Law360 (March 12, 2018, 6:31 PM EDT) — A Texas federal judge on Friday extended an asset freeze and other emergency measures put in place earlier this year for AriseBank and its top executives after the U.S. Securities and Exchange Commission accused them of running an illegal and fraudulent initial coin offering.
That TRO was extended twice before the SEC said in court filings last week that AriseBank and Rice agreed to a preliminary injunction that had many of the same provisions but allowed the pair to receive “certain funds from third parties” to cover legal fees, living expenses and other expenses like child support. Judge Lynn signed off on that preliminary injunction Friday.
Ford, meanwhile, has allegedly been holding out on the SEC. The agency told Judge Lynn last week that Ford lives in Dubai, United Arab Emirates, has responded to emails only selectively, has failed to answer calls and has otherwise avoided appearing in the case, meaning the SEC does not have his consent for a preliminary injunction.
Judge Lynn on Friday set a hearing for that injunction for next week and put a new TRO in place for Ford in the meantime.
Friday’s actions come as a receiver for AriseBank continues its work trying to track down assets of the now-shuttered cryptobank, which once styled itself as the “world’s first decentralized bank” and featured an endorsement from former champion boxer Evander Holyfield on its website.
That receiver was appointed by Judge Lynn on Jan. 25, the same day that the SEC filed its complaint in the case.
“Prior to the seizure by the SEC, Arise was working on a cutting-edge decentralized cryptocurrency management platform,” Rice’s attorney John A. Garland of Garland Samuel & Loeb PC told Law360 in an email Monday. “We are investigating the allegations in the complaint and will respond to those allegations through our filings in the case.”
The suit against AriseBank is one of a flurry of cryptocurrency-related enforcement actions filed in recent weeks as federal regulators have stepped up their warnings about fraud and other risks associated with cryptocurrency investments and ICOs.
The offerings are a novel capital-raising tool whereby startups offer blockchain-based digital tokens, often in exchange for digital currency or cash, to pay for projects. While the case law around ICOs is relatively underdeveloped, the SEC has advised that many ICOs may need to be registered with the agency or qualify for an exemption, depending on whether the involved tokens function like securities.
In the AriseBank case, the SEC alleges that the AriseCoin ICO counted as a securities offering that needed to be registered with the agency yet was not.
And the problems did not stop there, according to the SEC. The AriseCoin ICO’s white paper as well as AriseBank’s press releases and other public statements made in connection with the offering contained “false and misleading statements and omissions,” the agency said.
AriseBank announced on Jan. 18, for example, that it had completed its purchase of a century-old bank insured by the Federal Deposit Insurance Corp. The acquisition would allow AriseBank to “offer its customers FDIC-insured accounts and transactions,” the company said in a press release, but according to the SEC, the FDIC has no record of AriseBank or its acquisition being federally insured.
The SEC says AriseBank also claimed to have partnered with Visa Inc. and payment processing platform Marqeta Inc. to create a branded card that would make “crypto in your Arise account … instantly available on your AriseCard Visa,” as an AriseBank white paper allegedly put it.
AriseBank allegedly posted on Facebook that the card was compatible with more than 700 cryptocurrencies and would “change the very foundation of how we spend our money,” but the SEC says it was not real. Marqeta eventually sent AriseBank a cease-and-desist letter and posted on Twitter that the purported partnership “never existed,” according to the suit.
The agency alleges additional disclosure failures regarding the criminal backgrounds of Rice and AriseBank President Kelvin Spencer, who the SEC says served five years in prison for felony robbery and was ordered to pay $250,000. Neither man’s criminal history was mentioned in executive biographies provided on AriseBank’s website and white papers, the SEC alleges.
“This information — which bears directly on the honesty and professional competence of AriseBank’s principals — would have been highly material to investors,” the SEC alleges. “These convictions and guilty pleas also impact defendants’ ability to obtain licenses to own or operate financial institutions.”
The SEC does not comment on pending litigation. Counsel for AriseBank did not immediately return a request for comment, and contact information for Ford was not immediately available.
The SEC is represented in-house by Chris Davis, David Hirsch and B. David Fraser.
AriseBank is represented by Kent S. Hofmeister of Brown & Hofmeister LLP. Rice is represented by John Garland and Ed Garland of Garland Samuel & Loeb PC and Kent S. Hofmeister of Brown & Hofmeister LLP. Ford has not yet made an appearance in the case.
The case is Securities and Exchange Commission v. AriseBank et al., case number 3:18-cv-00186, in the U.S. District Court for the Northern District of Texas.