`Case 1:19-cv-09439-PKC Document 52 Filed 01/02/20 Page 1 of 5
`SECURITIES AND EXCHANGE COMMISSION
`NEW YORK REGIONAL OFFICE
`200 VESEY STREET, ROOM 400
`NEW YORK, NY 10281-1022
`Jorge G. Tenreiro
`WRITER’S DIRECT DIAL
`TELEPHONE: (212) 336-9145
`January 2, 2020
`Via ECF, Facsimile, and Overnight Delivery
`Hon. P. Kevin Castel
`United States District Judge
`Southern District of New York
`500 Pearl Street
`New York, NY 10007
`SEC v. Telegram Group Inc. et al., No. 19 Civ. 9439 (PKC)
`Dear Judge Castel:
`Pursuant to Rule 3.B of this Court’s Individual Practices, Local Rule 37.2 of the Southern
`District of New York, and Paragraph II(a) of the parties’ October 21, 2019 Stipulation and
`Consent Order (D.E. 23) (“Order”), Plaintiff respectfully moves to compel Defendants to answer
`questions and provide documents regarding the amounts, sources, and use of funds raised from
`investors in connection with the unregistered sale of securities at issue in this case.
`Defendants claim to have raised approximately $1.7 billion from investors through the
`sale of digital tokens called Grams between approximately January through March 2018 in what
`the SEC has charged to be an unregistered offering of securities. Defendants are now refusing to
`disclose the bank records concerning how they have spent the $1.7 billion they raised from
`investors in the past two years and to answer questions about the disposition of investor funds.
`Telegram has already once avoided having to provide financial information to investors,
`including regarding the intended use of their funds, by failing to register its sale of Grams and
`not therefore providing a statutory prospectus. The requested bank records are highly relevant to
`the issues in dispute in this case, including how much money Telegram has spent, and in what
`manner, in developing the TON Blockchain, the Telegram Messenger application to be
`integrated with the TON Blockchain, and related applications. This evidence is relevant to the
`efforts Telegram has made to ensure the viability and profitability of the Grams it sold, which is
`relevant to the “efforts of others” prong of the Howey test in determining whether the Grams are
`securities. Telegram’s bank records are also relevant to whether Telegram paid commissions to
`purchasers who were buying Grams to resell to other investors (as appears to be the case based
`on documents we have reviewed), which could render them statutory underwriters (such that
`Telegram’s offering would not qualify for an exemption). In turn, Defendants’ refusal to fully
`disclose and answer questions about their disposition of the $1.7 billion they raised from
`investors is deeply troubling. The SEC respectfully requests that Telegram be compelled to
`provide complete bank records and answers questions about Telegram’s use of these funds.
`Case 1:19-cv-09439-PKC Document 52 Filed 01/02/20 Page 2 of 5
`Hon. P. Kevin Castel
`January 2, 2020
`The SEC seeks this information through Telegram’s bank records, as well as from Pavel
`Durov, the witness designated as Defendants’ corporate representative pursuant to Fed. R. Civ.
`P. 30(b)(6), whose deposition is currently scheduled to take place on January 7 and 8, 2020, in
`Dubai, United Arab Emirates. Pursuant to Fed. R. Civ. P. 37(a)(1), the undersigned hereby
`certifies that he has attempted to confer in good faith with Defendants in an effort to obtain the
`requested bank records and information without court action. After various meet and confers on
`this subject over the last several weeks, on Friday, December 27, 2019, the undersigned advised
`Telegram’s counsel that it was prepared to file this motion that day if Telegram did not agree to
`provide its bank records showing credits and debits. Counsel for Defendants represented to the
`undersigned that, after consultation with their clients, they would produce the “bank records,”
`and prepare Mr. Durov to testify with respect to these topics. However, Defendants produced
`records showing only credits, and not debits showing how Telegram spent the investors’ money.
