SEC v. Shavers: Over $40 Million Disgorged in Bitcoin Fraud Case
In SEC v. Shavers, No. 4:13-CV-416, (E.D. Tex. Sept. 18, 2014), the United States District Court for the Eastern District of Texas entered final judgment against Trendon T. Shavers and Bitcoin Savings and Trust (“BTCST”) and ordered them to pay more than $40 million in disgorged profits and prejudgment interest. The court further required each defendant to pay an additional civil penalty of $150,000.
According to the SEC’s allegations, Shavers established BTCST, an unincorporated online entity, in February 2011, in order to obtain investments that would provide returns in the form of bitcoins. Shavers used online chat rooms to solicit BTCST investors with false promises of earning interest of up to 7% every week. According to the court, “[t]he uncontested summary judgment evidence establishes that Shavers knowingly and intentionally operated BTCST as a sham and a Ponzi scheme, repeatedly making misrepresentations to BTCST investors and potential investors concerning the use of their bitcoins; how he would generate the promised returns; and the safety of the investments.”
The SEC alleged Shavers violated Section 10(b) of the Exchange Act and Rule 10b-5, as well as Section 17(a) of the Securities Act. Section 10(b) and Rule 10b-5 prohibit (1) the use of any “device, scheme, or artifice to defraud”; (2) “an untrue statement of a material fact” or omission; or (3) “any act, practice, or course of business which operates . . . as a fraud or deceit upon any person.” Additionally, to establish liability, the SEC had to prove Shavers acted with scienter or “an extreme departure of the standard of ordinary care . . . and a danger of misleading [investors] . . . so obvious the defendant must have been aware of it.” To establish Section 17(a) Security Act liability, the SEC had to prove the same elements, but without the scienter requirement. The SEC also alleged that Shavers violated Section 5 of the Securities Act of 1933 by failing to register the investments in BTCST.
In pretrial motions, the court addressed whether the interests in BTCST were investment contracts under the federal securities law. Because investors paid for the interest in bitcoins, Shavers argued that bitcoins were not currency and the interests did not involve an investment of money. The SEC argued that the use of bitcoins constituted an investment of money. In an August 6, 2013 ruling, the court agreed and held that the investments in BTCST were in fact securities.
In the September 2014 ruling, the court addressed the claims under Section 10(b) of the Exchange Act and Sections 5 and 17(a) of the 1933 Act. As the court found:
- From February 2011 through August 2012, contrary to representations Shavers made to BTCST investors, the risk of the BTCST investments was not "very limited" or "almost 0"; Shavers did not receive "cash in hand" before moving any BTCST investors' bitcoins; and Shavers was not, as he promised investors, in a position to cover any losses personally.
- From February 2011 through August 2012, contrary to representations Shavers made to BTCST investors, BTCST was a sham and a Ponzi scheme, whereby Shavers used new bitcoins received from BTCST investors to make payments on outstanding BTCST investments and diverted BTCST investors' bitcoins for his personal use.
It also found Shavers acted with “a high degree” of scienter. See Id. (“Shavers made blatant misrepresentations to BTCST investors concerning the use of their bitcoins and the safety of their investments, while running BTCST as a sham and a Ponzi scheme, and diverting BTCST investors' funds for his personal use, including rent, car-related expenses, utilities, retail purchases, visits to casinos, and meals. Defendants' conduct was not an isolated occurrence.”).
The court also determined Shavers violated Sections 5(a) and 5(c) of the Securities Act. In order to violate Sections 5(a) and 5(c) a defendant must (1) offer or sell a security; (2) without filing a registration statement with the SEC; and (3) make use interstate communication in connection with the offer or sale. The court held the investments were previously determined to be a security, there was no evidence a BTCST registration statement had been filed. Id. (“Here, Defendants violated Sections 5(a) and 5(c) because there was no registration statement filed or in effect as to the BCTST securities offered and sold over the Internet.”).
Accordingly, the court ordered disgorgement of over $38 million in profits, payment of prejudgment interest totaling $1.8 million, a civil penalty against each Defendant of $150,000, and permanently enjoined Shavers and BTCST from future violations of Sections 5 and 17(a) of the 1933 Act, as well as Section 10(b) of the Exchange Act and Rule 10b-5.
The primary materials for this case may be found on the DU Corporate Governance website.