By Joseph Arshawsky, J.D.
The SEC announced that it obtained a court order halting an ongoing fraud involving an initial coin offering (ICO) that raised $21 million from investors, obtained an asset freeze, and the appointment of a receiver, according to a complaint filed in federal court in California. Titanium Blockchain Infrastructure Services, Inc. (TBIS) and its president, Michael Alan Stollery, a/k/a Michael Stollaire lied about business relationships with the Fed and dozens of well-known corporations. Instead, TBIS made misrepresentations to investors, and Stollaire diverted cash raised to his personal purposes (SEC v. Titanium Blockchain Infrastructure Services, Inc., May 22, 2018).
Misrepresentations. According to the SEC, Stollaire, through two companies that he controlled, TBIS and EHI Internetwork and Systems Management, Inc. (EHI), committed investment fraud to the tune of $21 million in cash and digital assets under the guise of an ICO of a digital currency asset called "BAR," and later "TBAR." The key misrepresentations included prominently identifying by name and logo nearly 30 large, well-known companies (and the Federal Reserve) as purported customers and would-be customers, of TBIS’s information technology (IT) services. Stollaire, TBIS, and EHI did not have relationships with these companies (or the Fed) and had no basis to represent that any of them were customers of TBIS’s services, "or even would-be customers of TBIS’s services." In addition to falsely promoting TBIS’s and EHI’s supposed relationships with the well-known companies, they fictionalized a series of client testimonials that they used on their websites.
Misappropriation. "While raising funds from investors on these false pretenses, Stollaire commingled some of the ICO investors' funds with his personal funds, using at least a portion of the offering proceeds for expenses unrelated to TBIS, such as credit card payments and the payment of bills for Stollaire's Hawaii condominium." Around the same time that the defendants were receiving cease-and-desist letters from the companies whose names and logos they were improperly using, the defendants announced that in "a malicious act," approximately 16 million BAR digital assets held by TBIS that could be sold at any time, were stolen in an "illegal theft" thereby devaluing BAR. To address the theft, defendants created a replacement digital asset, TBAR, to issue to BAR investors on a 1:1 basis. As the alleged fraud began to unravel, the defendants made further misrepresentations to keep the enterprise afloat.
Violations. The SEC charged each of the defendants with violating Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. In addition, Stollaire and TBIS were charged with violating the Securities Act registration provisions of Section 5.
Relief sought. The SEC sought and obtained an asset freeze and the appointment of a receiver. The SEC seeks injunctive relief, disgorgement, and civil money penalties.
The case is No. CV18-4315-DSF (JPRx).
Attorneys: David Stuart Brown for the SEC.
Companies: Titanium Blockchain Infrastructure Services Inc.; EHI Internetwork and Systems Management, Inc. a/k/a EHI-INSM, Inc.
MainStory: TopStory Blockchain Enforcement FraudManipulation SecuritiesOfferings CaliforniaNews
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