On March 22, 2023, the U.S. Securities and Exchange Commission announced charges against Justin Sun and his three wholly-owned companies, Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (formerly BitTorrent), accusing them of offering and selling unregistered securities Tronix (TRX) and BitTorrent (BTT).
The U.S. Securities and Exchange Commission also accused Justin Sun and his company of fraudulently manipulating the secondary market for TRX through extensive wash trading, which involves simultaneously or nearly simultaneously buying and selling a security to make it appear active, but without actually changing ownership. They also allegedly orchestrated a scheme to pay celebrities to promote TRX and BTT without disclosing their compensation.
The U.S. Securities and Exchange Commission also charged the following eight celebrities with illegally promoting TRX and/or BTT without disclosing the amount and nature of their compensation:
- Lindsay Lohan
- Jake Paul
- DeAndre Cortez Way (Soulja Boy)
- Austin Mahone
- Michele Mason (Kendra Lust)
- Miles Parks McCollum (Lil Yachty)
- Shaffer Smith (Ne-Yo)
- Aliaune Thiam (Akon)
According to the lawsuit filed by the U.S. Securities and Exchange Commission in the Southern District of New York, Justin Sun and his company offered and sold TRX and BTT as investments through multiple unregistered "bounty programs." These programs instructed participants to promote the tokens on social media and recruit others to join Tron-affiliated Telegram and Discord channels and create BitTorrent accounts in exchange for allocations of TRX and BTT. The complaint further alleges that Sun, BitTorrent Foundation, and Rainberry offered and sold BTT to investors in unregistered monthly airdrops, including in the United States, where these investors purchased and held TRX on Tron wallets or participating cryptocurrency exchanges. These unregistered offers and sales are alleged to have violated Section 5 of the Securities Act.
The commission also claims that Sun violated anti-fraud and market manipulation provisions of federal securities laws by orchestrating a scheme to artificially inflate the apparent trading volume of TRX in the secondary market. It is alleged that from at least April 2018 to February 2019, Justin Sun directed his employees to engage in wash trading of TRX between two cryptocurrency exchange accounts under his control, with over 600,000 wash trades of TRX occurring and daily wash trading volumes ranging from 4.5 million to 7.4 million TRX. This scheme required a significant supply of TRX, which Sun is alleged to have provided. It is also alleged that Sun sold TRX on the secondary market, resulting in $31 million in illicit gains from the unregistered token offering and sales.
"Cases like this demonstrate once again that investors face high risks when crypto asset securities are offered and sold without proper disclosures," said Gary Gensler, Chairman of the U.S. Securities and Exchange Commission. "As alleged, Justin Sun and his companies targeted U.S. investors not only in their unregistered offers and sales but also through wash trading coordinated on an unregistered exchange to create the misleading appearance of active trading in TRX. Sun further enticed investors to buy TRX and BTT through a campaign in which he and his celebrity promoters concealed the fact that the promoters were being compensated on Twitter."
"While we take a neutral stance on controversial technologies, we are anything but neutral when it comes to protecting investors," said Gurbir S. Grewal, Director of the Enforcement Division of the U.S. Securities and Exchange Commission. "As alleged in the complaint, Justin Sun's companies and others exploited an age-old game to deceive and harm investors, first by issuing securities without complying with registration and disclosure requirements, and then by manipulating those securities in the market. At the same time, Sun paid celebrities with millions of social media followers to promote unregistered products, specifically instructing them not to disclose their compensation. This is precisely the kind of conduct that federal securities laws are designed to protect against, regardless of the labels Sun and others may use."
Except for Cortez Way and Mahone, the celebrities charged today have agreed to pay over $400,000 in total fines, interest, and penalties to settle the charges without admitting or denying the findings of the U.S. Securities and Exchange Commission's investigation.