Canada’s largest capital markets regulator accused an Ontario man of a massive cryptocurrency fraud involving a token offering without a prospectus and “depleting a significant amount of invested funds” for purposes unrelated to crypto, such as buying real estate.
The Ontario Securities Commission laid out its case Friday against Troy Richard James Hogg and affiliated companies at the same time the U.S. Securities and Exchange Commission announced charges filed in the United States District Court Southern District of Florida against Hogg and several U.S. residents.
The OSC says the allegations related to an offering of crypto security tokens 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.
“Hogg and his companies defrauded investors with false and misleading statements in promotional materials,” the OSC said in a statement of allegations. “These statements included false claims that gold bullion supported the value of Dignity tokens.”
The regulator alleged Hogg and his companies further defrauded investors by diverting and depleting a significant amount of invested funds for purposes unrelated to the crypto security tokens, such as purchasing real estate and making payments to companies controlled by Hogg.
Contrary to Ontario securities law, the OSC alleges, Hogg and his companies did not file a prospectus with respect to the distribution of the Dignity token and did not obtain the necessary registration with the OSC to engage in trading activities.
In the 10-page statement of allegations, the regulator says the case “serves as a cautionary tale to investors interested in the crypto asset sector.”
The OSC claims Hogg and his companies “perpetrated a fraud on unwitting investors” and, as a result, the regulator moved in 2021 to freeze assets “that had been obtained with the proceeds of diverted 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 the fraudulent conduct that put the economic interest of investors at risk, and “is deemed to have contravened Ontario securities law.”
The document says UNY, a crypto security token on the Ethereum blockchain, was “Hogg’s brainchild”. It was created around May 2017 and issued by his company Cryptobontix, and Hogg made arrangements with two crypto asset trading platforms, Livecoin.net and CCEX.com, to list the UNY token for trading.
“Promotional materials, including a white paper issued by Cryptobontix dated November 5, 2017… represented that investor funds would be used to acquire crypto asset mining equipment, managed by Cryptobontix, to generate proceeds that would primarily be used to buy gold bullion and additional mining equipment in order to create exponential growth in earnings and physical bullion holdings to ‘back’ the UNY tokens,” the OSC document said.
The promotional materials also said each UNY token would be backed by a floor price of US$1 worth of gold, presenting the tokens as investments “with limited risks and maximum potential.”
However, in a section of the statement of allegations with the subheading ‘In reality’, OSC staff state:
“There was no agreement involving Cryptobontix, the entity that issued the UNY and DIG tokens, to back the tokens with any gold.”
The UNY token was subsequently renamed and replaced by the DIG token.
Further, the OSC alleges that one of Hogg’s companies, Arbitrade Ltd., “purportedly” agreed to purchase US$10 billion of gold bullion from a company called SION Trading FZE that appears to be based in the United Arab Emirates. However, the “agreement” did not contain important details such as purchase price and “SION did not own the gold bullion that it purportedly pledged to Arbitrade Ltd.”
Although “millions of dollars in investor funds from the sale of UNY and DIG tokens were paid to maintain the asset pledge agreement between Arbitrade Ltd. and SION… none of Cryptobontix, Arbitrade Exchange Inc. and Arbitrade Ltd. purchased any gold from SION or otherwise owned any amount of gold bullion,” the OSC document says.
The statement of allegations says the UNY and DIG tokens were bought primarily with Bitcoin, which was exchanged for U.S. 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.”
Some investor funds did go towards purchasing and operating crypto asset mining equipment, but “a significant amount” of investor funds were used and “depleted” for various unrelated purposes, according to the OSC. These included acquiring and/or improving real properties 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 of and/or on behalf of Hogg or his companies,” the regulator alleges.
The OSC says there were also some company expenditures that were unrelated to purchasing crypto mining equipment, such as funds put toward the purchase a property in Hamilton, Bermuda known as Victoria Hall, and used to pay monthly fees under the purported gold asset pledge agreement between Arbitrade Ltd. and SION.
Enforcement staff at the regulator are asking a panel of OSC commissioners to order the accused to pay an administrative penalty of not more than $1 million for each failure to comply with Ontario securities law and “disgorge… any amounts obtained as a result of noncompliance,” as well as cover the costs of the investigation.