`When, on December 30, 2019, the undersigned complained about the incomplete production,
`counsel for Defendants claimed they had misunderstood the SEC’s request to have been limited
`to credits, even though we had had an extended discussion with them on December 27 regarding
`our need for bank records including credits and debits and even though our request had been
`pending for weeks and was reiterated in writing the day before our December 27 call (see Exs. A
`& B). Counsel later informed the undersigned that they would not provide full bank records
`themselves, but instead only information, culled by them, concerning payments from Telegram
`to third parties relating to the TON project. They also indicated that they could not immediately
`produce those records because Telegram was no longer banking at the same institution. In the
`meet and confer process, the parties also agreed that the SEC would hold off filing this motion
`sooner, so that counsel could revert back to their client one more time in an attempt to resolve
`this, but that, if filed, Telegram’s response to this submission would be due in one business day,
`instead of the three set forth in the Order.
`At bottom, Telegram does not want to tell the SEC what it has done with the $1.7 billion
`it raised from investors. Because the deposition of Defendants’ corporate representative is slated
`to take place in Dubai next Tuesday and Wednesday, the SEC is filing this application today.
`In 2018, Telegram offered and sold to investors digital assets known as Grams by touting,
`among other things, its planned efforts to develop a “Telegram Open Network” (“TON”)
`Blockchain for Grams, and the potential to achieve widespread adoption of Grams through the
`future growth of its messaging app (“Messenger”). For example, in a “Letter of Interest” that
`Telegram had prospective purchasers sign, the company explained that it “intend[ed] to use the
`proceeds raised from the offering for the development of the TON Blockchain, for the continued
`development and maintenance of Telegram Messenger and for general corporate purposes at
`Telegram Messenger.” Ex. C at 1. In a “Primer” Telegram circulated to prospective investors,
`Telegram stated that “[a] total spending of about $620 million to support continuing organic user
`growth should allow Telegram to reach one billion active users by January 1, 2022.” Ex. D at
`18. Telegram promised to “leverage its existing ecosystem of communities, developers,
`publishers, payment providers, and merchants to drive demand and value for TON
`cryptocurrency,” and noted that “[i]ntegrated into Telegram applications, the TON-Telegram
`wallet will instantly become the world’s most adopted cryptocurrency wallet.” Id. at 5, 11.
`Case 1:19-cv-09439-PKC Document 52 Filed 01/02/20 Page 3 of 5
`Hon. P. Kevin Castel
`January 2, 2020
`In two Forms D filed with the SEC in February and March 2018, Telegram stated that it
`raised a total of $1.7 billion through the sale of certain “Purchase Agreements for Grams”
`(“Purchase Agreements”) to purportedly accredited investors (the “Offering”). Exs. E & F.
`Telegram stated that the Purchase Agreements were securities under the federal securities laws,
`but claimed that their sale was exempt from the registration requirement of Section 5 of the
`Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77e, pursuant to Rule 506(c) of Regulation
`D issued under the Act. See 17 C.F.R. § 230.506(c). In its Answer, Telegram has made the
`same claim D. See D.E. 37 at 34 (Second Affirmative Defense).
`During the SEC’s investigation of Telegram’s potential violation of the federal securities
`laws, Telegram proffered that, as of January 31, 2019, it had expended approximately $218
`million for general corporate purposes. But, Telegram has refused to provide any further
`financial information regarding how much money it has spent on developing the TON
`Blockchain and what it has done with the rest of the investors’ money.
`The SEC Sought, and Defendants Refused to Provide, Information About
`Telegram’s Use of Investor Funds
`The SEC filed this action on October 11, 2019, and sought an emergency order seeking,
`among other things, expedited discovery. D.E. 3. The Court granted the SEC’s request, D.E. 6,
`and the SEC served document requests seeking, among other things, a “complete and updated list
`of all individuals and entities that purchased Grams” and “financial records reflecting the current
`amount of the funds, and the use to which any funds were put.” Ex. G at 11-12 (Requests No. 8
`and 9). Telegram objected to these requests, id., and the SEC later explained to Defendants that
`this information was relevant, among other things, to “the stages of development of the TON
`Blockchain and ecosystem.” Ex. H (SEC Letter of Nov. 7, 2019) at 6. Subsequently, Telegram
`provided the SEC with redacted, partial copies of its bank statements. The redactions obscure
`many transactions occurring at the same time as Offering proceeds were received, and what is
`not obscured by redactions shows only deposits, not Telegram’s expenditures.
