OSC Alleges Fraud in US$51 Million Crypto Token Offering

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Ontario man is accused of ‘depleting a significant amount of invested funds’ for purposes unrelated to crypto

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Canada’s largest financial market regulator accused Ontario man of massive cryptocurrency fraud involving an offering of tokens without a prospectus and “depleting a significant amount of invested funds” for non-crypto related purposes, such as buying real estate.

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The Ontario Securities Commission filed its case Friday against Troy Richard James Hogg and his affiliates, as the U.S. Securities and Exchange Commission announced charges in U.S. District Court of the Southern District of Florida against Hogg and several American residents.

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The OSC says the allegations were related to a crypto security token offering that raised US$51 million from investors.

The Canadian regulator alleges that between May 2017 and June 2019, Hogg and his companies Cryptobontix Inc., Arbitrade Exchange Inc. and Arbitrade Ltd. promoted and sold a crypto asset named Dignity token (formerly Unity Ingot) to investors around the world.

None of the allegations have been proven.

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“Hogg and his companies defrauded investors with false and misleading statements in promotional materials,” the OSC said in a statement. “These statements included false claims that gold bullion supported the value of Dignity Tokens.”

The regulator alleged that Hogg and his companies further defrauded investors by misappropriating and depleting a significant amount of invested funds for purposes unrelated to crypto security tokens, such as purchasing real estate and making payments to companies controlled by Hogg.

Contrary to Ontario securities law, the OSC alleges that Hogg and his companies did not file a prospectus regarding the distribution of the Dignity token and did not obtain the necessary registration with the OSC to engage in trading activities.

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In the 10-page statement of allegations, the regulator says the case “serves as a cautionary tale to investors interested in the crypto asset industry.”

The OSC says Hogg and his companies “committed fraud against unwitting investors” and as a result the regulator decided in 2021 to freeze assets “that were obtained with the proceeds of misappropriated investor funds.”

Proceeds from the sale of certain properties were placed in the custody of the Accountant of the Ontario Superior Court of Justice, according to the statement of allegations.

The OSC alleges that as a director or officer of the companies involved, Hogg “authorized, permitted or acquiesced” in fraudulent conduct endangering the economic interests of investors, and “is deemed to have violated Ontario securities law “.

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UNY is a crypto security token on the Ethereum blockchain.
UNY is a crypto security token on the Ethereum blockchain. Photo by INA FASSBENDER/AFP via Getty Images Files

The document states that UNY, a cryptographic security token on the Ethereum blockchain, was “Hogg’s brainchild”. It was created around May 2017 and issued by his company Cryptobontix, and Hogg entered into agreements with two crypto asset trading platforms, Livecoin.net and CCEX.com, to list the UNY token for trading. .

“Promotional materials, including a white paper published by Cryptobontix dated November 5, 2017…indicated that investor funds would be used to acquire crypto asset mining equipment, operated by Cryptobontix, to generate revenue that would primarily be used to purchase gold bullion and additional mining activities. equipment to create exponential growth in earnings and physical bullion holdings to “back” UNY tokens,” the OSC document states.

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The promotional material also stated that each UNY token would be backed by a floor price of $1 gold, presenting the tokens as investments “with limited risk and maximum potential.”

However, in a section of the statement of allegations with the subheading “In fact”, OSC staff states:

“There was no agreement involving Cryptobontix, the entity that issued the UNY and DIG tokens, to back the tokens with gold.”

The UNY token was later renamed and replaced by the DIG token.

Additionally, the OSC alleges that one of Hogg’s companies, Arbitrade Ltd., “supposedly” agreed to purchase US$10 billion worth of gold bullion from a company called SION Trading FZE which appears to be based in the United Arab Emirates. However, the “agreement” did not contain important details such as the purchase price and “SION did not own the gold bars it allegedly pledged to Arbitrade Ltd”.

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Although “millions of dollars of investor funds from the sale of UNY and DIG tokens have been paid to maintain the asset pledge agreement between Arbitrade Ltd. and SION…none of Cryptobontix, Arbitrade Exchange Inc. and Arbitrade Ltd. did not purchase any gold from SION or otherwise possess any amount of gold bullion,” the OSC document states.

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The statement of allegations states that the UNY and DIG tokens were purchased primarily with Bitcoin, which was exchanged for US dollars by Stephen Braverman, one of the men accused alongside Hogg in the SEC action. and distributed “to various parties, including Hogg who received millions of dollars directly and indirectly through the companies he controlled.

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Some investor funds have been spent on purchasing and operating crypto-asset mining equipment, but “a significant amount” of investor funds has been used and “spent” for various purposes without report, according to the OSC. These included the acquisition and/or improvement of real estate in Ontario, including a hotel, restaurant and bar in Grand Bend.

Additional funds were used for “two luxury motorboats” and to make payments to bank accounts controlled by Hogg, held in the name of his companies, “or to other parties for the benefit and/or on behalf of Hogg or its companies”. the regulator alleges.

The CSO also says that some of the company’s expenses were unrelated to the purchase of crypto mining equipment, such as funds spent on the purchase of a property in Hamilton, Bermuda, known as Victoria Hall, and used to pay monthly fees under the alleged gold asset pledge agreement between Arbitrade Ltd. and if.

Enforcement staff at the regulator are asking a panel of OSC commissioners to order the accused to pay an administrative penalty of up to $1 million for each failure to comply. comply with Ontario securities law and to “return…any amount obtained as a result of non-compliance”. as well as cover investigation costs.

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