John Reed Stark

As cryptocurrencies and ICOs have proliferated, one very key question has been whether not the coins or tokens are securities within the meaning of the federal securities laws. Earlier this week, the first federal court hearing at which this question was discussed took place in the federal district court in Brooklyn. In the following guest post, John Reed Stark, President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement, provides his detailed report of the court hearing as well as his perspective on the topics under discussion. A version of this article originally appeared on Cybersecurity Docket. I would like to thank John for his willingness to allow me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is John’s guest post.


This week the first contested ICO/SEC oral argument finally took place at the historic Brooklyn New York Federal Courthouse in a hearing before famed 70+ year old Judge Raymond Dearie (who also happens to sit on the United States Foreign Intelligence Surveillance Court (FISC, also called the FISA Court, and the subject of some congressional and presidential discussion, criticism and consternation).  This article presents:

  1. Some key background information relating to the oral argument;
  2. A copy of the official transcript of the court hearing together with highlights and commentary; and
  3. Links to copies of all of the relevant case filings in one place (including all of the relevant legal briefs), neatly organized for quick and easy review

Background and FAQs

  • The Matter: USA/SEC versus Maksim Zaslavskiy filed in the United States District Court for the Eastern District of New York, E.D.N.Y. Docket No. 17-MJ-934 (Before the Honorable Judge Raymond Dearie). Zaslavskiy, et al, were charged by the United States Department of Justice (DOJ) and by the United States Securities and Exchange Commission (SEC) with securities fraud in connection with several ICOs. Zaslavskiy was arrested by the Federal Bureau of Investigation (FBI) and his assets were frozen by the SEC. Now, Zaslavskiy’s attorneys — federal public defenders who represent him in the criminal case and Polsinelli LLC who represent him in the SEC case — have filed a motion to dismiss the criminal charges, asserting, among other things, that the digital coins or tokens peddled by Zaslavskiy’s ICOs were not securities (and are not subject to SEC jurisdiction).
  • The Logistics: The hearing for Zaslavskiy’s Motion to Dismiss took place May 8th at 2:45 pm, in Court Room 10A S in United States District Court for the Eastern District of New York, 225 Cadman Plaza East, Brooklyn, NY 11201.
  • The Filings: The court filings are plentiful and robust but, for anyone interested in SEC jurisdiction over ICOs, cryptocurrency exchanges and the like, are absolutely worth reading. See for yourself below in parts III and IV.
  • The Trial: The trial date or the matter is currently scheduled for January, 2019.
  • When Will Judge Dearie Issue His Decision on the Motion?  Difficult to say for sure – though Judge Dearie will certainly issue his opinion before the trial date of January, 2019.
  • The PartiesThere were actually four parties to the hearing:

—For DOJ (who filed a criminal action against Zaslavskiy before Judge Dearie): Eastern District of New York Assistant United States Attorneys Julia Nestor and Audrey Spektor;

—For SEC (who filed a parallel civil SEC enforcement action against Zaslavskiy before Judge Dearie): Valerie Szczepanik, Assistant Director, SEC Division of Enforcement; and

—For Zaslavskiy: Federal Public Defenders Len Kamdang and Mildred Whalen (defending Zaslavskiy in the criminal proceeding) and Jason Nagi, Partner of Polsinelli LLC (defending Zaslavskiy in the SEC enforcement action).

  • Why Does Zaslavskiy Have a Federal Public Defender? It strikes me as odd that Zaslavskiy cannot afford criminal defense counsel but can afford civil defense counsel. Perhaps Polsinelli is representing Zaslavskiy pro bono(free of charge) because the issue is important to Polsinelli (e.g. Polsinelli represents other similarly situated ICOs and has advised those clients that they operate outside of SEC jurisdiction). Perhaps the rules allow for such an arrangement and Zaslavskiy is paying for civil defense counsel but getting free representation in the criminal matter. Perhaps the fees are being paid by someone else. (I have no idea of how Zaslavskiy’s legal fees are being handled and am just guessing.). Under any circumstance, whether paid or not, Polsinelli took the time to submit a sophisticated brief, which although presenting a weak argument (in my view), is nonetheless a well-written and very professional court submission.
  • My Take: The SEC and DOJ will win. Easily. Quickly. Handily. For my reasoning, please visit herehereor here . . . Yes, Judge Dearie’s questions and comments at the hearing evidence some sympathy for some of Zaslavskiy’s defenses and create some confusion as to whether the “what is a security” issue is one for the court (e.g. during a preliminary challenge such as a motion to dismiss) or one left for the jury (e.g. after a trial presents the facts of the transaction, which are transaction). However, the briefs from the SEC and from DOJ are compelling and spot-on — and I believe that once the Court focuses on the essence of the government’s position, the pleadings will ultimately assure a federal jurisdictional victory (which survives a motion to dismiss).


