Source: https://www.scribd.com/document/442428031/ICOBox-Motion-for-Default
Timestamp: 2020-02-17 04:20:41
Document Index: 73591186

Matched Legal Cases: ['§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 2688', '§ 6', '§77', '§\n12', '§ 6', '§ 77', '§ 78', '§ 2688', '§\n15', '§ 77', '§ 77', '§ 77']

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Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 1 of 34 Page ID #:63
1 AMY J. LONGO (Cal. Bar No. 198304)
Email: longo@sec.gov
2 BRENT W. WILNER (Cal. Bar No. 230093)
Email: wilnerb@sec.gov
4 Securities and Exchange Commission
5 Alka N. Patel, Associate Regional Director
6 444 S. Flower Street, Suite 900
7 Telephone: (323) 965-3998
12 SECURITIES AND EXCHANGE Case No. 2:19-cv-08066-DSF (Ex)
13 PLAINTIFF SECURITIES AND
Plaintiff, EXCHANGE COMMISSION’S
14 MEMORANDUM IN SUPPORT OF
vs. MOTION FOR DEFAULT
15 JUDGMENT AGAINST
ICOBOX and NIKOLAY DEFENDANTS ICOBOX AND
16 EVDOKIMOV, NIKOLAY EVDOKIMOV
17 Defendants. Date: February 10, 2020
18 Ctrm: 7D
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 2 of 34 Page ID #:64
2 I. INTRODUCTION ..........................................................................................1
3 II. STATEMENT OF FACTS .............................................................................2
4 A. Defendants’ Sale of Unregistered Securities........................................3
5 B. Defendants’ Unregistered Broker Services for Clients’ ICOs ............. 7
6 C. Defendants’ Current Status ..................................................................9
7 III. ARGUMENT ................................................................................................10
8 A. The SEC Has Complied With Fed. R. Civ. P. 55(a) and L.R. 55-1 ...11
9 B. The Eitel Factors Support Entry of Default Judgment .......................12
10 1. Possibility of prejudice to the SEC ..........................................12
11 2. Substantive merits and sufficiency of the complaint ...............13
12 3. Amount at stake and seriousness of defendants’ conduct .......17
13 4. Possibility of disputed facts .....................................................17
14 5. Possibility of excusable neglect ...............................................18
15 6. Policy for deciding on the merits .............................................18
16 C. The SEC Is Entitled to the Relief it Seeks .........................................19
17 1. ICOBox and Evdokimov should be permanently enjoined .....19
18 2. The Court should order joint and several disgorgement with
prejudgment interest.................................................................20
3. The Court should order second tier penalties against
20 Evdokimov ...............................................................................23
21 D. Default Judgment Should be Entered Without Delay ........................24
22 IV. CONCLUSION.............................................................................................25
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 3 of 34 Page ID #:65
4 Aldabe v. Aldabe,
616 F.2d 1089 (9th Cir. 1980) ...........................................................................10
Anderson v. Aurotek,
6 774 F.2d 927 (9th Cir. 1985) .............................................................................13
7 Benny v. Pipes,
799 F.2d 489 (9th Cir. 1986) .......................................................................10, 13
Eitel v. McCool,
9 782 F.2d 1470 (9th Cir. 1986) .........................................................10, 17, 18, 19
10 First T.D. & Investment, Inc.,
253 F.3d 520 (9th Cir. 2001) .............................................................................24
12 82 U.S. 552 (1872).............................................................................................24
13 Hakkasan LV, LLC v. Adamczyk,
No. 2:14-CV-01717, 2017 WL 1549508 (D. Nev. Apr. 5, 2017) .....................12
Kloepping v. Fireman’s Fund,
15 1996 U.S. Dist. LEXIS 1786 (N.D. Cal. Feb. 14, 1996) ...................................10
16 Landstar Ranger, Inc. v. Parth Enterprises, Inc.,
725 F. Supp. 2d 916 (C.D. Cal. 2010) ...............................................................13
McCarthy v. Langston,
18 23 F.R.D. 249 (N.D. Fl. 1959)...........................................................................12
19 Mullane v. Central Hanover Trust Co.,
339 U.S. 306 (1950)...........................................................................................18
PepsiCo Inc. v. Triunfo-Mex. Inc.,
21 189 F.R.D. 431 (C.D. Cal. 1999).......................................................................10
22 PepsiCo, Inc. v. Cal. Sec. Cans,
238 F. Supp. 2d 1172 (C.D. Cal. 2002) .....................................10, 12, 13, 17, 19
Phillip Morris USA, Inc. v. Castworld Prods., Inc.,
24 219 F.R.D. 494 (C.D. Cal. 2003).......................................................................18
25 SEC v. Abacus Int’l Holding Corp.,
2001 U.S. Dist. LEXIS 12635 (N.D. Cal. Aug. 16, 2001) ................................23
SEC v. Baccam,
27 No. ED CV 17-0172 SJO (SPx), 2017 WL 5952168
(C.D. Cal. June 14, 2017) ............................................................................18, 20
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 4 of 34 Page ID #:66
1 SEC v. Benger,
697 F. Supp. 2d 932 (N.D. Ill. 2010) .................................................................16
SEC v. Blockvest, LLC,
3 No. 18-CV-2287-GPB(BLM), 2019 WL 625163
(S.D. Cal. Feb. 14, 2019) ...................................................................................14
SEC v. CMKM Diamonds,
5 729 F.3d 1248 (9th Cir. 2013 ............................................................................15
6 SEC v. Continental Tobacco Co.,
463 F.2d 137 (5th Cir. 1972) .............................................................................14
SEC v. Cross Financial Services, Inc.,
8 908 F. Supp. 718 (C.D. Cal. 1995) ..............................................................21, 22
9 SEC v. Eurobond Exch., Ltd.,
13 F.3d 1334 (9th Cir. 1994) .............................................................................15
SEC v. First City Financial Corp., Ltd.,
11 890 F.2d 1215 (D.C. Cir. 1989).........................................................................21
12 SEC v. Hansen,
1984 WL 2413 (S.D.N.Y. Apr. 6, 1984) ...........................................................17
SEC v. Hui Feng,
14 935 F.3d 721 (9th Cir. 2019) .......................................................................16, 17
15 SEC v. Hui Feng,
No. 15-CV-09420, 2017 WL 6551107 (C.D. Cal. Aug. 10, 2017) ................... 16
SEC v. JT Wallenbrock & Associates,
17 440 F.3d 1109 (9th Cir. 2006) ...............................................................20, 21, 22
18 SEC v. Kenton Capital, Ltd.,
69 F. Supp. 2d 1 (D.C. Cir. 1998) .....................................................................23
SEC v. Koracorp Industries, Inc.,
20 575 F.2d 692 (9th Cir. 1978) .............................................................................19
21 SEC v. Manor Nursing Centers, Inc.,
458 F.2d 1082 (2d Cir. 1972) ............................................................................21
SEC v. Moran,
23 944 F. Supp. 286 (S.D.N.Y. 1996) ....................................................................23
24 SEC v. Murphy,
626 F.2d 633 (9th Cir. 1980) .....................................................13, 15, 16, 19, 23
SEC v. Newman,
26 CV 12-03142-BRO (PLAx), 2016 U.S. Dist. LEXIS 193639
(C.D. Cal. July 15, 2016) ...................................................................................13
SEC v. Phan,
28 500 F.3d 895 (9th Cir. 2007) .......................................................................13, 15
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 5 of 34 Page ID #:67
1 SEC v. Platforms Wireless International Corp.,
617 F.3d 1072 (9th Cir. 2010) .........................................................16, 20, 21, 22
SEC v. Qi,
3 No. CV 17-08856-CJC(JCX), 2018 WL 5263187
(C.D. Cal. Mar. 21, 2018) ..................................................................................16
SEC v. R.G. Reynolds Enters., Inc.,
5 952 F.2d 1125 (9th Cir. 1991) ...........................................................................14
6 SEC v. Rind,
991 F.2d 1486 (9th Cir. 1993) ...........................................................................20
SEC v. Rogers,
8 790 F.2d 1450 (9th Cir. 1986) ...........................................................................15
9 SEC v. Rubera,
350 F.3d 1084 (9th Cir. 2003) ...........................................................................14
SEC v. Schooler,
11 106 F. Supp. 3d 1157 (S.D. Cal. 2015) .............................................................22
12 SEC v. Souza,
2011 WL 2181365 (E.D. Cal. June 3, 2011) .....................................................24
SEC v. W. J. Howey Co.,
14 328 U.S. 293 (1946)...........................................................................................14
15 SEC v. Wallace,
Case No. SACV 16-01788 AG (FFMx), 2017 WL 8230026
16 (C. D. Cal. May 8, 2017) ...................................................................................13
17 T-Cetra, LLC v. Guzman,
No. CV 16-6416 DSF (AFMx), 2017 WL 7156250
18 (C.D. Cal. Dec. 15, 2017) ..................................................................................10
