SEC Sues Longfin Over Trades Following Acquisition of Cryptocurrency Company

The Securities and Exchange Commission (SEC) last week sued Longfin Corp., a financial technology company that recently entered the cryptocurrency space, as well as Longfin’s CEO and three others affiliated with the company.  The complaint, filed in federal court in Manhattan, was unsealed on April 6, 2018, when the SEC obtained a court order to freeze over $27 million in trading proceeds.

The SEC’s case arises from Longfin’s acquisition of a purported cryptocurrency business, “,” a deal that sent Longfin’s stock soaring shortly after it began trading on NASDAQ last year. The SEC charges that, soon after Longfin’s stock price surged upon the announcement of its acquisition, three individuals affiliated with Longfin who owned unregistered, restricted shares in the company, sold large blocks of their shares to the public, in violation of federal securities laws.  According to the complaint, these individuals netted $27 million in what the SEC alleges are illegal proceeds.  The SEC also seeks to hold the company and its CEO and controlling shareholder liable for their involvement in the issuance of the unregistered, restricted shares to these affiliates, and the subsequent alleged illegal sale of those shares.

The court order issued on Friday froze the funds in the brokerage accounts of the three individuals affiliated with Longfin.  The SEC says it took this forceful step to prevent the defendants from transferring their profits offshore while the case is pending.  The following Monday, Longfin and its CEO were named in a proposed class action lawsuit by private litigants in federal court in Manhattan.  That suit alleges that shareholders were misled about the company’s viability and profitability until public filings revealed that Longfin was facing financial concerns and investigation by the SEC.

More broadly, as the SEC and Commodity Futures Trading Commission confirmed in a joint statement on January 19, 2018, the agencies are taking aim at potential violations of the federal securities and commodities laws in connection with the “offering digital instruments — whether characterized as virtual currencies, coins, tokens, or the like.”  The Longfin suit is the latest demonstration of the SEC’s recent focus on cryptocurrency companies.  In particular, Longfin should be a wake-up call for all issuers and their insiders to be mindful of the insider trading issues that have long been part of the “traditional” securities fabric, and to consider whether they should be monitoring the trades their “insiders” are looking to make in relation to tokens issued by the company and whether to adopt an insider trading policy to help avoid “insider trading” type claims.