Two fraudulent initial coin offerings (ICOs) have landed a Brooklyn businessman, Maksim Zaslavskiy, in prison. Zaslavskiy was sentenced on Monday to 18 months behind bars for marketing RECoin as “The First Ever Cryptocurrency Backed by Real Estate.”
The offerings were also sold as Diamond Reserve Club, an “exclusive and tokenized membership pool” hedged by diamonds.
Zaslavskiy bought neither real estate nor diamonds. Instead, investigators found that he issued phony, worthless certificates, peddling the “ICOs” to investors as bona fide investment opportunities run by professionals.
REcoin allegedly employed a team of lawyers, brokers and accountants who were tasked with investing the proceeds from the REcoin ICO into real estate to increase the value of the tokens. He claimed that 2.8 million REcoin tokens had been sold.
The ICO fraudster pleaded guilty last November to conspiracy to commit securities fraud; however, he filed a motion to dismiss the indictment on the grounds that the securities laws did not apply to cryptocurrency offerings.
The court ruled,
“[Simply] labeling an investment opportunity as ‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract—a security—into a currency,” [in an effort to evade US federal securities laws.]
The government argued that the “cryptocurrencies” were “investment contracts” under the Howey test, making the federal court in Brooklyn the first to permit a criminal indictment to proceed for a cryptocurrency scheme.
Law enforcement says it’s on the lookout for old-fashioned fraud “camouflaged as cutting-edge tech.”
According to United States Attorney Richard P. Donoghue,
“This Office will continue to investigate and prosecute those who defraud investors, whether involving traditional securities or virtual currency.”
The amount of restitution will be determined by the court at a later date.