The SEC filed a Complaint against Jon E. Montroll ("Mr. Montroll") and BitFunder.com ("BitFunder" and, collectively, the "Defendants") for operating an unregistered securities exchange, defrauding exchange users by misappropriating their funds, and failing to disclose a cyberattack on their system. The alleged fraud resulted in the theft of more than 6,000 bitcoins.
The Complaint was filed in the U.S. District Court for the Southern District of Manhattan. As alleged, Mr. Montroll operated BitFunder, an unregistered securities exchange that allowed users to create, offer and sell digital assets that were actually shares in various enterprises that offered dividends. Mr. Montroll also operated WeExchange, an Australian virtual currency exchange providing digital wallets. Traders on BitFunder were required to use WeExchange to hold bitcoin for use as the sole source of payments on BitFunder. From December 2012 through November 2013, Mr. Montroll allegedly mixed BitFunder users' bitcoins in the WeExchange without their knowledge or consent. In the summer of 2013, unidentified individual(s) "hacked" into Mr. Montroll's site and withdrew approximately 6,000 bitcoins from WeExchange, which converts to roughly $60 million. Mr. Montroll allegedly did not alert his users or the public to this incident and, according to the SEC, misled investors and users since that time stating that BitFunder was profitable while operating on a bitcoin deficit.
Based upon evidence collected during the SEC's investigation, the SDNY U.S. Attorney's Office filed a separate Complaint against Mr. Montroll for perjury and obstruction of justice.
Commentary / Jeff Robins
The SEC did not allege that bitcoin are securities or that BitFunder was an illegal securities exchange because of the use of bitcoin on the exchange. Rather, bitcoin was the medium of payment for other virtual assets that were allegedly securities.
This case makes good on Chairman Clayton's warning that the SEC would take action against intermediaries facilitating trading of tokens deemed to be securities without appropriate licenses (though the fraud was clearly the main charge). Token brokers, dealers, platform operators (as well as the unnamed parties selling unregistered securities on BitFunder) should take note.
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