19 TeleVideo Sys., Inc. v. Heidenthal,
826 F. 2d 915 (9th Cir. 1987) ......................................................................10, 17
U.S. v. Odessa Union Warehouse Coop.,
21 833 F.2d 172 (9th Cir. 1987) .............................................................................19
22 U.S. v. Zaslavskiy,
No. 17 CR 647 (RJD), 2018 WL 4346339 (E.D.N.Y. Sept. 11, 2018) ............. 14
Vitaly Anaykin, et al., v. Nikolay Evdokimov, et al.,
24 No. 19-CV-8165, 2019 WL 4741550 (C.D. Cal. Sept. 20, 2019)....................... 2
25 Warfield v. Alaniz,
569 F.3d 1015 (9th Cir. 2009) ...........................................................................14
Wood v. Hampton-Porter Investment Bankers,
27 No. C-02-5367 MMC, 20014 WL 546888 (N.D. Cal. 2004) ............................12
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 6 of 34 Page ID #:68
1 FEDERAL STATUTES
2 Securties Act of 1933
3 Section 2(a)(1)
[15 U.S.C. § 77b(a)(1)] ......................................................................................14
5 [15 U.S.C. § 77e] ...............................................................................................13
6 Section 5(a)
[15 U.S.C. § 77e(a)]...........................................................................2, 13, 19, 20
8 [15 U.S.C. § 77e(c)]...........................................................................2, 13, 19, 20
9 Section 20(b)
[15 U.S.C. § 77t(b)] ...........................................................................................19
Section 20(d)(2)(A)
11 [15 U.S.C. § 77t(d)(2)(A)] .................................................................................23
12 Section 20(d)(2)(B)
[15 U.S.C. § 77t(d)(2)(B)] .................................................................................24
Section 21(d)(2)
14 [15 U.S.C. § 77t(d)(2)] ......................................................................................24
15 Securities Exchange Act of 1934
16 Section 3(a)(4)
[15 U.S.C. § 78c(a)(4)] ......................................................................................16
18 [15 U.S.C. § 78o(a)] ....................................................................2, 13, 16, 19, 20
19 Section 21(d)
[15 U.S.C. § 78u(d)(1)] .....................................................................................19
Section 21(d)(3)(B)
21 [15 U.S.C. § 78u(D)(3)(B)] .........................................................................23, 24
22 Section 21(d)(3)(B)(ii)
[15 U.S.C. § 78u(d)(3)(B)(ii)] ...........................................................................24
Fed. R. Civ. P. 4(e)(2)(B) ............................................................................................11
Fed. R. Civ. P. 4(h)(1)(A) ..............................................................................................1
Fed. R. Civ. P. 4(h)(1)(B) ............................................................................................11
Fed. R. Civ. P. 54(b) ....................................................................................................24
Fed. R. Civ. P. 54(c).....................................................................................................12
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 7 of 34 Page ID #:69
1 Fed. R. Civ. P. 55(a)...............................................................................................10, 11
2 Fed. R. Civ. P. 55(b) ..............................................................................................10, 18
3 Fed. R. Civ. P. 55(b)(2)............................................................................................2, 12
5 Local Rule 55-1 ......................................................................................................11, 12
6 OTHER AUTHORITIES
7 10A Charles Wright, Arthur Miller & Mary Kane, Federal Practice &
Procedure § 2688 (3d ed. 2010).........................................................................21
William W. Schwarzer et al., California Practice Guide: Federal Civil
9 Procedure Before Trial § 6:91 (2010) ...............................................................11
10 CALIFORNIA CODE OF CIVIL PROCEDURE
11 Cal. Civ. Proc. 415.20(a) ...............................................................................................1
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 8 of 34 Page ID #:70
2 Plaintiff Securities and Exchange Commission (“SEC”) hereby moves for entry
3 of default judgment against defendants ICOBox and Nikolay Evdokimov
4 (“Evdokimov”) (“defendants”), whose defaults for failure to respond to the complaint
5 were entered by the clerk on October 28, 2019. See Dkt. No. 11 [Clerk Default].
6 The SEC filed this action on September 18, 2019. See Dkt. No. 1 [Complaint]. The
7 complaint alleges that defendants conducted an unregistered securities offering and
8 acted as unregistered securities brokers for “initial coin offerings” (“ICOs”).
9 ICOBox, an incubator for digital asset startups, was founded in mid-2017 by
10 Evdokimov, its CEO and “vision director.” To raise funds, defendants sold
11 approximately $14.6 million worth of securities in the form of digital assets called
12 “ICOS” tokens. Between August 9, 2017 and September 15, 2017, defendants sold
13 ICOS tokens to over 2,000 investors, in the United States and globally, through
14 ICOBox’s website, https://icobox.io. By not registering the offering with the SEC,
15 defendants violated the securities laws’ registration requirements.
16 Defendants also acted as unregistered securities brokers. Since August 2017,
17 defendants facilitated token sales by over 30 clients, collectively raising over $650
18 million, and charging “success fees” of 1.5% of the amounts raised. The token sale
19 by at least one such client, Paragon Coin, Inc. (“Paragon”), constituted a securities
20 offering. By soliciting and attracting investors to securities offerings in exchange for
21 transaction-based compensation, without registering as or associating with a broker-
22 dealer, defendants likewise violated broker registration requirements.
23 On September 21, 2019, the SEC served ICOBox, pursuant to Fed. R. Civ. P.
24 4(h)(1)(A) and Cal. Civ. Proc. 415.20(a), and served Evdokimov, pursuant to Fed. R.
25 Civ. P. 4(e)(2)(B). See Dkt. No. 9 [Proof of Service]. The SEC personally delivered
26 these documents to the address in Beverly Hills, California that, at the time, served as
27 Evdokimov’s residence and one of ICOBox’s offices. The documents were received
28 by Maria Batura, Evdokimov’s co-resident and wife, who worked with Evdokimov
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 9 of 34 Page ID #:71
1 out of that address. Id. Shortly after being served with the SEC’s complaint,
2 Evdokimov, Batura, and ICOBox vacated the Beverly Hills premises. See
3 Declaration of Amy Jane Longo filed concurrently herewith (“Longo Decl.”) ¶¶ 4-5,
4 8, Ex. 5. Neither ICOBox nor Evdokimov responded to the complaint, and on
5 October 21, 2019, the SEC requested that the clerk enter defaults under Fed. R. Civ.
6 P. 55(a). See Dkt. No. 10. The clerk entered defaults on October 28, 2019. See Dkt.
7 No 11. 1
8 The SEC now moves under Rule 55(b)(2) for entry of default judgment against
9 defendants, permanently enjoining them from future violations of Sections 5(a) and
10 (c) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §77e(a), (c)] and
11 Section 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §
12 78o(a)]; ordering them jointly and severally to disgorge ill-gotten gains in the amount
13 of $14.6 million with prejudgment interest of $1,459,428.99; and imposing a civil
14 penalty against Evdokimov of $189,426. 2
15 II. STATEMENT OF FACTS
16 The SEC’s complaint alleges that ICOBox, a privately-owned limited liability
17 company, was formed in the Cayman Islands on June 23, 2017. Dkt. No. 1 (“Cmpl.”)
18 ¶ 18. ICOBox claimed to have between 50 and 150 employees in offices globally,
19 including in San Francisco. Id. Neither ICOBox nor any of its securities have ever
20 been registered with the SEC nor with any registered broker-dealers. Id.
21 Evdokimov, then a resident of Beverly Hills, co-founded ICOBox, registered
22 its domain name (https://icobox.io), and served as its CEO since December 27, 2018.
23 Id. ¶ 19. Like ICOBox, he has never been registered with the SEC nor with any
On December 10, 2019, the Court issued an order requiring the SEC to file this
26 default judgment motion on or before January 10, 2020. See Dkt. No. 12.
After the SEC’s action was filed, Evdokimov was named as a defendant in a private
investor’s securities fraud action filed on September 20, 2019, Vitaly Anaykin, et al.,
28 v. Nikolay Evdokimov, et al., No. 19-CV-8165, 2019 WL 4741550 (C.D. Cal. Sept.
20, 2019), also pending before this Court.
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 10 of 34 Page ID #:72
1 broker dealer. Id. Since ICOBox’s founding, he has been the face of the company,
2 representing it online, on social media, and in interviews to blockchain-centric media
3 sites. Id. After co-founding ICOBox, Evdokimov purportedly left the company for
4 some part of 2018, though he remained listed among ICOBox’s management on its
5 website, and continued to promote ICOBox on his personal social media account. Id.
