The founder of a digital currency exchange lied so much to the Securities and Exchange Commission (“SEC“) during its investigation and to a California Court, and made himself so not credible, that a Court has recommended one of the harshest remedies available – to deprive the defendant of the constitutional right to be heard – and to end a lawsuit against him with a default judgment.
Inherent jurisdiction of Court to terminate proceedings
All Courts have what is called inherent jurisdiction to punish parties in a litigation when untruthful evidence is created, tendered, sworn or filed in connection with an investigation, proceeding or litigation. When evidence a person gives ends up being so not credible because they made so many untrue statements or created fake documents or doctored others, often all that happens is their evidence is not taken into account or given any weight in the disposition of a litigation.
But a Court may also, on application of a party, punish the lying person by ending the litigation with a default judgment. This happens when the lying party’s conduct has been so harmful to the administration of justice that it’s impossible or prohibitively expensive to press the investigation or litigation reset button to ascertain the truth.
Forever cursed with losing litigation
There are other costs when a person is determined to be so not credible that the opposing party moves for default judgment successfully. Such a person is going to have to pay all the costs of litigation of all the parties. And more permanently such a person, having no credibility left, will never succeed in any future litigation even with different parties if their evidence is required or necessary. The latter is not the law but it’s the reality.
Here’s how the case with this digital currency exchange founder ended up there.
Untrue statements about ICO
In 2018, the SEC commenced an investigation into a digital currency exchange and initial coin offering (“ICO“) operated by a company called Blockvest LLC and its founder, Rasool Abdul Rahim El, who uses the name Reginald Ringgold III (“Rahim“).
The digital currency exchange and Rahim made statements to the public that the exchange and / or the ICO was licensed and regulated by the SEC, among other agencies, and that it was “approved” by the SEC and worked with Deloitte and was audited by them. The statements were untrue. The SEC believes such statements were made to induce the public into believing that the exchange had been vetted by the SEC, was safe and subject to regulatory oversight, when it was not.
On this promo page, it links to a (now deleted) Facebook post that says that Blockvest is moving to Malta.
Untrue statements wasted SEC’s time and public resources
During the SEC investigation, the SEC stated that Rahim lied to the SEC in respect of issues that were germane to the investigation and in respect of his exchange. The statements Rahim gave the SEC at the commencement of their investigation appear to have sent them down a path where they spent a substantial amount of time and resources investigating what ended up being untrue statements.
The SEC says that they engaged in costly and lengthy investigations as a result of Rahim’s deceit; and it caused the potential dissipation of assets depriving investors of recovery, in addition to wasting public funds with an investigation that was fruitless because it was based on untrue information.
In the midst of the investigation, the SEC filed an application ex parte for a temporary restraining order against Rahim and the exchange, alleging securities fraud. The Court granted the SEC’s application for a temporary restraining order.
Untrue statements used in Court
Rahim and Blockvest successfully applied to overturn the temporary order. Except that the application by Rahim and the digital currency exchange relied on untrue statements made by Rahim and some of his employees and/or investors.
The SEC then investigated the evidence filed by Rahim for that hearing and learned that some of that evidence was untrue, fabricated and involved at least one doctored document.
SEC applies to deprive Rahim of right to due process
When the SEC became aware of the extent of the conduct by Rahim in making untrue statements to the public, to its investigators and then to a Court, including the manufacturing of fake documents, they filed an application to end the Court case against Blockvest and Rahim, relying upon the Court’s inherent jurisdiction to sanction a deceiving litigant.
Sanctions that end a litigation, called terminating sanctions, are a severe remedy that can be imposed in circumstances where a litigation is pointless. A litigation is pointless when the objects of justice cannot be achieved such as where a party has engaged in practices that undermine the integrity of judicial proceedings and the deceptive conduct relates to the matters in controversy in such a way as to potentially interfere with a rightful decision. If a party engages in conduct that can cause severe damage to proceedings and there is a real risk that the truth might not come out, default judgment is an available, albeit rare, remedy. It’s rare because it’s a denial of due process and the right to be heard.
Statement made by at least four persons for Rahim were false or deceptive and Rahim had at least one of his people lie during an SEC investigative interview to support his version of an untrue reality. The SEC learned that some documents submitted to the Court were forged. The lawyer withdrew from the file.
Litigation rendered pointless by fake documents and untrue statements
In his defence, Rahim brought up his mental state and said that he was stressed by the SEC investigation and also suggested that some of the problematic documentation may have been his lawyer’s fault, ergo opening the door to the SEC taking the position that he and his company waived privilege and confidentiality in respect of the advice.
Rahim did not file statements to correct the falsehoods.
The SEC argued that the making and submission of false statements and fake documents so tainted the credibility of Rahim and the company generally, that there was no reason to pursue a litigation because there was no ground for a Court to review evidence that was so not credible.
One can see how this makes sense – if a person has lied so often in connection with a statutory investigation or legal proceeding, why would or should a Court allow the public purse to be used a second longer and how will the SEC or a Court ever know what statements can be relied upon and which cannot? A person who is not credible does not suddenly become credible over time or on a different day.
The Court found that the defendants’ misconduct greatly impeded the resolution of the case by obscuring critical facts, and would essentially make it impossible to separate fact from fiction.
In this case, the Court noted that dismissal is appropriate where a pattern of deception makes it impossible for a Court to conduct a trial with any reasonable assurance that the truth would be available, citing case law that “there is no point to a lawsuit if it merely applies law to lies. True facts must be the foundation for any just result.”
The Court recommended terminating the litigation with a default judgment.