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SEC halts $600 million alleged cryptocurrency scam that aimed to revolutionize banking

AriseBank claimed it was building the world’s first “decentralized bank”

[Update: This article is updated with more information from the SEC about AriseBank's operations, and the criminal histories of the company's principals. The article also notes that Kelvin Spencer was the victim of mistaken identity by the SEC and replaces previous details with updated information.]

The Securities and Exchange Commission halted the operations of a company that claimed it raised $600 million in an initial coin offering as part of an effort to “revolutionize banking” using cryptocurrency.

The SEC complaint, filed last week in federal court in Dallas and unsealed this week, alleges that AriseBank used social media, a celebrity endorsement (from Evander Holyfield, no less), and other tactics to raise hundreds of millions of dollars in just a few months.

But, AriseBank allegedly misled investors on the nature of the company, its intentions, its actions, and the criminal histories of one of its founders, Jared Rice.

According to the SEC, AriseBank claimed to be the world’s first “decentralized bank.” The company claimed to be a “decentralized, peer-to-peer banking platform that allows users of its software to serve as their own bank,” which “gives people the freedom to hold, send, receive, buy, sell and spend cryptocurrency directly from their computer or mobile device.”

The company’s marketing materials stated that AriseBank was built on “one of the largest cryptocurrency platforms ever built,” and is “focused on bringing cryptocurrency to the average consumer and using it to revolutionize banking.”

To fund the company’s operations, AriseBank launched its own cryptocurrency, dubbed “AriseCoin.”

According to the SEC, AriseBank began raising money in November 2017 by launching an “initial coin offering” for AriseCoin. Through an ICO, a company raises money by offering a “coin” or “token” in exchange for other cryptocurrency or fiat currency.

The company allowed investors to buy AriseCoin using a variety of virtual currencies, including Ethereum, Bitcoin, Litecoin, Dogecoin, and NEM.

The SEC claims that AriseBank, Rice, and the company’s other founder, Stanely Ford, allegedly offered and sold unregistered investments in AriseCoin by depicting AriseBank as a first-of-its-kind decentralized bank offering a variety of consumer-facing banking products and services using more than 700 different virtual currencies.

In the two months since AriseBank began selling AriseCoin, the company claimed to have raised $600 million and planned to raise $1 billion.

After launching its ICO, AriseBank began issuing press releases about its dealings, including announcing earlier this year that it had acquired two “traditional” banks. According to AriseBank, it purchased “KFMC Bank Holding Company, a 100-year-old commercial bank, and TPBG, a 25-year-old investment banking and management firm.”

At the time, AriseBank claimed that the acquisitions were the first time that a cryptocurrency bank acquired a commercial bank.

“As part of this acquisition, AriseBank can now offer its customers FDIC-insured accounts and transactions, and gain a strong backing for crypto ATMs which will grant consumers to easily convert and withdraw cryptocurrencies in U.S. dollars,” the company claimed at the time.

One week later, AriseBank issued a separate release, “correcting” several issues with its previous release.

According to the company, it was actually “wholly unnecessary” for its platform to be regulated by the Federal Deposit Insurance Corp. or insured because AriseBank’s individual users maintain full control of their funds the entire time.

The company also claimed that the acquisitions of KFMC and TPBG were not finalized as it previously stated. Rather, the company claimed it was still in process of acquiring the banks.

Interestingly, and perhaps tellingly, this second release referred to the “25-year-old investment banking and management firm” by two different names in the same release.

When AriseBank initially announced the acquisitions, the name of the “25-year-old investment banking and management firm” was TPBG, but when AriseBank “corrected” its previous announcement, the company was now a “25-year old investment bank” called TPMG.

But in the second release, the company referred to its acquisition as both TPBG and TPMG, using each name just two paragraphs apart.

But, according to the SEC, FDIC records show that neither AriseBank nor the commercial bank it “allegedly purchased” were ever FDIC-insured.

