Blockchain Credit Partners (mTokens and DMG Tokens) SEC Fair Fund Enforcement - What's Next?

In recent years, regulators have begun scrutinizing decentralized finance (DeFi) platforms with increasing intensity. One notable case involves Blockchain Credit Partners, operating as DeFi Money Market (DMM), and its principals Gregory Keough and Derek Acree. The SEC’s enforcement action, culminating in a detailed administrative order, serves as an instructive example of how traditional securities regulations intersect with emerging digital finance. Equally significant is the establishment of a Fair Fund to compensate harmed investors. This article explains the key details of the case and outlines the mechanism behind SEC Fair Funds.

Background: DeFi Money Market’s Promises and Practice

Between February 2020 and February 2021, the respondents—Blockchain Credit Partners and its principals—created a platform called DeFi Money Market. Their business model was built on the promise of combining decentralized finance with traditional asset-backed lending. The platform offered two types of digital tokens:

• mTokens: These tokens were marketed as interest-bearing digital assets, purportedly offering a stable annual return of 6.25%. The interest was to be generated by acquiring “real-world” assets, like car loans.
• DMG (DMM)Tokens: Functioning as governance tokens, DMG tokens were said to provide holders voting rights and a share in any excess profits, including benefits from secondary market resales.

The marketing material painted an attractive picture of secure DeFi investing. However, the SEC found that the underlying business practices did not match the platform’s promises.

SEC Allegations and Findings

The SEC’s investigation revealed several critical issues with the operation of DeFi Money Market:

1. Sale of Unregistered Securities:
   The platform raised over $30 million through the sale of mTokens and DMG tokens without registering them as securities. This omission violated registration provisions under the Securities Act of 1933.
2. Material Misrepresentations:
   Despite claims that DMM would use investor funds to acquire income-generating assets (specifically, car loans), the respondents failed to ensure that these assets were actually transferred into DMM’s ownership. This gap between promised and actual asset backing meant that investors were misled about the true source of returns.
3. Fraudulent Business Model:
   When the value of the promised real-world assets declined, instead of transparently addressing the shortfall, the company used its own funds to pay the promised interest. This secretive backfilling not only distorted the project’s financial reality but also amounted to a fraudulent misrepresentation of its profitability.

As a consequence, the SEC determined that the conduct of the respondents violated several provisions of the securities laws, including Sections 5(a) and 5(c) and Section 17(a) of the Securities Act, as well as Section 10(b) and Rule 10b-5 under the Exchange Act. Ultimately, the SEC ordered a cumulative financial remedy of over $13.35 million, comprising disgorgement, prejudgment interest, and civil penalties.

The Establishment and Mechanics of SEC Fair Funds

In addition to the monetary penalties levied on the wrongdoers, the SEC took steps to address the harm suffered by investors through the creation of a Fair Fund. Under Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is designed to redistribute disgorgement, penalties, and any related interest collected in enforcement actions back to the harmed investors. Here’s how this mechanism works:

1. Collection of Funds

Following enforcement actions, the funds collected—whether through disgorgement (the return of ill-gotten gains), prejudgment interest, or direct penalties—are deposited into a Fair Fund account. In the DMM case, the Fair Fund began with over $7.5 million and will expand as further funds are collected according to the SEC’s order.

2. Administration and Oversight

To manage the funds, the SEC appoints an independent fund administrator from its approved pool. In the DeFi Money Market case, KCC Class Action Services, LLC (KCC) was designated as the fund administrator. This administrator is responsible for overseeing the claims process and ensuring that the funds are distributed in a transparent and fair manner. Moreover, the administrator is required to obtain a bond—which, in this case, was set at approximately the initial Fair Fund balance—to ensure the proper management of the funds.

3. Distribution to Investors

Once the fund is established and administered, investors who suffered losses due to the fraudulent practices may submit claims. The fund administrator reviews these claims against established criteria to determine eligibility. Ultimately, the collected funds, along with any accrued interest, are distributed to compensate harmed investors. This process not only serves to remedy investor losses but also reinforces the SEC’s commitment to protect market participants even as novel financial products evolve.

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If you purchased DMM or mTokens, please contact us—we’re here to assist you with managing and submitting your claim.