SEC Sues Tron Founder Justin Sun and Celebrities over Crypto Sales

News | March 23, 2023 By:

On March 22, 2023, the United States Securities and Exchange Commission (SEC) filed a complaint in the U.S. District Court for the Southern District of New York against crypto entrepreneur Justin Sun and three of his companies for the unregistered offer and sale of crypto securities.

Sun is the founder of blockchain startup Tron. The company has issued its own cryptocurrency, TRX, which has a market cap of $5.6 billion at the time of writing. In 2018, Tron acquired peer-to-peer file-sharing protocol BitTorrent (now known as Rainberry), which has more than 100 million active users worldwide.

In the complaint, the SEC accused Sun and his companies of manipulating the secondary market for TRX through an “extensive wash trading” scheme.

“Sun violated the antifraud and market manipulation provisions of the federal securities laws by orchestrating a scheme to artificially inflate the apparent trading volume of TRX in the secondary market,” the SEC said. “From at least April 2018 through February 2019, Sun allegedly directed his employees to engage in more than 600,000 wash trades of TRX between two crypto asset trading platform accounts he controlled, with between 4.5 million and 7.4 million TRX wash traded daily. This scheme required a significant supply of TRX, which Sun allegedly provided. As alleged, Sun also sold TRX into the secondary market, generating proceeds of $31 million from illegal, unregistered offers and sales of the token.”

The SEC is also suing eight celebrities, including American rapper DeAndre Cortez Way, also known as Soulja Boy; Austin Mahone; actress Lindsay Lohan; YouTuber Jake Paul; and singer Aliaune Thiam, also known as Akon for allegedly promoting TRX and BTT without disclosing that they were compensated for doing so and the amount of their compensation. The majority of these celebrities agreed to pay a total of more than $400,000 in disgorgement, interest, and penalties to settle the charges.

“While we’re neutral about the technologies at issue, we’re anything but neutral when it comes to investor protection,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As alleged in the complaint, Sun and others used an age-old playbook to mislead and harm investors by first offering securities without complying with registration and disclosure requirements and then manipulating the market for those very securities. At the same time, Sun paid celebrities with millions of social media followers to tout the unregistered offerings, while specifically directing that they not disclose their compensation. This is the very conduct that the federal securities laws were designed to protect against regardless of the labels Sun and others used.”

SEC Chair Gary Gensler said that this case demonstrates again the considerable risk that investors face when crypto securities are offered and sold without proper disclosure.

“As alleged, Sun and his companies not only targeted U.S. investors in their unregistered offers and sales, generating millions in illegal proceeds at the expense of investors, but they also coordinated wash trading on an unregistered trading platform to create the misleading appearance of active trading in TRX,” Gensler said. “Sun further induced investors to purchase TRX and BTT by orchestrating a promotional campaign in which he and his celebrity promoters hid the fact that the celebrities were paid for their tweets.”

A copy of the original filing can be found here.