On July 30, 2024, the Securities and Exchange Commission (SEC) charged Nader Al-Naji, the founder of the BitClout blockchain protocol now known as Decentralized Social (DeSo), with perpetrating a multi-million-dollar fraudulent crypto asset scheme. Al-Naji, who adopted the pseudonym “Diamondhands” to evade regulatory scrutiny, is accused of defrauding investors through the unregistered offering of BitClout’s native token, BTCLT.
According to the SEC’s complaint, Al-Naji began raising funds in November 2020, ultimately amassing over $257 million through unregistered offers and sales of BTCLT. He misled investors by claiming that the proceeds would not be used to compensate him or BitClout employees. Contrary to these assurances, Al-Naji allegedly diverted more than $7 million of investor funds for personal expenditures, including rental payments for a Beverly Hills mansion and extravagant cash gifts to family members.
To further obscure his activities and avoid regulatory scrutiny, Al-Naji portrayed BitClout as a decentralized project with “no company behind it … just coins and code.” He launched the project under the pseudonym “Diamondhands” to create the illusion of autonomy, despite being the orchestrator behind the scenes. Al-Naji also secured a legal opinion from a prominent law firm, based on his mischaracterizations, that BTCLT were not likely to be deemed securities under federal law. Simultaneously, he allegedly confided to certain investors that his actions were a deliberate subterfuge to avoid compliance with the law.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated, “As alleged in our complaint, Al-Naji attempted to evade the federal securities laws and defraud the investing public, mistakenly believing that ‘being “fake” decentralized generally confuses regulators and deters them from going after you.’ He is obviously wrong: as we have shown time and again, and as reflected in the SEC’s detailed allegations here, we are guided by economic realities, not cosmetic labels. The dedicated staff of the SEC uncovered Al-Naji’s lies and will now hold him accountable for misleading investors.”
The SEC’s effectiveness in identifying and apprehending such defaulters underscores its commitment to maintaining market integrity and protecting investors. Through rigorous investigation and a thorough understanding of emerging technologies and complex financial instruments, the SEC continues to demonstrate its capability to detect fraudulent schemes and enforce compliance.
The SEC’s vigilant oversight and enforcement actions help save millions of dollars for investors by swiftly addressing fraudulent activities. By holding defaulters accountable, the SEC not only recovers misappropriated funds but also deters potential wrongdoers from engaging in similar misconduct, thereby safeguarding the financial interests of the investing public.
The SEC’s complaint highlights several primary rules disregarded by Al-Naji, including the registration provisions of the Securities Act of 1933 and the anti-fraud provisions of both the Securities Act and the Securities Exchange Act of 1934. By failing to register the offering of BTCLT and engaging in deceptive practices to mislead investors, Al-Naji violated fundamental securities laws designed to ensure transparency and protect investors from fraud.
The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, charges Al-Naji with violating the registration and anti-fraud provisions of the Securities Act of 1933 and the anti-fraud provisions of the Securities Exchange Act of 1934. Additionally, the complaint names Al-Naji’s wife, mother, and wholly owned entities as relief defendants for the investor funds that Al-Naji transferred to them.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York also announced charges against Al-Naji. The SEC’s investigation was conducted by Geoff Gettinger with the assistance of Sejal Bhakta and Pasha Salimi, under the supervision of Paul Kim and Jorge G. Tenreiro, Acting Chief of the Enforcement Division’s Crypto Assets and Cyber Unit. The SEC’s litigation will be led by Christopher Carney and Mr. Gettinger, under the supervision of James Connor and Mr. Tenreiro.
(Source: https://www.sec.gov/newsroom/press-releases/2024-91)