6 ¶ 114. In December 2018, Evdokimov became ICOBox’s CEO. Id. ¶ 115.
7 A. Defendants’ Sale of Unregistered Securities
8 An ICO is a fundraising event in which an entity offers participants a unique
9 “coin,” “token,” or “digital asset,” in exchange for consideration, often in the form of
10 virtual currency or fiat currency. Id. ¶ 21. The tokens are issued and distributed on a
11 “blockchain” or cryptographically secured ledger. Id. ICOBox’s offering of ICOS
12 tokens constituted an ICO, as did the token sales of many of its clients. Id. 3
13 The ICOS offering. On July 27, 2017, ICOBox announced that it would be
14 conducting an “ICO for ICOs,” offering ICOS tokens to the general public from
15 August 9, 2017 to September 15, 2017. Id. ¶ 27. ICOBox summarized the offering
16 in a white paper dated August 2017 (the “White Paper”), which appeared on the
17 company’s website and social media channels. Id. ¶ 28. Before and during the
18 offering, defendants promoted ICOS on social media; in online interviews; and via
19 Evdokimov’s appearances at crypto-enthusiast conferences. Id. ¶¶ 29-30.
20 ICOBox structured the sale of ICOS tokens in five consecutive phases. Id.
21 ¶ 31. The cost per token increased over each phase, starting at 0.008 bitcoin on
22 August 9, 2017, and increasing to 0.012 bitcoin during the final weeks of sale ending
23 September 15, 2017 (i.e., from $27 to $60 per token). Id. During the two “presale”
24 phases, investors were required to purchase between 1,000 and 10,000 tokens, with
On July 25, 2017, two weeks before ICOBox started its public sale of the ICOS
27 tokens, the SEC issued a release titled the DAO Report, which “advise[d] those who
would use . . . distributed ledger or blockchain-enabled means for capital raising, to
28 take appropriate steps to ensure compliance with the U.S. federal securities laws,”
and concluded that the digital assets at issue in that matter were securities. Id. ¶ 26.
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 11 of 34 Page ID #:73
1 the minimum purchase dropping to one ICOS token during the final phases. Id. ¶ 32.
2 ICOBox advertised ICOS as being available for purchase by the “public globally,”
3 including in the United States. Id. ¶ 33.
4 ICOBox did not impose sophistication or accreditation standards on investors,
5 and did not collect biographical information concerning its investors. Id. ¶ 34. It
6 accepted payments in the form of bitcoin, digital currency, and US dollars. Id. ¶ 35.
7 For every 100 ICOS tokens sold to investors, the White Paper stated that ICOBox
8 planned to issue 20 additional tokens for “distribution to partners, advisors, bounty
9 participants, and the team members.” Id. ¶ 36. Throughout the offering, the
10 company provided a 5% “referral” bonus for investors who promoted ICOS. Id. ¶ 37.
11 There was no minimum or cap on the number of tokens that could be sold, nor the
12 amount that could be raised. Id. ¶ 38.
13 The project, as advertised. The White Paper stated that “[t]he essence of the
14 project is to raise funds by selling ICOS tokens.” Id. ¶ 39. The primary use of
15 proceeds would be to fund ICOBox’s provision of facilitation services to other ICO
16 issuers who could not afford its fees. Id. ICOBox charged flat fees starting at
17 $250,000 depending on the facilitation service package provided, and success fees
18 starting at 1.5% of the amount raised where the client’s ICO went forward. Id. ¶ 40.
19 Prospective issuers agreed to make their future tokens available to ICOS token
20 holders, who could swap their ICOS tokens for an issuer’s tokens at a discount. Id.
21 ¶ 41. According to the White Paper, if a prospective issuer could not afford
22 ICOBox’s fees, the potential ICO would be “screened by ICOBox experts” to
23 determine if it met criteria sufficient to place the ICO on the ICOS platform—such as
24 “economic viability,” “unique offer” and “team (visionary, team members’
25 competence and potential).” Id. ¶ 42. Once ICOBox experts decided which proposed
26 ICOs to place on the ICOS platform, ICOS holders would vote to select the ICOs
27 they believed should receive facilitation services paid for by the ICOS token sale. Id.
28 The White Paper projected that the ICOS platform would launch on
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 12 of 34 Page ID #:74
1 September 1, 2017, with the first voting and selection of new ICO projects to take
2 place on October 2, 2017. Id. ¶ 43. ICOBox launched the ICOS platform on or about
3 September 27, 2017, and the first voting and selection of new ICO projects occurred
4 on or about October 15, 2017. Id. ¶ 44.
5 Investors’ expectations of profits from defendants’ efforts. ICOBox
6 advertised that token holders could profit from discounts on the ICOS platform, and
7 by trading ICOS tokens on digital asset platforms. Id. ¶ 45. The White Paper
8 highlighted token holders’ ability to profit by swapping their ICOS tokens at a
9 roughly one-to-four rate for tokens that would be issued during future ICOs by
10 ICOBox’s clients. Id. ¶ 46. Defendants frequently cited this attribute of the tokens,
11 claiming that token holders were “essentially getting an ICO discount pass.” Id. ¶ 48.
12 Evdokimov also claimed online that this facet of ICOBox’s offering provided a
13 “minimization of risks.” Id. ¶ 49.
14 Defendants made numerous statements online and on social media, before and
15 during the offering, about the large volume of anticipated ICOBox clients. Id. ¶ 51.
16 According to the White Paper, ICOBox planned to conduct “about 800 ICOs” in its
17 first year. Id. ¶ 52. ICOBox repeatedly emphasized during the offering that ICOS
18 token holders would be able to profit by trading the ICOS tokens on digital asset
19 platforms. Id. ¶ 55. ICOS tokens were ultimately listed on several digital asset
20 trading platforms including HitBTC, EtherDelta, and Tidex. Id. ¶ 58.
21 ICOS offering’s success depended on management’s efforts. ICOBox made
22 clear that its success depended on the efforts of its management team, and in
23 particular on Evdokimov. Id. ¶ 59. For example, in a July 27, 2017 press release
24 posted online, the company stated that “ICOBox was founded by . . . blockchain
25 visionaries” including Evdokimov. In an interview posted on Crypto-economy.net on
26 September 4, 2017, in the midst of the ICOS sale, Evdokimov described himself as
27 having “founded numerous successful companies that conduct ICOs,” and “written
28 several books and articles on digital marketing and blockchain.” Id. ¶ 60. ICOBox
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 13 of 34 Page ID #:75
1 claimed that its team had sufficient personnel to support the large volume of
2 anticipated offerings. Id. ¶ 62.
3 Although the White Paper stated that ICOS token holders would have the
4 ability to “vote” and “comment” on proposed projects on ICOBox’s platform,
5 ICOBox in fact restricted the token holders’ voting rights. Id. ¶ 63. Token holders
6 could not vote on ICOs by potential clients who had the money to pay for ICOBox’s
7 facilitation services; instead, they could vote only on the subset of nonpaying
8 potential clients’ projects that already had been “screened by ICOBox experts” in
9 what the White Paper referred to as an “initial audit.” Id. ¶ 64. Token holders could
10 not readily aggregate their votes, since the identities of ICOS token holders were not
11 available, and management allocated itself and partners 20 tokens for every 100
12 issued to investors. Id. ¶ 65. Similarly, the comment feature was merely an informal
13 mechanism for providing feedback to potential ICOBox clients. Id. ¶ 66.
14 Defendants’ offers and sales of securities. Through its offering, ICOBox
15 raised roughly $14.6 million from approximately 2,122 investors, including in the
16 U.S., between August 9, 2017 and September 15, 2017. Id. ¶ 67. ICOBox, as the
17 issuer of the tokens, directly offered and sold the ICOS tokens to investors through its
18 website. Id. ¶ 68. Evdokimov also directly offered and sold the ICOS tokens. Id.
19 ¶ 69. He held himself out as the company’s founder and public face, and promoted
20 the offering through ICOBox’s website and in his social media presence. Id.
21 The majority of the investors bought during the initial days of the ICO, with all
22 but $600,000 of the $14.6 million raised by the end of August 2017. Id. ¶ 71. The
23 company increased its social media pressure during the final days of the offering,
24 sending messages on social media every few minutes. Id. ¶ 72. The average price
25 paid per ICOS during the offering was $40/token. Id. ¶ 73. After the offering closed,
26 on September 22, 2017, ICOBox issued 591,617 ICOS tokens on the Ethereum
27 blockchain, which included the tokens issued to investors, referral bonus recipients,
28 and the ICOBox team. Id. ¶ 74.
