On Monday in the Southern District of New York, the Securities and Exchange Commission (SEC) filed a complaint against John McAfee, “a businessman and computer programmer” and founder of computer security software company McAfee, for promoting investments in initial coin offerings (ICOs) to his “hundreds of thousands of Twitter followers” without revealing that he was getting paid for said promotion; McAfee’s bodyguard Jimmy Watson, Jr. was also charged for his purported role in the endeavor.
The SEC alleged that McAfee “leveraged his fame to make more than $23.1 million U.S. Dollars (‘USD’) in undisclosed compensation by recommending at least seven” ICOs to his Twitter followers. According to the SEC, the ICOs in question “involved the offer and sale of digital asset securities and (that) McAfee’s recommendations were materially false and misleading.” While the defendants profited, the SEC averred that investors were left with digital assets that are essentially now worthless.
Specifically, the SEC proffered that McAfee did not disclose to his followers that he was being paid by the issuers to promote their ICOs, which constitutes “unlawful ‘touting’” in violation of securities laws. These ICOs allegedly raised at least $41 million and McAfee earned nearly $23.2 million in digital assets for his touting. Furthermore, when asked by investors if these were paid promotions, McAfee denied the claims. McAfee also “falsely claimed to be an investor and/or a technical advisor when he recommended several ICOs.” After his paid promotions were exposed, he “was still holding a large number of virtually worthless securities from the ICOs he had previously touted.” In a surreptitious scheme, “McAfee encouraged investors to purchase the securities sold in certain of the ICOs without disclosing the he was simultaneously trying to sell his own holdings and had paid another third-party promoter to tout the securities.” McAfee allegedly engaged in “scalping,” whereby he accumulated a large amount of the assets, touted them on Twitter with the intention to sell it and then sold the assets when the prices increased. “Scalping generally allows promoters to sell their securities holdings quickly and profitably through market interest that they deceptively generate, and violates the federal securities laws.”
According to the SEC, Watson assisted defendant McAfee’s touting and scalping schemes, for example, by negotiating the deals with the issuers of the ICOs, helping McAfee to monetize his paid promotions proceeds, and having his then-wife tweet fictitious interest in an ICO. Watson was allegedly paid $316,000 by McAfee for his assistance.
“Potential investors in digital asset securities are entitled to know if promoters were compensated by the issuers of those securities,” Kristina Littman, Cyber Unit Chief, said. “McAfee, assisted by Watson, allegedly leveraged his fame to deceptively tout numerous digital asset securities to his followers without informing investors of his role as a paid promoter.”
The SEC has sought to permanently enjoin the defendants from further violations, an order for the defendants to disgorge all ill-gotten gains that they received as a result of their illicit conduct, an award for penalties, to permanently prohibiting McAfee from serving as an officer or director for a company that with a registered securities class or one that files reports, and a permanent prohibition barring the defendants from participating “in the issuance, purchase, offer, or sale of any digital asset security.”
The Department of Justice’s Tax Division has also brought criminal charges against McAfee.