STATE ACTIONS ALLEGE FIRMS WERE INSOLVENT OR WERE NEARLY INSOLVENT BY MARCH 31, 2023
On June 15, 2023, the Texas State Securities Board filed enforcement actions against various companies collectively known as Abra and William John “Bill” Barhydt, the founder and CEO of Abra. The enforcement actions allege the respondents committed securities fraud and engaged in deception in connection with the offer and sale of investments in Abra Earn and Abra Boost. The alleged misconduct includes the intentional concealment of financial information reflecting the capitalization of parties, defaults on loans and the transfer of assets to Binance. The enforcement actions also alleged the firms were or were nearly insolvent as of March 31, 2023.
THE TEXAS STATE SECURITIES BOARD IS ENCOURAGING ABRA INVESTORS TO IMMEDIATELY ACCESS AND REVIEW THE ENFORCEMENT ACTIONS. THE ENFORCEMENT ACTIONS INCLUDE ALLEGATIONS THAT RELATE TO THE DISCLOSURE OF INFORMATION, INCLUDING THE DISCLOSURE OF FINANCIAL INFORMATION. ABRA HAS NOT YET HAD THE OPPORTUNITY TO CHALLENGE THE ALLEGATIONS.
THE ENFORCEMENT ACTIONS DO NOT PREVENT THE RESPONDENTS FROM RETURNING ASSETS TO CLIENTS. INSTEAD, THE ENFORCEMENT ACTIONS PRIORITIZE THE RETURN OF ASSETS TO INVESTORS OVER ANY OTHER RELIEF, INCLUDING THE PRAYER FOR MONETARY PENALTIES.
The enforcement actions consist of an Emergency Cease and Desist Order that incorporated a Notice of Hearing from the TSSB Enforcement Division. Taken together, the enforcement actions allege the respondents offered or sold Abra Earn to accredited and unaccredited investors and Abra Boost to accredited investors. Abra investors allegedly used digital assets to fund accounts tied to Abra Earn and Abra Boost in exchange for the payment of interest. Interest rates were as high as 10%, according to the enforcement actions.
The enforcement actions allege the TSSB Enforcement Division warned the respondents but Abra Earn sales continued through in or around October 2022. Around that time, the respondents allegedly stopped selling investments in Abra Earn and began selling investments in Abra Boost. The respondents allegedly relied upon Regulation D, Rule 506, to promote Abra Boost. This federal regulation, together with federal securities laws, preempt Texas and other state securities regulators from administering important laws designed to protect investors.
The enforcement actions allege respondents are allegedly intentionally concealing material information from Abra Boost investors. The enforcement actions allege this information includes the capitalization and operational history of parties and defaults on loans funded with assets tendered by Abra Boost investors. They also allege that as recently as June 11, 2023, the holding company for the parties or an affiliate thereof used an official social media platform to explain that “Abra is not bankrupt” even though the firms were insolvent or were nearly insolvent as of March 31, 2023.
According to the enforcement actions, as of May 17, 2023, the parties collectively had around $116.79 million of assets under management for U.S. Abra Earn and Abra Boost investors. More specifically, as of that date, Abra allegedly managed assets valued at approximately $49.96 million on behalf of 229 U.S. Abra Boost investors and assets valued at approximately $66.83 million on behalf of 9,087 U.S. Abra Earn Investors. These assets include $2.33 million of Abra Boost assets on behalf of 23 Texas residents and $9.12 million of Abra Earn assets on behalf of 827 Texas investors.
The Texas State Securities Board has been leading a working group of state securities regulators organized through the North American Securities Administrators Association (NASAA). NASAA is the oldest international organization dedicated to investor protection and consists of state, territorial and provincial securities regulators from the Untied States, Canada and Mexico. The agency and other members of the working group have filed enforcement actions against other issuers of cryptocurrency depository accounts, including BlockFi, Celsius Network, Voyager Digital and Nexo. Texas has also been advocating for investors that are creditors in bankruptcy proceedings filed by Celsius Network and Voyager Digital.
The respondents can challenge the enforcement actions by requesting a hearing on the Emergency Cease and Desist Order and answering and defending allegations in the Notice of Hearing at the State Office of Administrative Hearings.