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 14 of 34 Page ID #:76
1 Defendants’ failure to register the offering. ICOBox took no steps to register
2 the ICOS offering or qualify for any exemption, though defendants were well aware
3 of the SEC’s July 2017 DAO Report. Id. ¶ 75. In the days leading to the August 9,
4 2017 launch, Evdokimov gave interviews and made statements online about his
5 interpretation of the DAO Report, incorrectly claiming that the ICOS offering was
6 not a security or had an “exemption” from registration because the token had a
7 “utility.” Evdokimov did not say how this would constitute an exemption from the
8 securities laws. Id. ¶ 76. Similarly, on Telegram, the company’s management team
9 received multiple questions from potential investors as to whether the company was
10 able to offer the tokens to all US investors given the apparent application of the
11 federal securities laws. Id. ¶ 77. Management responded that it could (and did) sell
12 to U.S. investors, and that the company did not require information from purchasers
13 to assess whether they were accredited. Id. ¶ 78.
14 In the two years after the ICOS offering, ICOBox has facilitated
15 approximately 35 ICOs, far fewer than the 800 per year it forecasted. Id. ¶ 83.
16 ICOBox recently announced it was discontinuing the platform for swapping ICOS
17 tokens for deferred-payment clients, rendering the supposed discount “purchasing
18 power” of the ICOS tokens obsolete. Id. ¶ 84. ICOS tokens have experienced a
19 precipitous loss in value since their issuance on September 22, 2017. As of June 24,
20 2019, the tokens were worth at most approximately $2.41 per ICOS token, roughly
21 1/20th of the average purchase price during the offering (and roughly 1/30th the price
22 paid by investors who purchased during the final days of the ICO). Id. ¶ 85.
23 B. Defendants’ Unregistered Broker Services for Clients’ ICOs
24 ICOBox’s “marketing services.” Since the ICOS offering in August 2017,
25 ICOBox has facilitated approximately 35 clients launching ICOs, which have raised
26 an estimated $650 million dollars from investors. Id. ¶ 85. ICOBox promoted itself
27 as a “Blockchain Growth Promoter and Business Facilitator for companies seeking to
28 sell their products via ICO crowdsales.” Id. ¶ 87. The company provided various
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1 services to foster clients’ ICOs, such as “technology” (drafting smart contracts and
2 developing online payment processing applications), “legal” (company formation and
3 opinion letters through outside consultants), and “marketing.” ICOBox offered
4 services individually or in packages, such as the “Basic Package,” which included a
5 combination of the three categories. Id. ICOBox’s “marketing” services, which it
6 provided to at least 27 clients, included advising investors on the merits of the clients’
7 offerings and actively soliciting investors to purchase the clients’ tokens. Id. ¶ 89.
8 ICOBox charged two types of fees for marketing services: flat fees and
9 success fees. Id. ¶ 91. The flat fee depended on the category and extent of the
10 services, including, for example, the “Basic Package,” which cost roughly $250,000.
11 Id. ¶ 92. In addition, ICOBox charged “success” fees based on the amounts raised.
12 Id. ¶ 93. The “success” fees, which were transaction-based compensation, ranged
13 from 1.5% to 6% of the amount raised during the clients’ ICOs. Id. ¶ 94.
14 At least one of the tokens sold by ICOBox’s clients constituted securities:
15 “PRGs,” offered and sold by ICOBox client Paragon between August 2017 and
16 October 2017. Id. ¶¶ 95-96. Paragon was an online entity formed in Singapore. Id.
17 ¶ 97. It was involved in developing blockchain technology for the cannabis industry,
18 and raised over $12 million through the sale of PRGs to the general public. Id.
19 Paragon’s whitepaper and other online promotional materials represented that
20 Paragon would use the proceeds of its ICO to build a cannabis-related “ecosystem,”
21 the development of which would cause PRGs to rise in value. Id. ¶ 98. Paragon’s
22 representations led potential PRG investors to reasonably expect to profit from the
23 efforts of Paragon’s management. Id. ¶ 99. Paragon also promoted its efforts to
24 control and increase the price of the PRGs, and its plans for PRGs to be placed on
25 digital asset trading platforms. Id. ¶ 101. Paragon touted that its management’s
26 expertise would be responsible for the success of the venture and the PRGs’
27 profitability. Id. ¶ 102.
28 On July 22, 2017, Paragon retained ICOBox to perform “marketing” services
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1 in connection with the PRG offering, through a “Services Agreement” signed by an
2 ICOBox co-founder. Id. ¶ 103. As part of the agreement, ICOBox agreed to give
3 input on Paragon’s whitepaper and to advise on the promotion of the ICO, including
4 in retaining team members, increasing online visibility of the offering, disseminating
5 promotional and offering materials regarding PRGs, attracting investors through
6 ICOBox’s online and social media platforms, and communicating with potential
7 investors about the merits of the offering. Id. ¶ 104. Paragon agreed to pay ICOBox
8 a 3% success fee based on the amount raised, ultimately $12,066,000. Id. ¶ 105.
9 Evdokimov’s role. In his roles as ICOBox’s co-founder, “vision director,” and
10 CEO, Evdokimov managed ICOBox’s operations, including overseeing and engaging
11 in the “marketing” services it provided. Id. ¶ 106. Evdokimov personally registered
12 ICOBox’s website, the primary repository for attracting clients and the portal for
13 interested investors to obtain information about its clients’ ICOs. Id. ¶ 107.
14 Evdokimov was active in soliciting clients for ICOBox’s services online, on social
15 media, in interviews with crypto-enthusiast websites, and during appearances at
16 blockchain conferences. Id. ¶ 108. Evdokimov personally disseminated information
17 about ICOBox’s clients’ offerings to prospective investors through ICOBox’s Twitter
18 account as well as his own Twitter account, “@neopotus.” Id. ¶ 109. As to Paragon
19 in particular, Evdokimov discussed the merits of the offering with prospective
20 investors. Id. ¶ 110. For example, on ICOBox’s Telegram channel on September 18,
21 2017, Evdokimov responded to claims by some posters that Paragon was a “scam,”
22 by saying: “No, Paragon is [sic] really good project with brilliant idea and perfect
23 team.” Id. ¶ 111.
24 C. Defendants’ Current Status
25 ICOBox and Evdokimov have all but disappeared from the U.S. ICOBox is no
26 longer registered as a corporation with the Cayman Islands and its registered agent
27 for service of process has resigned with no replacement. Longo Decl. ¶¶ 11-13, Exs.
28 8-9. Its website, which was operational at the time the Complaint was filed, is no
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1 longer accessible. Id. ¶ 14. After service of the Complaint was effected at ICOBox’s
2 office, the premises was vacated, with several months’ rent left unpaid. Id. ¶¶ 4-5, 8,
3 Ex. 5. Efforts to email Evdokimov’s last known address, neo@icobox.io, garnered
4 no response (though no emails bounced back). Id. ¶¶ 9-10, Exs. 6-7.
5 III. ARGUMENT
6 Fed. R. Civ. P. 55(b) provides for entry of a default judgment by the Court
7 following entry of a default by the court clerk under Rule 55(a). Fed. R. Civ. P.
8 55(b); see also Kloepping v. Fireman’s Fund, 1996 U.S. Dist. LEXIS 1786, at *3-4
9 (N.D. Cal. Feb. 14, 1996). Failure to timely answer a properly-served complaint will
10 justify the entry of a default judgment. Benny v. Pipes, 799 F.2d 489, 495 (9th Cir.
11 1986). Entry of a default judgment is left to the Court’s sound discretion. PepsiCo
12 Inc. v. Triunfo-Mex. Inc., 189 F.R.D. 431, 432 (C.D. Cal. 1999), citing Aldabe v.
13 Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). In Eitel v. McCool, the Ninth Circuit
14 explained that a district court should consider the following factors in exercising its
15 discretion: (1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff’s
16 substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake
17 in the action, (5) the possibility of a dispute concerning material facts, (6) whether the
18 default was due to excusable neglect, and (7) the strong policy underlying the Federal
19 Rules of Civil Procedure favoring decisions on the merits. 782 F.2d 1470, 1471-72
20 (9th Cir. 1986). “In applying this discretionary standard, default judgments are more
21 often granted than denied.” PepsiCo, 189 F.R.D. at 432.
22 A party seeking a default judgment must state a claim upon which it may
23 recover. PepsiCo, Inc. v. Cal. Sec. Cans, 238 F. Supp. 2d 1172, 1175 (C.D. Cal.
24 2002). After default has been entered by the court clerk, all well-pled factual
25 allegations of the complaint are taken as true, except for those relating to damages.