Hearing Highlights and Transcript

Here is a link to the Official Transcript of the hearing for the motion to dismiss filed by defendant Zaslavskiy, which is opposed by the criminal prosecutors (from the United States Attorney’s Office of the Eastern District of New York) and by the civil enforcement staff lawyers (from the Enforcement Division of the SEC). The transcript was composed by the official courtroom reporter for the hearing and delivered directly to me. Below are some highlights gleaned from the transcript, together with some light commentary:

  • Opening Irony. In the first minute of the hearing, the defense began with an odd wisecrack by Zaslavskiy’s civil defense counsel Jason Nagi (which was actually fitting and ironically quite hilarious):


“MS. NESTOR: Good afternoon, your Honor. Julia Nestor for the United States and I’m here with Andrey Spektor from our office and Valerie Szczepanik from the Securities & Exchange Commission. 

THE COURT: Good afternoon. 

KAMDANG: Good afternoon, your Honor. Federal defenders Len Kamdang and Mildred Whalen. 

NAGI: Jason Nagi. 

THE COURT: I take it you are prepared to be bound by these discussions, Mr. Nagi. 

NAGI: Your Honor, every time I’m in court I’m prepared to be bound.” 

  • Judge Dearie’s Stark Declaration. Judge Dearie began the hearing with some introductory thoughts. Of note, he characterized the issues before him in stark contrast:

“THE COURT: I think we all agree that the picture the government paints in its papers as opposed to the picture the defendant paints in its papers are very different, very different indeed. They are ships not only crossing in the night, they are on different seas entirely . . . from whose perspective do I look at this? We have the government’s perspective, this whole thing is a sham from start to finish. There were no coins, there were no diamonds, there was no real estate, etcetera, etcetera, etcetera. The defense presents a very different picture that notwithstanding admissions of Mr. Zaslavskiy there was a full intention to develop this into what he regarded as a viable digital currency. Then we have the perspective of the victims themselves. Some might say, for example, I was investing my money in a common pool in the hopes of getting a return, as the white paper promised, through the efforts of others. Some might say, you know, I was intently interested on establishing a viable, working digital currency and this promised me that with the added security of hard assets, real estate or diamonds, to back it up.” 

  • Judge Dearie Has Done his Homework. Judge Dearie was clearly engaged by the government’s pleadings, which included actual advertisements for Zaslavskiy’s ICO, stating during an early part of the hearing:

“THE COURT: In one of the press releases, Recoin [Zaslavskiy’s company] press releases, it says that Recoin would be ‘An easily accessible financial platform through which people from all over the world can convert their savings into real estate backed currency for the potential of high returns or can protect their earnings from inflation.’ That sure does sound like an investment contract . . . We are in a new world here, right? Back in Howey days we were not talking digital currencies. You will concede, Ms. Nestor, will you not, that there are characteristics — again, I fully understand your position that this was a nothing burger, it was a fraud from top to bottom. I understand that. But assume for a moment the hypothetical along the lines that it’s presented in the defendant’s papers. There are characteristics of both currency and investment.” 

  • Judge Dearie Punches Right Through Zaslavskiy’s “governmental over-reach” Argument.Some ICO defenders have argued that because there are so many regulators asserting jurisdiction over ICOs, then none of them should. Judge Dearie seems uninspired by this argument:

“MR. KAMDANG: I think we are all bothered by the idea of fraud and fraud needs to be regulated. The question is whether or not the SEC can regulate this fraud. If they want to regulate this fraud our position is that Congress needs to give more guidance. There’s no question the government has any number of laws that they could apply to this situation. But — 

THE COURT: But that’s beside the point. The question is is it a security and what we have is the Howey test and the directive that we look past the form and consider the substance and step back and take a look at what’s really happening here. I must say I have difficulty with your position.”

  • A Question of Fact for the Jury? Surprisingly, Judge Dearie may end up leaving the question of whether an ICO is offering a security not as a matter of law for the court to determine, but instead a matter of fact for the jury to determine. Judge Dearie states:

“THE COURT: . . . it occurred to me, with the help of my clerks, that I had at one time in the past charged a jury on the question of what is an investment contract. . A case handled by your office, the Philip Barry case. It didn’t become a big issue in the case itself. The jury was asked to consider whether or not we were dealing with investment contracts that didn’t involve digital currency and supposed digital currency. It’s a case not unlike what we have here, at least from the government’s perspective.” 

Later on, along the same lines, Judge Dearie noted:

“THE COURT: I would instruct them [the jury] on what an investment contract is as I did in the Barry case. If they find it’s an investment contract, as in Barry, they found that it’s a security. These are things we could talk about, if we get that far.” 

