SEC Files Fraud Charges Against BitClout/Decentralized Social Founder

By: Eva Baxter

The U.S. Securities and Exchange Commission (SEC) has brought charges against Nader Al-Naji, the founder of the BitClout blockchain protocol, now operating as Decentralized Social (DeSo). The SEC accuses Al-Naji of orchestrating a fraudulent scheme through the unregistered offering and sale of crypto asset securities, raising over $257 million under false pretenses.

Compounding his legal challenges, the U.S. Attorney’s Office for the Southern District of New York has simultaneous charges against Al-Naji, emphasizing the gravity of the case.

Details of the SEC Complaint

Filed in the U.S. District Court for the Southern District of New York, the SEC’s complaint alleges violations of the registration and anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint also names Al-Naji’s wife, mother, and wholly-owned entities as relief defendants, highlighting the transfer of investor funds to them.

As outlined in the complaint, since November 2020, Al-Naji raised significant capital by selling BitClout’s native token, BTCLT. Investors were led to believe that the proceeds would not be used for personal gain or to remunerate BitClout employees. However, the SEC alleges that Al-Naji diverted more than $7 million for personal expenses, including renting a Beverly Hills mansion and giving substantial cash gifts to his family.

Attempts to Evade Scrutiny

To avoid regulatory oversight, Al-Naji allegedly marketed BitClout as a decentralized project with no corporate backing, operating under the pseudonym "Diamondhands." This portrayal aimed to present the project as autonomously managed, when in fact, Al-Naji retained direct control. Further complicating matters, he secured a misleading opinion letter from a renowned law firm based on misrepresentations about BitClout, asserting that BTCLT was unlikely to be deemed as securities under federal law.

Moreover, it is reported that Al-Naji confided in select investors about his strategies to avoid legal compliance. SEC Director Gurbir S. Grewal remarked on the case, noting Al-Naji's mistaken belief that feigning decentralization would confuse regulators and deter their actions.

“Al-Naji attempted to evade the federal securities laws and defraud the investing public, mistakenly believing that ‘being fake decentralized generally confuses regulators and deters them from going after you.’ He is obviously wrong,” commented Grewal.

These charges underline the commitment of regulatory bodies like the SEC and the Justice Department to ensure compliance in the rapidly evolving crypto space. Users and investors are encouraged to remain vigilant and conduct thorough research when engaging with crypto projects.