The SEC has defeated a dismissal motion and denied a counterclaim filed by defendant Eric J Watson in an insider trading case involving a soft drinks manufacturer that rebranded itself as blockchain technology company, causing its stock to briefly surge.
From iced tea to BTC
The Long Island Iced Tea Corporation made headlines in 2017 when it announced that it would de-emphasize production of its signature beverage and focus on blockchain technology development. The company changed its name to The Long Blockchain Corporation and stated that it would invest in thousands of bitcoin mining rigs – but was it was never entirely clear what the pivot would entail.
The unusual, headline-catching business shift ended up being highly lucrative for shareholders, at least briefly. A market frenzy caused the company’s share prices to jump 400% on the day after its announcement.
However, the company’s fortunes abruptly reversed as enthusiasm for its ability to remake itself from the ground up faltered, with share prices dropping to pre-blockchain announcement levels within weeks.
The company never carried through with purchasing blockchain technology, and in 2018 the company’s stock was delisted from NASDAQ after the exchange accused it of misleading investors about the viability of its plans.
Insider trading accusations
The SEC’s lawsuit was initiated in in 2021 and accused three people of committing insider trading by sharing nonpublic information about the company’s rebranding intentions.
According to the SEC’s complaint, Watson, who was the controlling shareholder of the company, passed on information about the blockchain initiative to a business associate, who in turn passed it on to a stock promoter. That promoter bought 35,000 shares of the Long Blockchain Corporation the day before the blockchain-pivot announcement, only to dump them “within hours” of the news breaking and netting over $160,000 in illegal profit, the SEC stated.
Both the promoter and the business associate consented to civil monetary penalties of $325,000 and $75,000, respectively, due to their involvement in the scheme. In 2019, they were sentenced to 17 and 12 months in prison due to an unrelated pump and dump scheme involving a microcap medical device manufacturer.
Watson, who is a New Zealand citizen, moved to dismiss the SEC’s complaint against him, challenging the sufficiency of the SEC’s claims and arguing that service of process was insufficient.
However, District Judge Andrew L Carter found that the SEC sufficiently alleged that Watson engaged in insider tipping and held that the SEC had properly served its complaint on Watson through Court-approved service by publication.
Watson also brought a counterclaim against the SEC for harming his reputation and negligently investigating him, which the Court also dismissed.
GRIP comment
The SEC’s attention to this case is striking at a time when the agency has largely steered clear of policing “meme coins”: digital assets whose prices are often driven by hype, and are prone to dramatic crashes caused by insider pump-and-dump schemes.
Earlier this year, it stated that meme coins are not securities, analogizing them to collectible items, prompting a strongly-worded dissent from Commissioner Caroline Crenshaw, who argued that the definition of meme coin is slippery and prone to abuse.
Yet the case of Long Blockchain Company mirrors many traits of the meme coin phenomenon: a speculative surge based on the company’s unusual name change and position in the news cycle, and a sharp collapse allegedly timed to benefit insiders while leaving the majority of retail investors out of luck. Do investors deserve a different set of protections based on an asset’s meme-ability?
