The Department of Justice told a federal judge it plans to proceed with a securities fraud case against the founders of cryptocurrency Safemoon, despite an agency memo circulated earlier this month instructing federal prosecutors to avoid pursuing cases that would involve determining the securities status of crypto assets.
In a letter sent Friday to the Brooklyn federal judge overseeing the case, DOJ attorneys said they had conducted an “internal review” of whether the department’s new crypto policies might implicate the Safemoon case, and concluded it should “proceed to trial on all counts.”
In early April, the DOJ shuttered its crypto-focused enforcement team and instructed its attorneys to wind down criminal crypto cases in several key areas. One such area: any cases that “would require the Justice Department to litigate whether a digital asset is a ‘security’ or a ‘commodity.’”
In late 2023, federal prosecutors arrested Safemoon’s founders and charged them with securities fraud, wire fraud, and money laundering. The indictment alleged that the founders told holders of their cryptocurrency, which trades as SFM, that the token’s liquidity was locked, when in reality the defendants “fraudulently diverted and misappropriated millions of dollars’ worth of purportedly ‘locked’ SFM liquidity for their personal benefit.”
On Friday, the judge overseeing the Safemoon case, Eric Komitee, also denied the defendants’ motion to dismiss the case on the grounds that SFM is not a security. Komitee ruled this objection was premature, and that it was not his role to weigh in on SFM’s security status.
“SFM’s status as a security (or not) should be left to the jury,” he wrote. “The Court should not resolve that fundamentally factual dispute before the parties can develop the record at trial.”
Though the DOJ has said that under its new digital assets rules it will continue to pursue fraud in the crypto sector, the charge of “securities fraud” in the Safemoon case—which it now is officially still pursuing—appears poised to obligate federal prosecutors to prove at trial that SFM is a type of security known as an investment contract.
Weeks after Safemoon’s founders were arrested, the company filed for bankruptcy. At its peak in early 2022, SFM briefly eclipsed a $1 billion market capitalization. At writing, it’s worth slightly more than $13 million.
