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    August 31, 2023 Articles

    Following Federal Indictment, SEC Charges Ringleader and Additional Co-Conspirators in Years-Long, Eye-Popping Fraud

    The defendants allegedly promised increasingly higher returns throughout the scheme, all the way up to $56.25 billion in return for an investment of $100,000.

    By Mark Cianci

    Background

    Following the indictment of Neil S. Chandran in June 2022 (see United States v. Chandran, No. 4:22-CR-3077 (D. Neb. filed June 14, 2022), in a case brought by the U.S. Department of Justice in the U.S. District Court for the District of Nebraska, the Securities and Exchange Commission (SEC) filed a complaint in January 2023 against Chandran and his co-conspirators and various related entities alleging various federal securities law violations, including conducting an unregistered securities offering. See United States Securities and Exchange Commission v. Chandran, No. e 2:23-cv-10017 (E.D. Mich. filed Jan. 4, 2023). The complaint has made additional details about the alleged fraud available to the public. The scheme, the complaint alleges, involved investments in a fictitious, trillion-dollar artificial intelligence and blockchain-related company whose sale was promised to return hundreds of billions of dollars to unsuspecting investors.

    The complaint was filed against Chandran, Garry J. Davidson, Michael T. Glaspie, Linda C. Knott, Amy S. Mossel, AEO Publishing Inc., Banner Co-Op, Inc., and BannersGo, LLC for their alleged involvement in soliciting investments in a fictitious artificial intelligence and blockchain-related company referred to as “CoinDeal.” The scheme, the SEC alleges, involved raising more than $45 million from more than 10,000 investors over four years to support a “company involved with cryptocurrency and artificial intelligence that was pending sale.” The sale, the defendants claimed, was to be for trillions of dollars to a group of billionaires. According to the complaint, neither CoinDeal nor the potential sale ever existed. The funds, therefore, were allegedly simply misappropriated by the co-conspirators.

    Initially conceived by Chandran, a convicted felon, the scheme allegedly involved a wide-ranging multi-level marketing campaign to raise money from unsuspecting investors. Given his prior legal issues, including publicly known violations of various securities laws, Chandran allegedly approached Davidson, an individual who had been a victim in one of Chandran’s prior schemes, to communicate on his behalf. Davidson then recruited Glaspie, who had apparently been successful in various online multi-level marketing programs in the past, to help him.

    For years, the complaint alleges, the co-conspirators promoted the “imminent” sale of CoinDeal for trillions of dollars, sending prospective investors charts showing astronomical return amounts directly tied to specific investment amounts. The alleged promises and lies communicated by the defendants, according to the complaint, are shocking. For example, the defendants allegedly promised increasingly higher returns throughout the scheme, all the way up to $56.25 billion (in addition to a Bentley GT) in return for an investment of $100,000. The defendants allegedly went even further than promising sky-high returns, promising a 7 percent return if the transaction did not go through, therefore claiming this was a risk-free investment.

    According to the SEC, the defendants promoted the fact that the supposed buyers of CoinDeal were well-known individuals the investors would know. The defendants claimed that two of the buyers, purportedly obfuscated by illegitimate non-disclosure agreements, were a “founder and executive chairman of a large online retailing company” and the “CEO of an electric car company,” one of which a defendant referred to as a “household name.” All told, the complaint claims that the defendants raised over $45 million in the scheme, promising hundreds of billions of dollars in profit, even though neither the “CoinDeal” company nor the potential sale ever existed.

    According to the complaint, the defendants promised that the sale was imminent, continuously providing updates over a period of years that the sale was to take place “tonight” or “this week.” In all cases, though, there was an excuse. In many cases, Chandran, by way of his co-conspirators, noted that additional documentation needed to be created, claiming that these documents needed wet signatures that required travel. In one case in particular, the deal was supposedly held up as a result of one of the company’s programmers becoming sick, creating a hiccup in the buyers’ due diligence.

    As investors grew wary, the complaint alleges, some began to ask specifically if the individual selling the company was Neil Chandran. As alleged, one individual even asked Glaspie to “confirm that Neil Chandran is NOT the seller of this transaction.” The response: “Please make this the last email on this topic [as] I just don[’]t have time for this disrupting mail.” Another investor is alleged to have said to Glaspie, “I have been doing some digging around the internet. Some people say that ‘Neil’ the owner, is actually convicted fraudster Neil Chandran. Please tell me that’s not true,” and described additional red flags, to which Glaspie responded, “[W]here these rumors start is a mystery to me. The owner is NOT the man u think he is.”

    The Department of Justice then charged Chandran in June 2022 with three counts of wire fraud and two counts of monetary transactions in unlawful proceeds. As Chandran was held in prison awaiting his trial, it is alleged that his fraud began to unravel. Even still, the complaint alleges, the defendants continued to advance the CoinDeal scheme, claiming that, notwithstanding Chandran’s arrest, the company was real and the money coming in was being deposited in bank accounts controlled by the company.

    As of the date the complaint was filed, the vast majority of investors had not been returned the money they invested, and no investors had received any profits.

    Alleged Securities Law Violations

    In carrying out this alleged fraud, the complaint alleges, the defendants conducted an unregistered securities offering in violation of section 5 of the Securities Act of 1933. The complaint also asserts that Chandran, Davidson, Glaspie, Knott, Banner, and BannersGo intentionally, knowingly, recklessly, or negligently “(i) employed devices, schemes and artifices to defraud; (ii) obtained money and property by means of untrue statements of material facts and omissions...; and (iii) engaged in transactions, practices, and courses of business which operated or would operate as a fraud or deceit upon the purchasers of such securities,” in violation of the Securities Act and section 10(b) of the Securities Exchange Act of 1934. The complaint further alleges that other defendants aided and abetted these securities law violations by engaging in a multi-level marketing scheme to bring in investors.

    In addition to an injunction, disgorgement, and a civil fine, the SEC has requested that the individual defendants be barred from serving as officers or directors of any SEC-registered company and that Chandran be permanently banned from the issuance, purchase, offer, or sale of any security, except for his own account.

    Policy Considerations

    In most cases, an SEC action alleging an unregistered offering relating to digital assets involves an analysis of the nature of the business and the digital assets sold under the Howey test. It has become quite common to see the SEC take the position that a crypto project, by offering a token (or the promise of a future token) to investors in exchange for an investment of money to be used to build a new project, constitutes an unregistered securities offering. This has been the case for many years, through multiple crypto boom-and-bust cycles.

    This case, though, was different. In this case, the defendants seemingly used buzzwords like “artificial intelligence” and “blockchain” that they presumably thought would drum up interest in the project. The actual offering, though, did not involve any tokens or coins. Likewise, it did not involve a sale of any definitive security. Rather, it was just a general promise of cash in return for cash paid in. The SEC spends no time in the complaint assessing the type of security at issue, however, instead saying succinctly that “[t]he CoinDeal investments offered and sold by the Defendants were securities.”

    According to the allegations in the complaint, the defendants preyed on unsophisticated investors and prosecuted a scheme designed from the beginning to harm these investors and enrich themselves, orchestrated primarily by a “recidivist securities law violator and convicted felon.” On multiple occasions from 2018 through 2022, the defendants were also charged by state securities authorities for offering unregistered securities and fined. The unrealistic promises to investors that the defendants allegedly made would presumably raise red flags for any regulator that caught wind of the scheme.

    Mark Cianci is litigation counsel at Ropes & Gray LLP in Boston, Massachusetts.

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