After SEC
Got Injunction Judge Castel Signs Consent
Order For Telegram To Give Info By May 20
By Matthew
Russell Lee, Patreon
BBC
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SDNY COURTHOUSE,
May 8 -- On February 19
lawyers for Telegram and the
U.S. Securities and Exchange
Commission argued for more
than two hours about the SEC's
request for a preliminary
injunction against Telegram's
proposed crypto currency, the
Gram. More on Patreon here.
Now on May
8, in a world made different
by the Coronavirus crisis,
SDNY Judge P. Kevin Castel has
issued this order:
"STIPULATION AND ORDER: NOW,
THEREFORE, UPON THE CONSENT OF
THE PARTIES IT IS HEREBY
ORDERED: (a) The parties shall
meet and confer regarding the
SEC's discovery requests dated
February 4, 2020. Telegram
agrees not to object to the
discovery requests on the
ground of timeliness but
otherwise expressly reserves
all rights and objections, and
as further set forth in this
stipulation. (Signed by Judge
P. Kevin Castel on 5/8/2020)."
The
previous day, as Inner City
Press reported and was picked
up, Telegram filed this,
agreeing among other things to
provide "communications" by
May 20: "UPON THE CONSENT OF
THE PARTIES IT IS HEREBY
ORDERED:
(a) The
parties shall meet and confer
regarding the SEC’s discovery
requests dated February 4,
2020. Telegram agrees not to
object to the discovery
requests on the ground of
timeliness but otherwise
expressly reserves all rights
and objections. (b) Telegram
shall provide to the SEC
information regarding any
assets disbursed to Initial
Purchasers under the Purchase
Agreements and assets received
from Initial Purchasers in
connection with the
termination of the Purchase
Agreements promptly after such
information is available
(subject to all foreign data
privacy laws and
considerations, about which
the parties reserve their
respective rights). (c)
Telegram shall provide the SEC
with notice of any amendments
to the Purchase Agreements,
and notice of any final
written agreements entered
into with the Initial
Purchasers relating to or
arising out of the Purchase
Agreements, within two days
following such amendments or
final agreements. (d) Telegram
agrees to produce its
communications with Initial
Purchasers relating to the
termination of the Private
Placement, including
communications regarding any
agreements offered or entered
into with the Initial
Purchasers relating to or
arising out of the Purchase
Agreements, as promptly as
practicable, and by no later
than May 20, 2020. (e)
Telegram shall provide to the
SEC the bank records
previously identified by the
SEC and which Telegram has
agreed to produce, and to
respond to the SEC’s questions
about already produced bank
records that the SEC has
already posed. Nothing in this
stipulation is meant to modify
in any way the parties’
obligations under the Court’s
January 13, 2020 Order. (f)
The parties may engage in
discovery served on third
parties, while reserving all
rights to object to such
discovery on grounds other
than timeliness.
(g) For
additional discovery, if any,
the parties agree to meet and
confer regarding a schedule to
be proposed to the Court. The
parties reserve all rights
with respect to any such
proposed schedule, including
but not limited to objecting
to any additional discovery."
Back in
March SDNY Judge P. Kevin
Castel granted the SEC's
request for a preliminary
injunction, writing that "the Court finds
that the SEC has shown a
substantial likelihood of
success in proving that
Telegram’s present plan to
distribute Grams is an
offering of securities under
the Howey test to which no
exemption applies. The motion
for a preliminary injunction
will be granted." Full
decision for download via here.
By the end, their
agreement that Telegram will
hold off was extended, but
only under U.S. District Court
for the Southern District of
New York Judge P. Kevin Castel
rules on the SEC's request.
Judge Castel said he is
mindful of an April 30
deadline by which Telegram
would have to return
investors' unspent money.
In essence the
SEC argues that Telegram's
raising of $1.7 billion to
lead to the Gram crypto
currency was an offer of
securities which should have
been registered with the SEC
in the 1946 test set out by
the Supreme Court in SEC
v. W. J. Howey Co., 328
U.S. 293.
That case involved oranges,
and that fruit as well as gold
and even Mets season tickets
were used as examples by the
two sides, vying for Judge
Castel's ruling. (The Mets
tickets analogy used by
Telegram's Skadden Arps
attorney Alexander C Drylewski
caught Judge Castel's
attention: he said the Mets
improving the roster sounded
like "a fantasy," drawing
laughter in the packed
courtroom).
More
seriously, Drylewski
emphasized that Telegram would
not be a validator of the TON
blockchain, and therefore
investors were not banking on
Telegram's continuing
involvement in management.
SEC lawyer
Jorge Gerardo Tenreiro
countered that Telegram
founder Pavel Durov had
admitted, in a deposition the
SEC conducted, that he cares
deeply about the reputation of
Telegram.
On that basis, Judge Castel
repeatedly asked Drylewski to
admit that Telegram would get
involved in a sufficient
community of validators did
not immediately
emerged.
Drylewski answered that
Telegram could not do that,
then said that Telegram had
represented that it would
not. Judge
Castel asked, "Which is
it?"
Drylewski
countered that since the
validators would have to agree
by a two-thirds margin, no one
actor would control things.
This, he said with some
effect, was the benefit of
blockchain and this crypto
currency in particular.
He compared Grams favorably to
both Bitcoin and Ethereum,
while saying that Telegram got
its idea of a TON Foundation,
not yet in existence, from the
foundations of Bitcoin and
Ethereum. The
upshot is that Judge Castel
will grant or not grant the
SEC requested preliminary
injunction before April 30.
Drylewski offered
that Telegram could live with
injunctions against particular
parts of its plan as long as
the overall plan can go
forward. He painted a picture
of developers adding apps and
smart contracts to the TON
blockchain and Grams
becoming a "new
mass-market crypto currency"
unlike Ethereum or Bitcoin.
That remains to be seen. This
case is Securities and
Exchange Commission v.
Telegram Group Inc. et al.,
19-cv-9439 (Castel).
***
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