Additionally, the SEC alleges that AriseBank falsely stated that it offered customers the ability to obtain an AriseBank-branded VISA card to spend any of the 700-plus cryptocurrencies.

During the ICO process, the Texas Department of Banking also raised red flags about AriseBank, which is supposedly based in Dallas.

On Jan. 5, 2018, the Texas Department of Banking issued a consumer alert stating that AriseBank was not licensed to operate in Texas. Later, the regulator issued a cease and desist order to the company because it was improperly using the term “bank” in its operations because it was not engaged in banking.

During the ICO process, AriseBank also apparently signed an agreement with former heavyweight champion Evander Holyfield to endorse the company.

Holyfield tweeted about the endorsement from his official Twitter account on Jan. 4, 2018, inviting his 268,000 followers to “join the biggest fight in history.”

AriseBank also allegedly hid the criminal history of Rice, misled investors with incorrect about the company's principals, and used the identity of an uninvolved individual and incorrectly claimed that person was involved in the company's operations.

According to the original SEC complaint, Rice was charged in 2015 with felony theft and tampering with government records. He recently pleaded guilty and is on probation for the crimes.

A later SEC complaint provided more information about Rice's background.

According to the SEC, Rice is currently on probation as a part of a plea deal stemming from a Collin County, Texas felony indictment in November 2015 for theft and tampering with government records. Rice is also "currently under felony indictment in Dallas County, Texas for assault, after which he allegedly destroyed evidence by stealing the victim’s cell phone and deleting an audio recording of the incident."

AriseBank also claimed that a man named Kelvin Spencer served as the company's president, but the SEC now states that Spencer was not involved in the company's operations.

According to the SEC, Rice falsely claimed that he was the company's president and allegedly inflated various points about Spencer's experience..

From the SEC complaint:

Perhaps most notably, Spencer was never actively involved in AriseBank's operations. Instead, Rice—who Spencer knew and trusted from his days growing up in Dallas— fraudulently used Spencer's name, likeness, and biography to mislead investors about the legitimacy of AriseBank. 

Spencer was also the victim of mistaken identity by the SEC. In its original complaint, the SEC stated that Spencer also has “multiple arrests and convictions,” including serving a five-year sentence for felony robbery. 

But an updated SEC complaint states that the Spencer that was supposedly involved in AriseBank's operations does not have a criminal history. The SEC also apologized for the error.

From the SEC complaint:

The SEC's original Complaint contained the erroneous allegation that Spencer has a criminal history. That is not the case. Having filed this case on an emergency basis, ex parte and under seal, SEC counsel first realized the error by speaking with Spencer after the case was unsealed. Upon speaking with him, SEC counsel determined that the prior criminal conduct alleged in the original complaint relates to another person with the same name and similar identifying characteristics. SEC counsel greatly appreciates Mr. Spencer's assistance in correcting its mistake and apologizes to him for it. 

“We allege that AriseBank and its principals sought to raise hundreds of millions from investors by misrepresenting the company as a first-of-its-kind decentralized bank offering its own cryptocurrency to be used for a broad range of customer products and services,” Stephanie Avakian, co-director of the SEC’s Enforcement Division, said. “We sought emergency relief to prevent investors from being victimized by what we allege to be an outright scam.”

According to the SEC, the court approved an emergency asset freeze over AriseBank, Rice, and Ford and appointed a receiver over AriseBank, including over its digital assets.

“The SEC intervened to protect the digital assets before they could be dissipated, enabling the receiver to immediately secure various cryptocurrencies held by AriseBank including Bitcoin, Litecoin, Bitshares, Dogecoin, and BitUSD,” the SEC said.

The SEC said that it is seeking preliminary and permanent injunctions, disgorgement of ill-gotten gains plus interest and penalties, and bars against Rice and Ford to prohibit them from serving as officers or directors of a public company or offering digital securities again in the future.

To read the SEC's full complaint, click here. For the amended complaint that contains more information about the case, click here.

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