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On January 9, Richard Heart, the founder of HEX, and his team of world-class attorneys filed a letter requesting a pre-motion conference to dismiss the charges brought against him by the U.S. Securities and Exchange Commission (SEC). The SEC reacted with their own pre-motion in an attempt to respond to the attacks and provide justification for their actions. The plot intensifies as the highest-stakes legal battle takes place in the crypto space.
The cause of it all
In a recent development, the U.S. Securities and Exchange Commission (SEC) has filed charges against Richard Heart, as well as Hex, PulseChain, and PulseX. The charges include conducting unregistered offerings of crypto asset securities, raising over $1 billion from investors, and allegations of fraud involving the misappropriation of at least $12 million in offering proceeds.
Background case
The SEC’s charges are based on claims that Richard Heart, through his projects Hex, PulseChain, and PulseX, violated the registration provisions of Section 5 of the Securities Act of 1933. The Commission further alleges violations of the antifraud provisions of federal securities laws, seeking injunctive relief, disgorgement of ill-gotten gains, penalties, and other equitable relief.
Unregistered Crypto Asset Security Offerings
The SEC contends that Richard Heart conducted unregistered security offerings for Hex, creating an expectation of profits for investors. Despite disclaimers, the SEC argues that the economic reality of the offerings contradicts these disclaimers. Additionally, the SEC alleges that neither Heart nor Hex registered the Hex tokens or the Hex Offering with the Commission. The SEC further claims that the PulseChain and PulseX offerings were also unregistered.
Funds Misappropriation
One of the serious allegations involves the misappropriation of $12 million in funds from PulseChain investors. The SEC asserts that Heart transferred a significant portion of the PulseChain offering proceeds to another address and spent $12 million on luxury goods, including a 555-carat black diamond known as ‘The Enigma.’
Fraud in Connection with the Sale of the Security
The SEC acknowledges that Richard Heart is familiar with the U.S. securities laws and the Howey test, which determines if an offering qualifies as a security and accuses Heart of recycling sacrifice funds to gain control of more Hex tokens, creating a false impression of significant trading volumes and demand for Hex using their own funds.
Richard Heart assembles a world-class team of lawyers
Richard Heart assembled a highly experienced and diverse legal team of 11 attorneys, some of whom worked for the very same SEC.
The team includes former SEC Deputy Chief of Staff Michael Liftik, who brings a unique depth of knowledge from his tenure at the Commission. Other team members, such as Nicholas J. Inns and Kristin N. Tahler from Quinn Emmanuel, have impressive backgrounds in military law and international corporate defence.
The Grey Reed team, led by Chris Davis, a former Senior Trial Counsel at the SEC, and Joshua D. Smeltzer, a former U.S. Department of Justice lawyer, provides a strong foundation in government investigations and compliance.
Jeffrey D. Rotenberg, Patrick J. Smith, Brian T. Burns from Clark Smith Villazor, with their extensive experience in multi-jurisdictional issues and regulatory investigations, contribute valuable expertise.
Finally, David E. Kirk and Michael W. Ingram from Kirk and Ingram LLP, with their focus on corporate law, federal securities law, and digital assets, add depth to the team.
The collective experience of this legal team suggests a thorough understanding of securities laws, regulatory matters, and a broad spectrum of legal challenges related to cryptocurrencies.
Richard Heart requests a pre-motion conference
I am fighting the SEC for your rights. 11 of my lawyers filed this today. Ironically, today, the SEC's twitter account was hacked and a fraudulent message was posted. The blockchain literally solves exactly this problem. The SEC is attacking the very tech that it needs.… pic.twitter.com/WRsdmkiuiR
— Richard Heart (@RichardHeartWin) January 9, 2024
The timing of the letter, addressed to Judge Amon from the United States District Court for the Eastern District of New York and watching over the case between the SEC and Richard J. Schueler, aka Richard Heart, couldn’t be any better. Richard Heart chose to post it on X right at the moment of the hack of SEC’s X account. In the wake of the Bitcoin ETF approval, a fraudulent message emerging from the Commission’s account sent shockwaves through the entire financial industry. That situation is the reason why blockchains and cryptographically verifiable authentication were invented. Richard Heart wrote that the SEC is attacking the very technology it needs to protect investors from fraud and market manipulation.
Richard Heart’s lawyers submitted a letter to the judge to request a pre-motion conference and to provide a summary of the basis of Heart’s anticipated motion to dismiss the complaint. They list reasons for which the Commission is without merit and warrants dismissal with prejudice.