26 Id., citing TeleVideo Sys., Inc. v. Heidenthal, 826 F. 2d 915, 917 (9th Cir. 1987); see
27 also Benny, 799 F.2d at 496; T-Cetra, LLC v. Guzman, No. CV 16-6416 DSF
28 (AFMx), 2017 WL 7156250, at *1 (C.D. Cal. Dec. 15, 2017) (granting motion for
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1 default judgment). Along with the complaint, the court may look to affidavits and
2 declarations to determine whether default judgment is appropriate. See William W.
3 Schwarzer et al., California Practice Guide: Federal Civil Procedure Before Trial
4 § 6:91 (2010).
5 A. The SEC Has Complied With Fed. R. Civ. P. 55(a) and L.R. 55-1
6 The SEC has satisfied the procedural requirements for a default judgment
7 against ICOBox and Evdokimov under Fed. R. Civ. P. 55(a) and Local Rule 55-1.
8 The SEC has: (1) served ICOBox and Evdokimov with the summons, complaint,
9 notice of assignment, notice to parties of court directed alternative dispute resolution
10 program and the initial standing order of United States District Judge Dale S. Fischer
11 (Dkt. No. 9); (2) caused the clerk to enter defaults against ICOBox and Evdokimov
12 for their failure to answer (Dkt. No. 11); (3) demonstrated that ICOBox and
13 Evdokimov are neither minors nor incompetent; and (4) demonstrated that ICOBox
14 and Evdokimov are not in the military or otherwise exempt under the Soldiers’ and
15 Sailors’ Civil Relief Act of 1940. See Longo Decl. ¶¶ 4-5, 9, 15-17.
16 The SEC served both defendants with the complaint in this action. The SEC
17 effected service on Evdokimov by personally delivering a copy to his wife and co-
18 resident, Maria Batura, at his home, satisfying Fed. R. Civ. P. 4(e)(2)(B).4 The SEC
19 also effected service on ICOBox through this personal delivery to Ms. Batura, the
20 person apparently in charge of ICOBox’s office at this address, followed by mailing
21 the papers to ICOBox at this address. See Longo Decl. ¶¶ 4-5; Fed. R. Civ. P.
22 4(h)(1)(B).5 ICOBox conducted business at the Beverly Hills address, including
23 using it as the business address for the registration of its ICO website. Longo Decl. ¶
Rule 4(e)(2)(B) provides for service on an individual within a U.S. judicial district
by “leaving a copy of each at the individual’s dwelling or usual place of abode with
26 someone of suitable age and discretion who resides there.”
Rule 4(h)(1)(B) provides for service on a corporation within a U.S. judicial district
“by delivering a copy of the summons and of the complaint to an officer, a managing
28 or general agent, or any other agent authorized by appointment or by law to receive
service of process . . . .”
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1 6, Exs. 1-2. Evdokimov and Batura also conducted other businesses out of this
2 ICOBox office, which also served as their residence. Id. ¶¶ 7-8, Exs. 3-4. To
3 augment defendants’ receipt of notice of this lawsuit, the SEC further emailed a copy
4 to Evdokimov’s last known address, and received a receipt that the email was
5 relayed. Longo Decl. ¶¶ 9-10, Exs. 6-7. The SEC also attempted to serve ICOBox
6 through its managing agent for service of process in the Cayman Islands, but learned
7 that ICOBox’s agent had resigned, and the company was delisted, with no new agent
8 appointed. Longo Decl. ¶¶ 11-13, Exs. 8-9.
9 Courts have upheld service by personal delivery to a managing agent’s spouse
10 at the agent’s residence. See, e.g., Wood v. Hampton-Porter Investment Bankers, No.
11 C-02-5367 MMC, 20014 WL 546888, at *2 (N.D. Cal. 2004) (entity effectively
12 served where documents received by officer’s wife at his home; default judgment
13 entered); McCarthy v. Langston, 23 F.R.D. 249, 250 (N.D. Fl. 1959) (service on
14 corporation president’s wife effective where there was no indication she would not
15 act in interest of company and plaintiff showed actual notice of lawsuit); cf.
16 Hakkasan LV, LLC v. Adamczyk, No. 2:14-CV-01717, 2017 WL 1549508, at *2 (D.
17 Nev. Apr. 5, 2017) (finding service on a corporate officer’s mother insufficient).
18 Notice to ICOBox and Evdokimov of this motion and the relief requested are
19 not required under Fed. R. Civ. P. 55(b)(2) and L.R. 55-1, because they have not
20 appeared in this action in any capacity; however, the SEC has nevertheless provided
21 notice of this motion to defendants. Longo Decl. ¶ 20. Additionally, because the
22 SEC does not request relief that differs from or exceeds that prayed for in the
23 complaint, the application for default judgment complies with Fed. R. Civ. P. 54(c).
24 B. The Eitel Factors Support Entry of Default Judgment
25 1. Possibility of prejudice to the SEC
26 The possibility of prejudice exists where “[i]f Plaintiffs’ motion for default
27 judgment is not granted, Plaintiffs will likely be without other recourse for recovery.”
28 PepsiCo, 238 F. Supp. 2d at 1177; see also Landstar Ranger, Inc. v. Parth
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 20 of 34 Page ID #:82
1 Enterprises, Inc., 725 F. Supp. 2d 916, 920 (C.D. Cal. 2010) (granting default
2 judgment, where “[d]enying default judgment here would leave [plaintiff] without a
3 proper remedy.”). Here, the SEC seeks to enforce its remedies for defendants’
4 registration violations. Absent a default judgment, the SEC would be without other
5 recourse for relief unless it incurs substantial time and expense to proceed by a
6 motion for summary judgment or by trial. The possibility of prejudice is enhanced by
7 the fact that defendants have defaulted, thereby admitting the averments of the
8 complaint. See, e.g., SEC v. Wallace, Case No. SACV 16-01788 AG (FFMx), 2017
9 WL 8230026, at *3 (C. D. Cal. May 8, 2017) (“The SEC’s duty to enforce federal
10 securities laws would be undermined if the Court were to allow [defendant] to escape
11 liability simply by not responding to the case”); SEC v. Newman, CV 12-03142-BRO
12 (PLAx), 2016 U.S. Dist. LEXIS 193639 (C.D. Cal. July 15, 2016) (same).
13 2. Substantive merits and sufficiency of the complaint
14 Taken together, the second and third Eitel factors “require that a plaintiff state
15 a claim on which [plaintiff] may recover.” PepsiCo, 238 F. Supp. 2d at 1175
16 (citation omitted). Well-pleaded allegations are taken as admitted on a default
17 judgment. Benny, 799 F.2d at 495. Here, the SEC’s well-pled allegations establish
18 that ICOBox and Evdokimov violated Securities Act Section 5 and Exchange Act
19 Section 15(a).
20 Section 5 violations. The SEC’s allegations establish that defendants violated
21 Sections 5(a) and 5(c) of the Securities Act. These registration provisions prohibit
22 the unregistered offer and sale of securities in interstate commerce. See Anderson v.
23 Aurotek, 774 F.2d 927, 929 (9th Cir. 1985); SEC v. Murphy, 626 F.2d 633, 649 (9th
24 Cir. 1980). To establish a prima facie case, the SEC must show that defendants
25 offered or sold securities, and that no registration was in effect or filed with the SEC
26 for those securities. See SEC v. Phan, 500 F.3d 895, 902 (9th Cir. 2007); SEC v.
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 21 of 34 Page ID #:83
1 Continental Tobacco Co., 463 F.2d 137, 155 (5th Cir. 1972). 6 All of these elements
2 are met here.
3 Section 2(a)(1) of the Securities Act defines “security” to include “investment
4 contracts.” An investment contract involves (1) an investment of money, (2) in a
5 common enterprise, (3) with an expectation of profits derived from the efforts of
6 others. See SEC v. W. J. Howey Co., 328 U.S. 293, 298-99 (1946); SEC v. Rubera,
7 350 F.3d 1084, 1090 (9th Cir. 2003); SEC v. Blockvest, LLC, No. 18-CV-2287-
8 GPB(BLM), 2019 WL 625163, at *5 (S.D. Cal. Feb. 14, 2019). The Howey test is an
9 “‘objective inquiry into the character of the instrument or transaction offered based
10 on what the purchasers were ‘led to expect.’” Blockvest, 2019 WL 625163, at *5
11 (citing Warfield v. Alaniz, 569 F.3d 1015, 1021 (9th Cir. 2009)). The ICOS tokens
12 were “securities” under this test.
13 First, an investment in ICOS tokens required an investment of money, in both
14 U.S. dollars and various digital assets. See, e.g., U.S. v. Zaslavskiy, No. 17 CR 647
15 (RJD), 2018 WL 4346339, at *5 (E.D.N.Y. Sept. 11, 2018) (investment of a virtual
16 currency, and other forms of payment, in a token constitutes an investment of money
17 under Howey). More than 2,000 purchasers invested $14.6 million in various forms
18 in the ICOS offering, through ICOBox’s website.
