Securities and Exchange Commission v. Okhotnikov was filed in the United States District Court for the Northern District of Illinois on August 1, 2022, claiming violations of several provisions of the Securities Act and Securities Exchange Act in connection with offering and selling unregistered smart contracts operated on the Ethereum, Tron, and Binance blockchains. Specifically, the SEC seeks permanent injunctive relief against all Defendants in order to prevent future violations of the federal securities laws, disgorgement of any ill-gotten gains, and civil damages.
The SEC brought the enforcement action against Defendants Vladimir Okhotnikov (“Okhotnikov”), Jane Doe a/k/a Lola Ferrari (“Ferrari”), Mikail Sergeev (“Sergeev”), and Sergey Maslakov (“Maslakov”)—a set of Russia-based individuals who are alleged to have created, operated, and maintained an online pyramid and Ponzi scheme through smart contracts on various blockchains (collectively, the “Founder Defendants”)—and Defendants Samuel D. Ellis (“Ellis”), Mark F. Hamlin (“Hamlin”), and Sarah L. Theissen (“Theissen”) who are individuals alleged to have engaged in the promotion or sale of the smart contracts to investors within the United States (collectively, the “Promoter Defendants”).
The complaint alleges that in the fall of 2019, the Founder Defendants formed Forsage.io (“Forsage”), an unincorporated entity, for the purpose of coding smart contracts on various blockchains and building a website that would serve as an interface for the promotion and sale of the smart contracts. However, the complaint alleges that from January 2020 until the present, Defendants operated, promoted, and maintained an online pyramid and Ponzi scheme through Forsage, allowing millions of retail investors to enter into transactions via the sale of unregistered smart contracts maintained on the Ethereum, Tron, and Binance blockchains. To date, the transactions have totaled over $300 million.
To purchase slots in a smart contract, investment platforms required investors to create a crytpo-asset wallet, populate it with funds in the applicable crypto-asset token (i.e., Ethereum (Eth), Tron (TRX), or Binance (BUSD)), and then direct payment of the funds from the crypto-asset wallet to a Forsage smart contract slot on the corresponding blockchain. Each investor that purchased a smart contract slot was assigned a sequential Forsage identification number (“Forsage ID”). The lower the Forsage ID, the earlier an investor joined the Forsage network and the more the investor could earn in compensation. As later investors were recruited to purchase smart contract slots, payments were automatically allocated to earlier Forsage IDs in accordance with an algorithm coded by the Founder Defendants.
The complaint alleges Forsage falsely claimed that investors would earn compensation each time later investors purchased the smart contract slots or from profit sharing in the form of spillover payments from other investors in the larger Forsage network. In fact, the Founder Defendants held the lowest Forsage IDs and were entitled to more payments by virtue of their position at the very top of the pyramid scheme. As the recruitment of new investors began to slow, downline investors lost most or all of their investment in the smart contracts, while the Founder Defendants were able to recoup 100% of their investment. In addition, the Founder Defendants coded certain smart contracts to automatically divert funds paid by investors to a non-investor wallet outside the Forsage network, thereby depriving investors of compensation earned through the recruitment of later investors.
The SEC alleges that Forsage was an illegal pyramid scheme in that it did not sell or offer any bona fide investment product to retail investors. Rather, it only offered and sold the right to participate in an income opportunity. In addition, because the payouts under Forsage’s compensation structure were based solely on investments from later investors, the SEC asserts that Defendants were engaged in the promotion and operation of a classic Ponzi scheme.
The complaint asserts claims for violations of (i) Section 5(a)and 5(c) of the Securities Act; (ii) Section 17(a)(1) of the Securities Act; (iii) Section 17(a)(3) of the Securities Act; and (iv) Section 10(b) and Rule 10b-5(a) of the Securities Exchange Act, and seeks permanent injunctive relief, disgorgement of ill-gotten gains, and civil penalties.