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SEC asks the court to order telegram to pay $1.2b back for $1.7b ICO

Updated: Jul 3, 2020

The United States’ Securities and Exchange Commission, or SEC, has filed a proposal for final court judgment in regard to the terminated Telegram Open Network project.

In a proposed final judgment filed on June 25, the SEC has asked the New York Southern District Court to order million-dollar penalties to multiple defendants related to the case.

“Defendants are jointly and severally liable for disgorgement of $1,224,000,000,” the SEC wrote in the proposed judgment. As of press time, the judgment has been received by the court. Although the court has “reviewed and approved as to form” the proposed judgment, it is not yet final.

Telegram agreed to pay back $1.2 billion to investors and penalties to the SEC

Out of a total of $1.2 billion disgorgements, $1.19 billion represents the amount that defendants have paid as termination amounts or original contracts to pay back investors. Meanwhile, Telegram Group is liable for a civil penalty of $18.5 million. The payment should be made within 30 days after entry of the proposed judgment, the SEC wrote.

According to the document, Telegram has consented to pay the $18.5 million penalties upon an agreement reached on June 11.

The penalty amount will go to the U.S. government “for all purposes”

According to the proposed judgment, the SEC should send the funds paid pursuant to the judgment to the U.S. Treasury. The amount ordered to be paid should be treated as “penalties paid to the government for all purposes,” including all tax purposes, the SEC wrote. 

In the proposed judgment, the SEC specified that defendants may transmit the payment electronically via the Automated Clearing House network or the Fedwire Funds Service. The regulator said that payment may also be made directly from a bank account via through the SEC website as well as a certified check, bank cashier’s check, or U.S. postal money.

Telegram will have 30 days to pay if the judgment is accepted by the court

In the event that defendants do not send the amount within 30 days following entry of the proposed judgment, the SEC may enforce the Court’s judgment for disgorgement and civil penalty by moving for civil contempt.

The SEC continued to explain that the defendants relinquish all rights for the funds:

“By making payments of the Termination Amounts (as that term is defined in Section 1.1 of the “Purchase Agreements for grams”), or of the disgorgement and civil penalty amounts to the Commission, Defendants relinquish all legal and equitable right, title, and interest in such funds and no part of the funds shall be returned to Defendants.”

American investors accounted for about $400 million in TON’s $1.7 Billion ICO

As previously reported, American investors accounted for $424.5 million out of Telegram’s total $1.7 billion initial coin offering (ICO) conducted in 2018. Soon after a court ruled that Telegram’s GRAMs were likely to represent unregistered securities, Telegram CEO and founder Pavel Durov suggested a reimbursement plan.

In early May, Durov reportedly said that American TON investors will not be eligible for a 110% refund option, but rather would be only able to get an immediate 72% repayment. In mid-May, a report said that the majority of investors decided to quit the project with an immediate 72% refund soon after TON officially announced the closure on May 12.

The court is likely to accept the judgment, a lawyer says.

Philip Moustakis, attorney at Seward & Kissel LLP and former SEC counsel, believes that the New York Southern District Court is likely to accept the proposed settlement. “It is extremely rare for a court to reject a proposed judgment submitted by the SEC on the consent of the defendants in a case,” Moustakis told Cointelegraph.

The attorney also highlighted that the $1.2 million disgorgement amount should not be a surprise despite the fact that American investors invested about $400 million. “Nothing prevents the SEC from establishing a fair fund for the benefit of all investors, including non-U.S. investors, impacted by violative conduct,” Moustakis noted.

The lawyer continued:

“It was only after the court entered the injunction against Telegram that it raised the extraterritoriality argument and requested the court limit the injunction so as not to apply to non-U.S. purchasers. The court rejected the request, finding that it was untimely and that the safeguards Telegram proposed to prevent non-U.S. purchasers from reselling grams back into the U.S. were essentially unenforceable.”

Soon after the news broke, Durov issued a statement on his official Telegram channel, stating that Telegram has “already repaid more than $1.2 billion to purchasers either directly or in the form of loans.”

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