19 Second, ICOS tokens were investments in a common enterprise. In the Ninth
20 Circuit, this element is satisfied by either horizontal commonality (pooling of investor
21 funds and interests) or strict vertical commonality (the fortunes of the investors are
22 linked with those of the promoter). See SEC v. R.G. Reynolds Enters., Inc., 952 F.2d
23 1125, 1130 (9th Cir. 1991). Here, horizontal commonality existed because ICOS
24 investors’ funds were pooled to support ICOBox’s provision of facilitation services to
25 clients. In addition, strict vertical commonality was present due to the direct
The offers or sales must also be in interstate commerce. Here, defendants offered
28 and sold the ICOS tokens to investors worldwide through means of interstate
commerce through its website and social media on Internet pages available globally.
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1 correlation between the fortunes of ICOS holders and of ICOBox’s management.
2 See, e.g., SEC v. Eurobond Exch., Ltd., 13 F.3d 1334, 1339-40 (9th Cir. 1994). The
3 fortunes of the ICOS holders were linked to ICOBox’s management’s ability to
4 identify, attract, and facilitate offerings, and to thereby generate discounted
5 investment opportunities and returns on secondary markets for the investors, as well
6 as fees for the company and its management. See id. at 1340 (strict vertical
7 commonality existed where “[t]he investor’s success . . . was correlated with the
8 financial stability of Eurobond”).
9 Third, ICOS purchasers had a reasonable expectation of profits derived from
10 defendants’ managerial efforts. Based on defendants’ representations, token
11 purchasers could reasonably anticipate profits in the form of significant discounts on
12 future ICO tokens, and could expect the ICOS token to increase in value based on
13 ICOBox’s planned use of the proceeds to grow the business and attract future clients.
14 The promise of trading by ICOS tokens on secondary trading platforms further
15 bolstered those reasonable expectations.
16 Section 5 imposes liability on persons who “directly or indirectly” offer or sell
17 securities. Liability is “not confined only to the person who passes title to the
18 security” (Murphy, 626 F.2d at 649; see also SEC v. Rogers, 790 F.2d 1450, 1456
19 (9th Cir. 1986)); rather, in addition to those who directly sell, liability reaches those
20 who are “both a ‘necessary participant’ and ‘substantial factor’ in the sales
21 transaction[s].” Phan, 500 F.3d at 906; see also Murphy, 626 F.2d at 648-49, 651-52.
22 The Ninth Circuit has interpreted this to mean that “but for the defendant’s
23 participation, the sale transaction would not have taken place” and that the
24 defendant’s acts were not de minimis. See Murphy, 626 F.2d at 651-52; see also
25 Rogers, 790 F.2d at 1456; SEC v. CMKM Diamonds, 729 F.3d 1248, 1255 (9th Cir.
26 2013) (indirect seller’s role in the transaction must be “significant”).
27 Here, both defendants directly offered and sold ICOS tokens. ICOBox was the
28 tokens’ issuer. Evdokimov, who held himself out as the company’s founder and
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1 public face, directly promoted the offering online through the ICOBox website
2 (registered in his name), through social media accounts, and in interviews to crypto-
3 focused media. Evdokimov also indirectly sold ICOS tokens, as a necessary
4 participant and substantial factor in the sales.
5 Once the SEC establishes a prima facie Section 5 violation, defendants bear the
6 burden of proving that an exemption to the registration requirement applies. SEC v.
7 Platforms Wireless International Corp., 617 F.3d 1072, 1086 (9th Cir. 2010), citing
8 SEC v. Murphy, 626 F.2d at 641. Having failed to answer the complaint, defendants
9 have made no such showing.
10 Section 15 violations. Section 15(a) of the Exchange Act makes it unlawful
11 for any broker “to make use of the mails or any means or instrumentality of interstate
12 commerce to effect any transactions in . . . any security . . . unless such broker . . . is
13 registered” in accordance with Section 15(b) of the Exchange Act. “Section 15(a) is
14 a strict liability statute; neither scienter nor negligence is required to prove its
15 violation.” SEC v. Qi, No. CV 17-08856-CJC(JCX), 2018 WL 5263187, at *7 (C.D.
16 Cal. Mar. 21, 2018). “The purpose of Section 15(a)’s broker registration requirement
17 is to ensure that ‘securities are [only] sold by a salesman who understands and
18 appreciates both the nature of the securities he sells and his responsibilities to the
19 investor to whom he sells.’” SEC v. Hui Feng, No. 15-CV-09420, 2017 WL
20 6551107, at *6 (C.D. Cal. Aug. 10, 2017) (citation omitted), aff’d SEC v. Hui Feng,
21 935 F.3d 721 (9th Cir. 2019).
22 Exchange Act Section 3(a)(4) defines a “broker” generally as “any person
23 engaged in the business of effecting transactions in securities for the account of
24 others.” Courts generally consider whether the defendant’s conduct “may be
25 characterized by a ‘certain regularity of participation in securities transactions at key
26 points in the chain of distribution.’” SEC v. Benger, 697 F. Supp. 2d 932, 944-45
27 (N.D. Ill. 2010) (citations omitted). Pertinent factors include: (1) receiving
28 transaction-based compensation; (2) selling or previously selling the securities of
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1 other issuers; (3) involvement in negotiations between the issuer and the investor; (4)
2 advertising for clients; (5) advising or making valuations as to the merits of the
3 investment; and (6) actively rather than passively soliciting and finding investors.
4 See SEC v. Hansen, 1984 WL 2413, at *10 (S.D.N.Y. Apr. 6, 1984); Feng, 935 F.3d
5 721.
6 Both defendants acted as unregistered brokers. They actively solicited
7 investors for their clients, including Paragon, by advertising the offerings on
8 ICOBox’s website and social media accounts, sharing their clients’ promotional
9 materials, white papers, and links to their websites for placing investments, and
10 publicizing their clients’ offerings through crypto-focused publications and review
11 sites. They advised potential investors about the merits of the clients’ tokens, and
12 enabled ICOS token holders to swap for the clients’ new tokens through their
13 platform, thereby acting as the link between the issuers and the investors. Defendants
14 charged transaction-based compensation in the form of “success” fees tied to the
15 amount of funds raised from investors in client ICOs.
16 Because the well-pleaded allegations of the complaint establish defendants’
17 liability for selling unregistered securities and acting as unregistered brokers, the
18 second and third Eitel factors favor entry of default judgment.
19 3. Amount at stake and seriousness of defendants’ conduct
20 For the fourth Eitel factor, “the court must consider the amount of money at
21 stake in relation to the seriousness of Defendant’s conduct.” PepsiCo, 238 F. Supp.
22 2d at 1176. Here, defendants raised $14.6 million in their unregistered offering,
23 which the SEC seeks by disgorgement. This factor favors default judgment.
24 4. Possibility of disputed facts
25 The fifth Eitel factor considers the possibility of a dispute as to any material
26 facts in the case. Upon entry of default, all well-pleaded facts in the complaint are
27 taken as true, except those relating to damages. TeleVideo, 826 F.2d at 917-18
28 (citations and quotations omitted). As explained above, the Complaint’s allegations
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1 establish that defendants violated the federal securities laws; if litigated, those
2 allegations would be supported by substantial evidence. ICOBox and Evdokimov,
3 who are not represented by counsel and have not appeared nor responded to the
4 SEC’s claims against them, have not and will be unable to refute this evidence. See,
5 e.g., SEC v. Baccam, No. ED CV 17-0172 SJO (SPx), 2017 WL 5952168, at *7 (C.D.
6 Cal. June 14, 2017) (granting default judgment where “the SEC filed a well-pleaded
7 Complaint alleging facts sufficient to prevail on its claims”).
8 5. Possibility of excusable neglect
9 The sixth Eitel factor considers the possibility that the default resulted from
10 excusable neglect. Due process requires that all interested parties be given notice
11 reasonably calculated to apprise them of the pendency of the action and be afforded
12 an opportunity to present their objections before a final judgment is rendered.
