SEC Tells N.D. Ill. Court Not to Toss Case Against Alleged Russian Crypto Pyramid Scheme Fraudster

On Thursday, the Securities and Exchange Commission (SEC) opposed defendant Vladimir Okhotnikov’s bid to exit the fraud case on personal jurisdiction and other grounds. The agency said that Okhotnikov, a Russian national, is subject to personal jurisdiction in the United States as a result of his role as the “face” of Forsage, a crypto pyramid and Ponzi scheme that raised more than $300 million from investors worldwide, including in the United States.

The SEC sued Okhotnikov and three other co-founders and several promoters of Forsage, some of whom have already settled the charges, in August. According to the agency, the defendants operated the website, which allowed retail investors to enter into smart contracts that operated on the Ethereum, Tron, and Binance blockchains.

The SEC called Forsage a textbook pyramid and Ponzi scheme as all payouts to earlier investors were made using funds from later investors. Reportedly, the defendants duped unsuspecting investors with aggressive social media marketing campaigns including on Twitter and YouTube by making unrealistic claims of expected return on investment.

Faced with allegations that the scheme was indeed a fraudulent pyramid scheme, the SEC argued that the founders pushed back even harder, denying such contentions in video posts and interviews, including some on the Crypto Crusaders’ YouTube channel. The complaint sought disgorgement of ill-gotten gains, civil penalties, and conduct-related injunctions.

Last month, Okhotnikov argued that the SEC charges cannot stick because the Northern District of Illinois court overseeing the civil suit lacks jurisdiction over him. In this week’s 36-page opposition, the SEC countered that contrary to Okhotnikov’s legal and factual arguments, the totality of the circumstances shows his activities were directed toward the United States. 

First, the agency contended that statements in his declaration are disputed. Whereas Okhotnikov said that he did not hire or engage with three U.S.-based promoters or oversee their activities, the SEC’s investigation and interviews with those three revealed otherwise.                                       

In addition, the SEC asserted that Forsage’s smart contracts were offered and sold in the United States and were open to investors here. Yet, when the SEC filed the complaint, the website suddenly became restricted, explaining that “US Persons are prohibited from accessing” it. 

According to the opposition, “[t]he accessibility of the website is critical – indeed, contrary to what Okhotnikov contends, the Seventh Circuit has noted specifically that where, as here, the operation of a website is unrestricted and thus available to residents in the forum, the same means the defendant is ‘ready and willing to do business with [forum] residents.’”

In addition to bolstering its jurisdictional bases for hailing Okhotnikov to court, the SEC argued that its claims, including that Forsage’s smart contracts are securities and those for fraud,  are sufficiently pleaded.

The case is before Judge Jorge L. Alonso.

The SEC is represented by its own counsel and the defendant by Foley & Lardner LLP, Kuchinski Law Group LLC, and Azhari LLC.