`The SEC has also sought the deposition of a Telegram corporate representative witness
`pursuant to Fed. R. Civ. P. 30(b)(6). The SEC sought, among other things, a representative to
`testify regarding “specific expenditures related to [Telegram’s] development of TON Blockchain
`. . . , including up to October 31, 2019, at present, and expected future expenditures, including
`payments to non-Telegram employees,” and the “expected amount of funds remaining from the
`Initial Offering after the launch, [and] the expected use of those funds.” Ex. I at 19-20 (Topics
`Nos. 26 and 27). Telegram similarly objected to these requests. Id.
`Information Regarding Use of Investors Funds Are Critical to the Claims
`and Defenses to be Tried
`Regulation D Exemption. The SEC contends that the Grams were part of the “investment
`contract” (and, therefore, securities) offered and sold in 2018 and that Telegram failed to register
`their offer and sale and failed to make clear that any resale of the Grams to the public would
`similarly be subject to registration or a valid exemption. Telegram claims that only the Purchase
`Agreements, but not the Grams which are the subject of the Purchase Agreement are securities,
`Case 1:19-cv-09439-PKC Document 52 Filed 01/02/20 Page 4 of 5
`Hon. P. Kevin Castel
`January 2, 2020
`and that they were sold only to “accredited investors,” thus exempting their offer and sale from
`registration in reliance on Rule 506(c). D.E. 37 (Answer) ¶ 51. However, even assuming
`arguendo, Telegram’s claim that the Grams are not securities, exemption from registration under
`Rule 506(c) of the Purchase Agreements as Defendants construe them nevertheless requires
`compliance with Rule 502(d) of Regulation D, i.e. that the issuer “exercise reasonable care to
`assure that the purchasers of the securities are not underwriters within the meaning of section
`2(a)(11) of the [Securities] Act.” 17 C.F.R. § 230.502(d). The Securities Act defines an
`“underwriter” as “any person who has purchased from an issuer with a view to, or offers or sells
`for an issuer in connection with, the distribution of any security.” 15 U.S.C. § 77b(a)(11).
`Telegram has the burden to establish its entitlement to an exemption from registration. SEC v.
`Ralston Purina Co., 346 U.S. 119, 126 (1953); SEC v. Cavanagh, 155 F.3d 129, 133 (2d Cir.
`1998). “Registration exemptions are construed strictly to promote full disclosure of information
`for the protection of the investing public.” SEC v. Cavanagh, 455 F.3d 105, 115 (2d Cir. 2006).
`The evidence developed in discovery undermines Telegram’s claimed affirmative
`defense. Evidence shows that Telegram made continuous offers and sales of the Purchase
`Agreements well after the offering for which it claimed a Regulation D exemption, Exs. E, F,
`and received significant payments on Purchase Agreements between May and November 2018.
`The SEC also has evidence that certain entities tendered invoices to Telegram for commissions
`ranging between 10-15% to Telegram based on the sale of certain Purchase Agreements,
`purportedly on the basis of contracts between those entities and Telegram dated in June 2018.
`The record shows: (1) Purchase Agreements post-dating March 29, 2018, e.g., Exs. J at 29, L at
`29; (2) that certain entities submitted to Telegram “invoices” apparently billing for those entities’
`sale of the post March 29, 2018, Purchase Agreements, e.g., Exs. K at 1, M; and (3) the entities
`that entered into some of those Purchase Agreements remitted funds to Telegram via various
`payments in late 2018, see Ex. N at 2-7 (payments from August through November 2018).
