I requested access to any and all investigations related to the Tezos Foundation or tezos cryptocurrency. The periods of information requested were for December 2017 till June 2019, and the SEC answered my request stating that, “[b]ased on the information you provided in your letter, we conducted a thorough search of the SEC’s various systems of records, but did not locate or identify any information responsive to your request.” The letter went on stating, “[i]f you still have reason to believe that the SEC maintains the type of information you seek, please provide us with additional information, which could prompt another search. Otherwise, we conclude that no responsive information exists and we consider this request to be closed.”
So, what does this mean? It means that the SEC does NOT have any information on Tezos Foundation or Tezos crypto-currency. If the SEC was investigating Tezos, then they would have asserted an exemption to my request instead of flat out stating that they did not have any information related to my request as of the date of my public record’s request return (June 10, 2019). Keep in mind that if the SEC did begin an investigation after June 10, 2019, then my return letter from the SEC would not be accurate anymore as the dates covered are all the way up to the return date of June 10, 2019. However, this letter debunks Mr. Silver’s claims, the Coindesk article, and confirms the Reuters article’s last two sentences, “Reuters made a public records request to the SEC for documents related to Tezos in November. On Dec. 12 the SEC responded by saying it had conducted a search but had not found any such documents”. (Note; the SEC could have made a mistake in their search for my public record’s request and Mr. Silver could have worded his public record’s request differently and received a different return from the SEC. As I have stated above, before publishing this story, I have reached out to Mr. Silver for any updates or comments and if he responds, I will update this story.)
Hopefully this article will stop some of the misinformation out there regarding Tezos and the SEC. As always, please do your own research regarding Tezos and crypto-currencies in general. Further, please do not rely on this article as financial advice or legal advice as this article is solely based on my opinion and information found that is available to the public. Lastly, I have reached out to Mr. Silver to see if he has any comments or updates. If he responds I will update this article.
By: Alexander Liu, Esq., licensed to practice law in the State of Louisiana (Civil Law) and the State of Missouri (Common Law).
