Telegram’s Legal War With the SEC Over TON Bank Records Exacerbates

Telegram’s legal war with the U.S Securities and Exchange Commission (SEC) has been one of the most closely monitored events in the crypto community in 2019, as it is not only the first major obstacle for Durov brothers’ incessant expansion, but a watershed which may determine the destinies of future fintech projects globally.

Though the first court decision has allowed Telegram to evade the banking records handover to the SEC, it has been changed. Telegram confirmed, that it would comply with the demands by January 15, though the handover deadline was set for February 26.

The problem at hand

Aside from the influence of the case on crypto-related projects in the United States, it takes place amidst revolutionary changes in the industry. The first to shake the ground was Facebook’s ambitious stablecoin Libra, which sent Bitcoin price to the sky (over $10,000 since 2017).

Then Chinese President Xi Jinping made a groundbreaking statement about leveraging blockchain technology for the country’s development, and China’s digital currency created by the central bank. It was interpreted as softening the government’s attitude towards cryptocurrencies.

This, blended with Libra’s potential implications on the monetary policy of sovereign states, fueled enthusiasm around TON, which was intended to become the very first token-running project for mainstream use.

As Facebook gained trust of billions of users, Libra’s launch was expected to be an indisputable success. The Durov brothers led the pack — but not for long.

The question stands

Telegram entered the world of cryptocurrency with a massive $1.7 billion ICO conducted in February 2018. Telegram’s dispute with the SEC revolves around the way Telegram devised to avoid registering the sale of Gram tokens as securities.

On February 17, 2018, Telegram filled the Form D, which exempted it from registering their securities with the SEC. However, Form D has its own restrictions.

Telegram filed under a 506(c), which allows the company not to register with the SEC, if securities are sold only to accredited investors. Everything was smooth for several months, and investors waited for October 16 distribution of Grams.

However, on October 11, the SEC halted the TON project with an emergency action and restraining order, claiming that reselling tokens by accredited investors was a violation of 506(c) exemption.

Despite the catastrophic lack of time, Telegram managed to strike back, disputing SEC’s findings. Investors took the side of Telegram, foregoing their right to an initial refund and agreeing to a delay in the issuance of Grams.

SEC Fight for bank records

Though Telegram’s hearing is scheduled for mid-February, the first signs of further fight are already visible. In a January 13 filing with the District Court of the Southern District of New York, the company is expected to produce bank records with the right to redact the information presented to the court according to foreign privacy legislation.

Philip Moustakis, a former senior counsel at the SEC and attorney with Seward and Kissel, explained that the SEC will seek evidence of the firm’s “failing to exercise reasonable care to ensure that the purchasers were not acting as underwriters.”

A letter to the court from Pavel Durov’s lawyers states that Telegram will produce bank records by January 15. Legal disputes concerning financial issues often require bank records, and the fact that the initial SEC’s request for this data has been rejected is particularly interesting.

The court order from January 6, signed by Judge P. Kevin Castel states that the New York court denied a request by the SEC to “compel the production of the defendant’s bank records.”

Former federal enforcement attorney with Kansas City-based Kennyhertz Perry LLC Braden Perry noted that such court decision was quite unexpected and worth attention:

“What it signals is that the court agrees, at least at this time, with Telegram in that the SEC brought a non-fraud case against them within essence one legal question: Did the offering of the Gram constitute a ‘security’ under the Howey Test. This case does not involve any allegations of fraud or that Defendants misrepresented how they would use the funds raised. The court is denying the typical massive scope of SEC discovery, which ordinarily involves vast financial requests.“

Though the court may have denied SEC’s requests, Perry explained that it does not restrict access to the rest of the case, and the SEC may proceed with attempting to gain information they need:

“From a judicial standpoint, Telegram had previously provided information related to the TON platform and the SEC’s request was likely considered just too broad because the SEC was seeking every bank record from Telegram reflecting every single transfer or payment to or from Telegram during the time of the private placement up until now. The judge denied it without prejudice, meaning the SEC could request that information again later.”

Leaving the legal fight aside, we should note that on the day when initial court ruling was issued, Telegram stated, that they would refrain from public comments about the rumors concerning their products, but would ensure TON and Grams operation within the legal frameworks.

Perry also noted, that, as Telegram is an international company, it will have process bank records in compliance with each country’s privacy law, which is time-consuming and ineffective, as the relevancy of the information sought is negligible.

Telegram denies security status

On January 6 Telegram has stressed that Grams are not for investment, which means that users can not expect any gain from buying or holding the tokens.

This is worth taking into consideration, as such definition is often attributed to securities, a label the company desperately tries to avoid. Telegram stated that Grams are only a ”medium of exchange” between the users in the network, which can not be expected to bring profits.

Telegram CEO’s legal deposition

Despite Pavel Durov’s nasty habit of operating outside the spotlight, he has reportedly given a deposition along with two other Telegram employees.

According to a ruling by Judge Castel, the deposition was scheduled for January 7 or 8 in a location chosen by the two parties. For now, it seems that the information provided by the Telegram CEO during the deposition is not intended for public distribution. Though yet unconfirmed, the court’s decision to deny SEC’s requests came right before the disposition, which may hint that the information presented by the Telegram CEO could have influenced it in some way.

As the fact that Pavel Durov wanted the deposition to take place not on the U.S territory gained much attention, Perry provided some details about this procedure:

“Many cases, especially regulatory matters, involve overseas entities and parties this was a joint consent (agreed to by both parties) to allow the 30(b)(6) witnesses and Durov’s testimony to be held at a place convenient for the parties. This was likely negotiated stance where the Telegram would not object to the CEO’s testimony as long as it was at a place convenient for him. The deposition will not be in front of a judge but will be the parties to the matter and a court reporter. It is transcribed and can be used by the parties for a number of things, including discovery purposes and to tie down important information for a potential trial.”