`These documents undermine Telegram’s claimed affirmative defense that the Offering
`was exempt under Regulation D. First, Telegram either raised more than the $1.7 billion for
`which it claimed an exemption, or it did not raise $1.7 billion as of March 29, 2018 and the later
`funds may have been raised through underwriters. Second, the ongoing large deposits Telegram
`received from certain Purchase Agreement investors after the claimed end of the Offering
`suggests that those entities had entered into Purchase Agreements with Telegram with a view to
`reselling those securities to others, and during the latter half of 2018 were raising funds from
`others on behalf of Telegram. The September and October 2018 invoices for commissions based
`on certain Purchase Agreements only strengthen the force of that conclusion.
`Without fully un-redacted bank records (an example of which is submitted herewith as
`Exhibit N), the SEC (and the Court) cannot fully understand (1) who made payments under
`which purchase agreement, (2) whether some of those payments were from entities who were
`acting as statutory underwriters, and (3) whether Telegram made any payments to such
`underwriters. Nor should the SEC have to rely on Telegram’s own determinations of what
`constitute relevant entries, or what expenditures are or are not “relating to” the TON project.
`Whether Grams Are “Investment Contracts.” The SEC contends that the “investment
`contracts” at issue in this case are both the Purchase Agreements and the Grams sold pursuant to
`Case 1:19-cv-09439-PKC Document 52 Filed 01/02/20 Page 5 of 5
`Hon. P. Kevin Castel
`January 2, 2020
`such agreements. The SEC must establish that such instruments are “investment contracts”
`under SEC v. W.J. Howey & Co., 328 U.S. 293 (1946). The Howey test asks whether purchasers
`tendered money into a common enterprise with a reasonable expectation of profit based on the
`efforts of others. Id. at 301. How much money Telegram has spent to date, and in what manner,
`to develop the TON Blockchain and related applications, and to integrate them into Telegram
`Messenger, is highly relevant evidence to whether the investors had a reasonable expectation of
`profits through the “efforts of others”, i.e., Telegram, in developing the TON Blockchain to
`advance the viability and profitability of Grams to investors.
`Telegram has further argued that even if Grams were “investment contracts” under
`Howey when the Purchase Agreements were sold, they will not be upon their distribution
`because, among other things, Telegram will need to engage in no additional efforts to complete
`its vision of a decentralized blockchain. Understanding how much of the amounts raised have
`been spent in developing the “ecosystem” to support Grams, as well as in supporting Messenger,
`the application it touted as potentially increasing “demand and value” for Grams (Ex. D at 5), is
`critical to evaluating these claims. Specifically, a financial accounting would show what
`Telegram has spent to fulfill its promised venture, how it has spent the money (which is relevant
`to understanding the true economic nature of the Offering), and is probative to test what
`additional efforts by Telegram will be required before the TON Blockchain will be capable of
`operating independent of the efforts of Telegram. Because the extent of development, to date,
`and the potential continuation of efforts by Telegram needed to further develop the TON
`Blockchain and Grams remains in dispute, financial information relating to these efforts is
`probative to the issues to be tried.
`Accordingly, full disclosure of the sources, amounts, dates, and uses of funds are central
`to the SEC’s claims that Telegram violated Section 5 of the Securities Act by engaging in
`unregistered offers and sales of Grams, and to Telegram’s affirmative defense that its Offering is
`eligible for the exemption from registration provided by Regulation D of the Act. Because
`Telegram can claim no burden in producing un-redacted versions of documents it has already
`produced (and because any confidentiality concerns are resolved by the Protective Order entered
`in this action, D.E. 36), Telegram should be ordered to produce these documents. Nor is there
`any burden to Telegram by having its corporate representative prepare and testify about these
`matters, and he should therefore be compelled to answer deposition questions about them.
`Telegram’s refusal to produce this information to the SEC—and its suggestion that it may
`not have access to its own bank records because it has changed banks—is unfounded and deeply
`troubling. Because the deposition of Pavel Durov is scheduled to commence next Tuesday, the
`SEC respectfully requests that the Court issue an order compelling Telegram to provide the
`discovery sought in this Motion.
`Jorge G. Tenreiro