13 Mullane v. Central Hanover Trust Co., 339 U.S. 306, 314 (1950). “The possibility of
14 excusable neglect is remote where the defendant is provided proper notice of the
15 pending suit, but does not contact the court or the plaintiff in any manner.” Baccam,
16 2017 WL 5952168, at *8 (citing Phillip Morris USA, Inc. v. Castworld Prods., Inc.,
17 219 F.R.D. 494, 501 (C.D. Cal. 2003)). Here, the SEC served ICOBox and
18 Evdokimov at his residence, which served as one of ICOBox’s offices, through
19 service on his wife, with whom he conducted joint business at this address. Longo
20 Decl. ¶¶ 4-8, Exs. 1-5. The SEC attempted to serve ICOBox at its former registered
21 agent for service of process, only to find that it had de-registered. Id. ¶¶ 11-13,
22 Exs. 8-9. The SEC also emailed defendants regarding this lawsuit, but heard no
23 response. Id. ¶¶ 9-10, Exs. 6-7. Because ICOBox is not represented by counsel, it is
24 not able to appear in the action under L.R. 83-2.2.2. The notice defendants have
25 received, combined with their inaction since the action was filed on September 18,
26 2019, preclude them from showing any possibility of excusable neglect.
27 6. Policy for deciding on the merits
28 The mere existence of Fed. R. Civ. P. 55(b) suggests that the seventh Eitel
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1 factor, a preference for deciding matters on their merits, is not alone dispositive.
2 PepsiCo, 238 F. Supp. 2d at 1177. Indeed, the “Defendant’s failure to answer [the]
3 Complaint makes a decision on the merits impractical, if not impossible.” Id.
4 Therefore, the seventh Eitel factor should not preclude the Court from entering a
5 default judgment against ICOBox and Evdokimov.
6 C. The SEC Is Entitled to the Relief it Seeks
7 In its Complaint, the SEC sought a judgment: (1) permanently enjoining
8 ICOBox and Evdokimov from future violations of Securities Act Sections 5(a) and
9 (c), and Exchange Act Section 15(a); (2) ordering disgorgement of ill-gotten gains
10 with prejudgment interest; and (3) imposing civil penalties. Because the SEC has
11 shown that default judgment is warranted, the Court should order the relief requested
12 herein.
13 1. ICOBox and Evdokimov should be permanently enjoined
14 Section 20(b) of the Securities Act, 15 U.S.C. § 77t(b), and Section 21(d) of
15 the Exchange Act, 15 U.S.C. § 78u(d)(1), provide that upon proper showing, a
16 permanent injunction shall be granted in an enforcement action brought by the SEC.
17 To obtain an injunction, the SEC must establish that there is a reasonable likelihood
18 of future violations. See Murphy, 626 F.2d at 655. Whether a likelihood of future
19 violations exists depends upon the totality of the circumstances. Id. The existence of
20 past violations may give rise to an inference that there will be future violations. See
21 id.; see also U.S. v. Odessa Union Warehouse Coop., 833 F.2d 172, 176 (9th Cir.
22 1987) (citing SEC v. Koracorp Industries, Inc., 575 F.2d 692, 698 (9th Cir. 1978)).
23 Courts also consider factors such as the degree of scienter involved, the isolated or
24 recurrent nature of the infraction, the defendant’s recognition of the wrongful nature
25 of the conduct, the likelihood, because of the defendant’s professional occupation,
26 that future violations may occur, and the sincerity of the defendant’s assurances
27 against future violations. See Murphy, 626 F.2d at 655; Koracorp, 575 F.2d at 698.
28 A reasonable likelihood exists that, absent a permanent injunction, defendants
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1 may commit future securities violations. The SEC’s complaint—the allegations of
2 which are taken as true for purposes of this motion—reflect that ICOBox raised $14.6
3 million in an unregistered securities offering, and charged fees for their facilitation of
4 the sales of other securities offerings, with at least reckless disregard of the
5 requirement to register ICOBox’s securities and to register or associate with a broker.
6 By failing to file an answer or otherwise participate in this action, and by apparently
7 fleeing the jurisdiction, defendants have declined to offer this Court any assurances
8 that they will not commit violations of the federal securities laws. Nor have they
9 acknowledged the wrongful nature of their conduct. See, e.g., Baccam, 2017 WL
10 5952168, at *9 (awarding injunctive relief by default, noting that the defendant “has
11 not given any assurances against future violations, but to the contrary, declined to
12 appear in this case”). Accordingly, this Court should issue a judgment permanently
13 enjoining ICOBox and Evdokimov from future violations of Securities Act Sections
14 5(a), (c) and Exchange Act Section 15(a).
15 2. The Court should order joint and several disgorgement with
16 prejudgment interest
17 In the Ninth Circuit, it is well-settled that this Court has “‘broad equity powers
18 to order the disgorgement of ill-gotten gains’” obtained through a defendant’s
19 violation of the securities laws. Platforms Wireless, 617 F.3d at 1096.
20 “‘Disgorgement is designed to deprive a wrongdoer of unjust enrichment, and to
21 deter others from violating securities laws by making violations unprofitable.’” Id.;
22 SEC v. JT Wallenbrock & Associates, 440 F.3d 1109, 1113 (9th Cir. 2006).
23 In contrast to damages, which are designed to compensate fraud victims,
24 disgorgement forces a defendant to surrender his unjust enrichment and thus serves to
25 reduce the incentive to violate the law. See SEC v. Rind, 991 F.2d 1486, 1491-93
26 (9th Cir. 1993). Therefore, “‘[t]he amount of disgorgement should include all gains
27 flowing from the illegal activities.’” Platforms Wireless, 617 F.3d at 1096 (quoting
28 JT Wallenbrock, 440 F.3d at 1114). For example, in Platforms Wireless, the Ninth
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 28 of 34 Page ID #:90
1 Circuit affirmed the district court’s order that the defendants disgorge all of the
2 proceeds obtained from their illegal and unregistered offerings. See id. at 1097; see
3 also SEC v. Cross Financial Services, Inc., 908 F. Supp. 718, 734 (C.D. Cal. 1995)
4 (defendant ordered to disgorge net receipts from investors in fraudulent offering of
5 notes). When seeking disgorgement, the SEC only needs to present evidence of a
6 “reasonable approximation” of the defendant’s ill-gotten gains. Platforms Wireless,
7 617 F.3d at 1096. Once the SEC has made that showing, the burden shifts to the
8 defendant to “‘demonstrate that the disgorgement figure was not a reasonable
9 approximation.’” Id. (quoting SEC v. First City Financial Corp., Ltd., 890 F.2d
10 1215, 1232 (D.C. Cir. 1989)). This burden, as the Ninth Circuit explained, rightfully
11 belongs to the wrongdoer:
12 We place this burden on the defendants because information
is not “obtainable at negligible cost.” The defendants are
13 more likely than the SEC to have access to evidence
[demonstrating that the SEC’s approximation is not
14 reasonable]…. [W]e conclude that “the risk of uncertainty
should fall on the wrongdoer whose illegal conduct created
15 that uncertainty.”
16 Id. (quoting First City Financial, 890 F.2d at 1231, 1232). “If defendant does not
17 contest the amount prayed for in the complaint and the claim is for a sum certain or a
18 sum that can be made certain by computation, the judgment generally will be entered
19 for that amount without any further hearing. Indeed, if defendant is in default for
20 failing to appear . . ., the clerk may enter the judgment for that amount and assess
21 costs against defendant without any judicial hearing.” 10A Charles Wright, Arthur
22 Miller & Mary Kane, Federal Practice & Procedure § 2688 (3d ed. 2010). It is also
23 well-established that the principal of an entity may be held jointly and severally liable
24 for an order of disgorgement against the entity. See JT Wallenbrock, 440 F.3d at
25 1111-13; Platforms Wireless, 617 F.3d at 1099.
26 In the case of an illegal offering, “it [i]s appropriate for the district court to
27 order [defendants] to disgorge the proceeds received in connection with the …
28 offering.” SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1104 (2d Cir. 1972).
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 29 of 34 Page ID #:91
1 In the Ninth Circuit, it is well- established that the proper disgorgement amount
2 equals the total amount of proceeds raised in an offering fraud from investors, less
3 whatever was paid back to investors. See JT Wallenbrock, 440 F.3d at 1111-13
4 (affirming disgorgement of $139.4 million, representing “the entire proceeds from the
5 scheme less amounts paid to investors”); Platforms Wireless, 617 F.3d at 1096-97
6 (affirming disgorgement of about $1.75 million, the total “amount of proceeds
7 obtained from” illegal offering); see also SEC v. Schooler, 106 F. Supp. 3d 1157,
8 1169 (S.D. Cal. 2015) (awarding disgorgement of the amount raised less the amount
9 returned to investors for Section 5 violations, rejecting effort to distinguish
10 Wallenbrock and Platforms Wireless on the grounds that they involved fraud, noting
11 that “disgorgement is still an appropriate remedy in this case even in the absence of
12 fraud”), rev’d and remanded in part on other grounds, 905 F.3d 1107 (9th Cir.