- The Complaint fails to establish personal jurisdiction and was not properly served:
- Not lived in the US or done business with the US for over a decade
- He engaged with persons from the worldwide forum rather than with specific US residents
- Websites didn’t register or process payments specifically aimed at the United States
- Dropping papers at the Finish police station is not a valid service of papers
- The Complaint suffers from myriad pleading, constitutional, statutory, and regulatory deficiencies that mandate dismissal. There’s no ground for establishing the required domesticity for the SEC to claim jurisdiction over the case. Some investors in the United States taking part in some transactions is not sufficient for establishing where the transaction occurs. The SEC alleges that HEX, PulseX, and PulseChain are “investment contracts,” therefore securities, without giving any plausible allegiance to the existence of any security. Despite the complaint pleading fraud, no deception is identified, and no inference of fraudulent intent is ever found. The SEC seems solely to disagree with how 3% of the entire sacrifice was used. The letter asks the judge to dismiss the Complaint because of the overarching powers granted to the SEC by Congress. It’s stated that through their enforcement action, the SEC tries to exceed their lawful authority and take over the entire $2 trillion cryptocurrency industry. In the end, Richard Heart’s lawyers demand dismissal because the SEC’s action infringes on Richard Heart’s and anyone engaging with HEX, PulseChain, and PulseX’s right to exercise their constitutional freedoms of speech and association guaranteed by the First Amendment. Computer code constitutes free speech and is protected by law. Banning blockchains and tokens means infringing on freedom of speech.
Constitutional Rights and Major Questions Doctrine
Heart contends that the SEC’s actions violate constitutional rights to speech and association, but the SEC asserts that their enforcement is focused on securities laws, not protected speech. The SEC refutes Heart’s claim that the major questions doctrine warrants dismissal, emphasizing their authority in enforcing statutory requirements.
The Pulsechain sacrifice of $1 billion was made with the purpose of sacrificing for freedom of speech and freedom of assembly and movement, and it’s very telling that Richard Heart seeks to protect these constitutional rights in this case.
The SEC reacts to Richard Heart’s attacks
The SEC promptly responded to Richard Hearts request for pre-motion with their own request for pre-motion. The SEC accused him of minimizing his role in the fraudulent scheme and portrays him as the main orchestrator and the main character developing, releasing, and promoting securities while also controlling the websites, pooling, and misappropriating funds.
The SEC stresses that it has proper jurisdiction over the case as the defendant has sufficient minimum contacts with the United States, like accepting investments from US residents and using the US-based trading platform. It retains that Richard Heart was properly served with papers validated by the Finland Ministry of Justice. The SEC cites legal precedents granting it enough territory for proper jurisdiction.
The Plaintiff justifies the missing definition of crypto assets as “investment contracts” because they’re de facto “investment contracts.” According to the SEC, there need not be a formal common-law contract between transacting parties for an investment contract to exist.
The SEC retains that Richard Heart utilizing funds for personal use is in clear violation of antifraud provisions; it fails, however, to provide proof that these funds were used for personal expenses. The SEC stresses that their action is justified as they’re enforcing securities laws rather than violating free speech and freedom of association.
The Commission responded to Richard Heart’s accusations of First Amendment violations by stating that they don’t impose content-based regulation on computer code or prohibit him from discussing open source code and P2P communication software, which in this case means “promotion.” They justify their intervention with the authority to protect investors from unregistered offerings of securities and fund misappropriation.
Next Steps and Motion Dates
Heart’s legal team proposed the following schedule:
Motion to Dismiss: motion to dismiss is set on April 8, 2024.
SEC Response: The SEC has until July 8, 2024, to respond to Heart’s motion. This period allows the regulatory body to counter Heart’s arguments and strengthen its case against the founder of PulseX, HEX, and PulseChain.
Heart’s Reply: Following the SEC’s response, Richard Heart has until August 22, 2024, to submit a reply. This phase offers Heart an opportunity to address the SEC’s counterarguments and reinforce his position.
Conclusion
As the legal drama continues to unfold, the crypto community eagerly awaits the outcomes of these critical milestones. The legal battle between Richard Heart and the SEC raises broader questions about the intersection of blockchain technology, securities regulation, and constitutional rights. The next few months promise to be a defining period, shaping the trajectory of crypto-related legal frameworks and regulatory approaches.
