11 USC §523 – Bankruptcy No Escape

If the perpetrators of the tsunami of ICO shenanigans think they can hide their ill gotten gains, and then discharge all related debts and fines in personal bankruptcy, they had better think again. The Congress, and their advance guard, the SEC, long ago cut off their escape.

SEC v Tomahawk Exploration LLC et al.

In the case of the SEC v. Tomahawk Exploration LLC and David Thomson Laurance, File No. 3-18641, (“Tomahawk”) the Respondent Laurance had previously been convicted in 1993 of penny stock fraud, in 2009 was the president of a company that ceased business after being investigated for stock manipulation, and had filed for personal bankruptcy in 2010 and 2016.

In the Tomahawk case, the SEC issued an Administrative Consent Order against the Respondents for violation of Sections 5(a) and 5(c) of the Securities Act by offering and selling the Tomahawkcoin tokens without having a registration statement filed or in effect with the Commission or qualifying for an exemption from registration with the Commission. Several other violations were also part of the findings of the Commission.

In the consent Order promulgated against the Respondents, the SEC fined Laurance a civil penalty of $30,000.00, to be paid in installments over about 2.8 years to the Securities and Exchange Commission for transfer to the general fund of the United States Treasury in accordance with Exchange Act Section 21F(g)(3).

Then in the last paragraph, Section V of the Order, the SEC included language also accepted by the Respondent prohibiting discharge of the debt in personal bankruptcy:

“It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by Respondent Laurance, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Respondent Laurance under this Order or any other judgment, order, consent order, decree or settlement agreement entered in connection with this proceeding, is a debt for the violation by Respondent Laurance of the federal securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19).”

See also SEC v Zachary Colburn

See also SEC v Mayweather and Khaled

SEC Power – Fines and Penalties

The take away from these examples, and no doubt there are many others, is that there are a broad range of civil and criminal penalties available to the SEC to penalize deceptive, reckless and/or fraudulent behavior by promoters. Even after more than 80 years of well defined Securities laws on the books to protect investors and the markets, investors can still get bewitched by get-rich-quick claims. The promoters apparently believe their own sales pitches.  Attributed to a myopic personality, “There is no better judge of Me than Me.”  Until the SEC kicks down the door.

Will this type of penalty deter promoters from such activities in the future?  The best assessment we can conclude is that it will deter most, but not all. Just like driving on the interstate – human behavior dictates that most drivers will maintain safe practices for their own safety and that of others. But there will still be some speedsters recklessly driving their ego-engines oblivious to the risks. Hence the continuing need for the Congress to provide strong guidance and penalties to maintain economic stability and protect the legitimate equity markets.

Cryptocurrency principals and entities would be well advised to consider this bankruptcy exclusion, in addition to the other civil and criminal penalties present in the statutes, as part of their management of ICO promotions and services made to investors.