SEC Turns the Screws Again With Crypto Market Manipulation Case

Latest Action Targets Tiny Player Hydrogen Technology

By: Samuel Haig Loading...

SEC Turns the Screws Again With Crypto Market Manipulation Case

In the latest of a spate of enforcement actions, the U.S. Securities and Exchange Commission on Sept. 28 accused Hydrogen Technology Corp., a fintech firm, and its former CEO, Michael Ross Kane, of unlawfully manipulating “crypto asset securities.”

The SEC says the company offered unregistered offers and sales of crypto asset securities in the form of the HYDRO token, which is miniscule with a fully diluted market cap of $416,000. The agency also alleges Hydrogen oversaw a scheme to manipulate the trade volume and price of HYDRO that netted more than $2.2M in profits.

Alleged Scheme

In its lawsuit, the SEC said Tyler Ostern, the CEO of Moonwalkers Trading Limited, the self-described market-making firm for Hydrogen, also participated in the alleged scheme.

“Hydrogen and Kane offered and sold crypto asset securities called Hydro tokens and privately hired Ostern to fraudulently manipulate the price and volume of Hydro tokens traded on crypto asset trading platforms so that Hydrogen could sell its own Hydro tokens at a greater profit,” the complaint said.

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The action is the latest in a flurry of enforcement moves by U.S. authorities. Last week, the Commodity Futures Trading Commission sued a DAO for failing to register crypto derivatives as securities. By targeting relatively tiny players, the agency appears to be trying to send a message to more valuable projects to register their tokens as securities or investment contracts.

The complaint notes that HYDRO tokens were distributed through bounty programs, employee compensation, direct sales to the public via exchanges, and an airdrop.

After issuing the HYDRO token, the SEC alleges that Kane hired Moonwalkers Trading to create the illusion of strong market activity for the HYDRO token, enabling Hydrogen to sell the token into an “artificially inflated market” for profit.

Manipulated Price

The complaint cites communications between Ostern and Kane that suggest Moonwalkers Trading attempted to manipulate the price of HYDRO for Kane.

“Starting off slow, trying to keep the sell pressure minimal until we can build enough capital to really get the market moving upward,” Ostern said on Oct. 11, 2018, according to the complaint. He added that the pair would “have plenty of excuses to pump price and sell into the FOMO guys down the road.”

“The defendants profited from their manipulation by creating a misleading picture of Hydro’s market activity,” said Joseph Sansone of the SEC’s Enforcement Division.

Drawing Fire

Like prior actions, the Hydrogen suit drew fire from crypto experts who argue the SEC is overstepping its authority by treating tokens issued through airdrops as securities.

“Companies cannot avoid the federal securities laws by structuring the unregistered offers and sales of their securities as bounties, compensation, or other such methods,” said Carolyn Welshhans, the associate director of the SEC’s Enforcement Division.

Jake Chervinsky, the head of policy at Blockchain Association, said the complaint is another example of the “SEC regulation by enforcement.”

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“They say airdrops meet the Howey test’s ‘investment of money’ prong, even if no one makes an investment and no money changes hands,” Chervinsky tweeted. “Just remember, SEC settlements are not settled law.”

However, others argued that the SEC is treating Hydrogen’s bounty program as indicative of a security investment contract, rather than its airdrop.

“To be fair, the complaint seems to suggest that the ‘bounties’ where users were rewarded with tokens for a promotional action count for that clause. Not the generic airdrop,” replied Adam Cochran, a Yearn Finance contributor.

“It seems like the airdrop isn’t within the scope of the actual Howey analysis, just distributions through bounties and sales,” added Jeremy Sklaroff, general counsel to the Celestia network.

Monetary Penalties

The SEC filed its complaint in U.S. District Court in Manhattan. The complaint says Hydrogen, Kane, and Ostern violated registration, antifraud, and market manipulation provisions of the Securities Act.

Without admitting or denying the allegations, Ostern has agreed to a $36,750 fine plus prejudgment interest of $5,118 and future monetary penalties determined by the court in exchange for admitting no wrongdoing. Ostern also agreed to prohibitions preventing him from participating in future offers of securities or penny stocks.

The SEC is seeking judgment against Kane that would include an order to disgorge ill-gotten gains, civil monetary penalties, and enjoinments prohibiting him from engaging in offers of crypto securities or other offerings, or acting as a director or executive in the future.