13 2018). Joint and several disgorgement is appropriate given Evdokimov’s close
14 association with ICOBox and role as its principal. See Platforms Wireless, 617 F.3d
15 at 1097-98 (joint and several liability for disgorgement warranted when co-
16 defendants collaborated or “act[ed] collectively” in violating securities laws); see also
17 J.T. Wallenbrock, 440 F.3d at 1116-17.
18 The SEC has alleged in the Complaint and presented evidence with this motion
19 that defendants raised $14.6 million through their unregistered securities offering.
20 See Longo Decl. ¶¶ 21-24, Exs. 10-13. This includes defendants’ 2200+ investor list,
21 showing the amounts of digital currency invested in ICOS, and their public
22 proclamations of the amount they raised. Id. The SEC has thus presented evidence
23 demonstrating a “reasonable approximation” of defendants’ ill-gotten gains, which
24 defendants have not contested. Accordingly, $14.6 million is the appropriate
25 disgorgement.
26 Defendants should also pay prejudgment interest on the disgorgement amount.
27 Disgorgement normally includes prejudgment interest to ensure that the wrongdoer
28 does not profit from the illegal activity. See Cross Financial Services, 908 F. Supp.
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 30 of 34 Page ID #:92
1 at 734. An award of prejudgment interest is designed to deprive the wrongdoer of the
2 benefit of “what amounts to an interest free loan procured as a result of illegal
3 activity.” SEC v. Moran, 944 F. Supp. 286, 295 (S.D.N.Y. 1996). Prejudgment
4 interest on $14.6 million from September 15, 2017 through September 17, 2019 is
5 $1,459,428.99. See Longo Decl. ¶¶ 25-26, Ex. 14. Thus, the total amount of
6 disgorgement and prejudgment interest that should be assessed jointly and severally
7 against defendants is $16,059,428.99.
8 3. The Court should order second tier penalties against
9 Evdokimov
10 Civil penalties are meant to punish wrongdoers and to deter them and others
11 from future securities law violations. See SEC v. Kenton Capital, Ltd., 69 F. Supp. 2d
12 1, 17 (D.C. Cir. 1998). Under Section 20(d)(2)(A) of the Securities Act and Section
13 21(d)(3)(B) of the Exchange Act, the amount of any civil penalty “shall be
14 determined by the court in light of the facts and circumstances.” 15 U.S.C. §§
15 77t(d)(2)(A), 78u(d)(3)(B). Because civil penalties, like permanent injunctions, are
16 imposed to deter the wrongdoer from similar conduct in the future, in assessing civil
17 penalties, courts frequently apply the factors set forth in SEC v. Murphy, 626 F.2d
18 633 (9th Cir. 1980), used to establish the need for injunctive relief. See, e.g., SEC v.
19 Abacus Int’l Holding Corp., 2001 U.S. Dist. LEXIS 12635, at *15 (N.D. Cal. Aug.
20 16, 2001). Those factors include: (i) the degree of scienter involved; (ii) the isolated
21 or recurrent nature of the infraction; (iii) the defendant’s recognition of the wrongful
22 nature of the conduct; (iv) the likelihood, because of the defendant’s professional
23 occupation, that future violations might occur; and (v) the sincerity of any assurances
24 against future violations. See Murphy, 626 F.2d at 655.
25 Here, the Murphy factors support statutory second-tier 7 civil monetary
The Securities Act and the Exchange Act provide that penalties should be assessed
according to a three-tier system. See 15 U.S.C. §§ 77t(d)(2), 78u(d)(3)(B). Second-
28 tier penalties apply to violations that “involved fraud, deceit, manipulation or
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 31 of 34 Page ID #:93
1 penalties against Evdokimov for each of his violations.8 Evdokimov acted with at
2 least reckless disregard of the registration requirements for the ICOS tokens, and for
3 ICOBox’s broker activities. Evdokimov assured investors there was no need for
4 ICOBox to register with the SEC, despite his public statements regarding the DAO
5 Report. ICOS tokens’ value has declined precipitously since defendants sold them to
6 the public, and by not registering the offering with the SEC, defendants deprived
7 investors of the kinds of information about the offering that an SEC registration
8 statement would have afforded them. Since he has defaulted, Evdokimov has
9 provided no evidence of any inability to pay such an award—nor any evidence of his
10 financial condition whatsoever—further warranting the recommended penalty. See,
11 e.g., SEC v. Souza, 2011 WL 2181365, at *3 (E.D. Cal. June 3, 2011) (imposing
12 penalty by default judgment motion, “in order to adequately serve the deterrent
13 function of the civil penalty provision”).
14 D. Default Judgment Should be Entered Without Delay
15 Fed. R. Civ. P. 54(b) provides that “the court may direct entry of a final
16 judgment as to one or more, but fewer than all, claims or parties only if the court
17 expressly determines that there is no just reason for delay.” Thus, where delay is
18 necessary to avoid an inconsistent result as to similarly situated defendants, Fed. R.
19 Civ. P. Rule 54(b) requires deferring the entry of default judgment. See First T.D. &
20 Investment, Inc., 253 F.3d 520, 532 (9th Cir. 2001) (reversing entry of default
21 judgments on a legal theory that was rejected by the court as to answering defendants
22 in the same action), citing Frow v. De La Vega, 82 U.S. 552 (1872). Because both
23 defendants have failed to answer the SEC’s complaint, and ICOBox cannot, without
24 counsel, appear and defend this enforcement action, the Court should enter final
26 deliberate or reckless disregard of a regulatory requirement.” Id. §§ 77t(d)(2)(B),
27 78u(d)(3)(B)(ii). Each tier provides that a penalty cannot exceed the greater of either
a specific statutory amount, or “the gross amount of pecuniary gain to such defendant
28 as the result of the violation.” Id. §§ 77t(d)(2), 78u(d)(3)(B).
The SEC waives its request for penalties against ICOBox.
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 32 of 34 Page ID #:94
1 judgment at this time against both defendants.
2 IV. CONCLUSION
3 For the foregoing reasons, plaintiff SEC respectfully requests that the Court
4 grant its motion for entry of default judgment, and impose the requested relief.
5 Dated: January 9, 2020 Respectfully submitted,
/s/ Amy Jane Longo
8 Brent Wilner
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 33 of 34 Page ID #:95
2 I am over the age of 18 years and not a party to this action. My business address is:
3 U.S. SECURITIES AND EXCHANGE COMMISSION,
444 S. Flower Street, Suite 900, Los Angeles, California 90071
4 Telephone No. (323) 965-3998; Facsimile No. (213) 443-1904.
5 On January 9, 2020, I caused to be served the document entitled PLAINTIFF
SECURITIES AND EXCHANGE COMMISSION’S MEMORANDUM IN
6 SUPPORT OF MOTION FOR DEFAULT JUDGMENT AGAINST
DEFENDANTS ICOBOX AND NIKOLAY EVDOKIMOV on all the parties to
7 this action addressed as stated on the attached service list:
8 ☐ OFFICE MAIL: By placing in sealed envelope(s), which I placed for
collection and mailing today following ordinary business practices. I am readily
9 familiar with this agency’s practice for collection and processing of correspondence
for mailing; such correspondence would be deposited with the U.S. Postal Service on
10 the same day in the ordinary course of business.
11 ☐ PERSONAL DEPOSIT IN MAIL: By placing in sealed envelope(s),
which I personally deposited with the U.S. Postal Service. Each such envelope was
12 deposited with the U.S. Postal Service at Los Angeles, California, with first class
postage thereon fully prepaid.
☐ EXPRESS U.S. MAIL: Each such envelope was deposited in a facility
14 regularly maintained at the U.S. Postal Service for receipt of Express Mail at Los
Angeles, California, with Express Mail postage paid.
☐ HAND DELIVERY: I caused to be hand delivered each such envelope to the
16 office of the addressee as stated on the attached service list.
17 ☐ UNITED PARCEL SERVICE: By placing in sealed envelope(s) designated
by United Parcel Service (“UPS”) with delivery fees paid or provided for, which I
18 deposited in a facility regularly maintained by UPS or delivered to a UPS courier, at
☒ ELECTRONIC MAIL: By transmitting the document by electronic mail to
20 the electronic mail address as stated on the attached service list.
21 ☐ E-FILING: By causing the document to be electronically filed via the Court’s
CM/ECF system, which effects electronic service on counsel who are registered with
22 the CM/ECF system.
23 ☐ FAX: By transmitting the document by facsimile transmission. The
transmission was reported as complete and without error.
26 Date: January 9, 2020 /s/ Amy Jane Longo
Case 2:19-cv-08066-DSF-E Document 13-1 Filed 01/09/20 Page 34 of 34 Page ID #:96
1 SEC v. ICOBox, et al.
2 Case No. 2:19-cv-08066-DSF-Ex
5 ICOBox
neo@icobox.io
9 neo@icobox.io
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