Ethereum: SEC weighs in on cryptocurrency debate
The price of the cryptocurrency surged after the US watchdog weighed in on the debate.
The US Department of Justice charged and arrested yesterday two executives of a cryptocurrency consultancy firm with extorting a Seattle-based cryptocurrency startup.
The two execs stand accused of threatening to “hijack” the startup’s initial coin offering (ICO) unless they were paid additional sums of money on top of what they initially negotiated, among other threats.
The two executives are Steven Nerayoff and Michael Hlady, CEO and COO of Alchemist, LCC, a New York-based company that advertises itself as a consultancy, accelerator, and investment firm for high-potential blockchain projects.
According to court documents unsealed by the DOJ yesterday, Alchemist signed a contract with an unnamed Seattle startup in July 2017.
The Seattle company was described as a mobile-based business that rewarded users with cryptocurrency tokens for the amount of affiliate traffic they sent to selected e-commerce products.
The start-up was planning to raise funds to build this product by organizing an initial coin offering and hired Alchemist to advise and organize the ICO’s launch.
According to the contract, Alchemist would keep 22.5% of all the startup’s tokens in return for (1) revising the technical whitepaper describing the startup’s ICO and product; (2) add advisors and strategic partners; (3) manage the ICO’s pre-seed funding round; (4) assist the start-up with the ICO token sale method and network connection; and (5) complete the ICO in a compliant manner.
The ICO was scheduled for November 7, 2017, and during the pre-sale round, Alchemist raised 55,677 ETH (Ether coin) on behalf of its client.
However, US authorities said that Nerayoff asked to keep 30,000 ETH from the pre-sale, rather than the 22.5% cut, as initially agreed upon in the contract signed a few months earlier.
When the Seattle startup refused, the DOJ alleges that Nerayoff asked for the entire pre-sale sum; otherwise, he’d “sabotage the crowdsale, generate negative press for [the startup] and use his contacts with influential people to ‘destroy’ [the startup].”
On November 6, the day before the ICO, Nerayoff allegedly sent the Seattle startup an email with two agreements that would solidify the alleged extortion as a legal contract update, which the startup signed.
The ICO then went as planned, and after a public crowdsale, the startup raised an additional 20,000 ETH after selling its custom tokens to users, bringing the total ICO to 75,766 ETH, worth almost $32 million at the time.
Of these, as per the updated terms, Nerayoff’s company kept 30,000 ETH, worth approximately $8.75 million at the time.
But the story didn’t end here. The DOJ claims that things took a sinister turn when two Seattle startup execs visited Nerayoff for meetings at his house, in New York, in March 2018.
It’s prior to this meeting that Nerayoff introduced Hlady to the start-up as an “operations guy,” describing him as a former member of the Irish Republican Army, the National Security Agency, the Central Intelligence Agency, and the Federal Bureau of Investigation, and a man who was shot at and also killed people.
Per the DOJ indictment:
Due to a snowstorm, Jane Doe was unable depart New York on a flight as scheduled. Instead, Jane Doe stayed at NERAYOFF’s house on the evening of March 21, 2018, and through March 22, 2018. In the middle of the night, on approximately March 22, 2018, the defendant MICHAEL HLADY walked into the room where Jane Doe was sleeping by herself. HLADY turned on the lights, pulled up a chair to the bed where Jane Doe had been sleeping and told Jane Doe, in sum and substance, that if Company 1 did not agree to his demands, which included, among other things, a demand for $10,000,000 and a large amount of Company 1 tokens, then “we will crush you,” by, among other things, driving down the price of Company 1’s tokens. At some point later that night, the defendant STEVEN NERAYOFF also entered the room. He told Jane Doe, in sum and substance, that he would destroy her and Company 1, but that he did not want to, and asked Jane Doe if she wanted to, in sum and substance, thrive or be destroyed. Shortly thereafter, NERAYOFF and HLADY demanded that Company 1 provide a purported 10,000 ETH loan to NERAYOFF.
After the incident in the middle of the night, the DOJ claims that Hlady continued to threaten the startup exec using iMessages.
All of this was eventually too much, and the startup’s execs eventually gave in and forwarded 10,000 ETH as a loan to the two Alchemist execs, which the two later refused to pay back. The loan was worth approximately $4.45 million at the time.
In the following months, the DOJ claims that Nerayoff and Hlady followed through with other threats, in an attempt to acquire the Seattle startup. However, these never materialized.
The startup eventually went to authorities, and the two were arrested and arraigned in court yesterday. If found guilty, the two Alchemist execs face up to 20 years in prison, each.
The trial will likely be one of the most high-profile cases in the cryptocurrency world as Nerayoff is one of the most well-known figures in the Ethereum scene and one of the cryptocurrency’s earliest backers.