  • Agree to Disagree. It appears that Zaslavskiy’s SEC defense counsel was not winning points from Judge Dearie with his “vagueness” argument, which is an argument made in the Polsinelli briefsupporting Zaslavskiy’s motion to dismiss. Consider this exchange between Judge Dearie and the Polsinelli attorney representing Zaslavskiy, Jason Nagi, who may or may not have been getting on the judge’s nerves (tough to discern from the transcript without actually witnessing this discussion):

“MR. NAGI: I would like to talk to you about something you mentioned, the new world. Let’s talk about the new world and the lack of clarity. Can it be both a security and can it be a currency and I would like to talk to you about the Administrative Procedure Act which is essentially the amalgamation or the inclusion of the due process clause into government agencies that regulate the people. I don’t think you have to get to the issue of whether this is a security and you have to do the Howey analysis. Under the Administrative Procedure Act because there was no clear rulemaking and if you look at what the APS says, it’s a couple of short answers. You don’t have to have special certifications. You don’t even have to have a comment period with the public. You can issue interpretive rules and general statements under 553(b)(3) A and B and if there’s good cause you don’t have to have public procedure to have an open discussion about how you regulate something. We’re dealing with a new asset class and it’s caused a lack of clarity with the law. 

THE COURT: I’m not so sure I agree with you. Go ahead. 

NAGI: I’ll give you a couple of examples. Your Honor is free to disagree with me. 

THE COURT: Good. I’m pleased.”

  • Handle Bar Mustaches. Nagi got into even more trouble later on in the argument, when he tried to paint his client, Zaslavskiy, as an honest and law-abiding citizen. Check out this sardonic dialogue between Nagi and Judge Dearie:

“MR. NAGI: When Mr. Zaslavskiy believed that the SEC would consider what he was doing to be a security he stopped doing it. He’s not a fat cat. He didn’t take it and use it for home improvements and go fix his house like they did in PlexCorps. It’s not a Ponzi scheme. He’s not holding on to anything and he’s willing to work that out with the SEC, whatever remains that was not provided. This is not your example of a guy with a handle bar mustache sitting behind a railroad tying somebody to the tracks. 

THE COURT: You’re giving a bad name to people with handle bar mustaches.” 

  • Vague Statutes. Clearly, Judge Dearie would be more comfortable if the criminal prosecution had charged simple fraud (as opposed to securities fraud), and avoided the “what is a security” question altogether — and to Nagi’s credit, Judge Dearie seems to share Nagi’s frustration with the vagaries of what Nagi refers to as antiquated U.S. statutes:

“MR. NAGI: It’s often hard to look at those statutes [The 1933 Securities Act and the 1934 Securities and Exchange Act] and find out where something as new and innovative as bitcoin or cryptocurrency, where do they fall into a regulatory regime that was written decades ago. That’s why we need rulemaking and that’s why we think you should dismiss the case. You don’t have to worry about letting the Ponzi schemers off. They did something else. That’s all I have to say. 

JUDGE DEARIE: THE COURT: I don’t have to worry about it for this case either. The government intimated a moment ago that there are going to be additional charges [simple fraud claims added]. 

NESTOR: I said there may be additional charges. As your Honor is aware I am starting a trial in front of your Honor in a month, so I’m not sure those charges will come in the next month. 

JUDGE DEARIE [LATER ON, REFERRING BACK TO MR. NAGI’S POINT AS HE BID FAREWELL TO THE PARTIES]: Yes, it would be wonderful if the regulators, you know, got into the 20th century, much less the 21st and we would be able to avoid some issues. I have to deal with the cards that have been dealt me and with that I’ll thank you for your time.” 

Actual Court Filings in US DOJ Federal Criminal Action Against Maksim Zaslavskiy 

Actual Court Filings in SEC Federal Civil Enforcement Action Against Maksim Zaslavskiy



John Reed Stark is president of John Reed Stark Consulting LLC, a data breach response and digital compliance firm. Formerly, Mr. Stark served for almost 20 years in the Enforcement Division of the U.S. Securities and Exchange Commission, the last 11 of which as Chief of its Office of Internet Enforcement. He has taught most recently as Senior Lecturing Fellow at Duke University Law School Winter Sessions and will be teaching a cyber-law course at Duke Law in the Spring of 2019. Mr. Stark also worked for 15 years as an Adjunct Professor of Law at the Georgetown University Law Center, where he taught several courses on the juxtaposition of law, technology and crime, and for five years as managing director of global data breach response firm, Stroz Friedberg, including three years heading its Washington, D.C. office. Mr. Stark is the author of, “The Cybersecurity Due Diligence Handbook.”