SEC v. CROWD MACHINE

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United States District Court

Northern District of California

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA

U.S. SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.

CROWD MACHINE, INC., METAVINE,
INC., and CRAIG DEREL SPROULE
Defendants,
and
METAVINE PTY. LTD.,
                        Relief Defendant.

Case No.  4:22-cv-0076-HSG

ORDER GRANTING IN PART AND
DENYING IN PART MOTION FOR
MONETARY RELIEF
Re: Dkt. No. 40

Pending before the Court is Plaintiff U.S. Securities and Exchange Commission’s Motion
for disgorgement against Defendants Crowd Machine, Inc., Metavine, Inc., and Craig Sproule and
Relief Defendant Metavine Pty. Ltd., and civil penalties against Defendants Crowd Machine, Inc.
and Metavine, Inc.  Dkt. No. 40 (“Mot.”).  Defendants oppose the Motion.  Dkt. No. 52 (“Opp.”).
The Court orders Defendants Crowd Machine, Inc., Metavine, Inc., and Craig Sproule and Relief
Defendant Metavine Pty. Ltd. to pay the amounts detailed in this Order.
I. BACKGROUND
1

In 2013, Craig Sproule founded Metavine, Inc., a technology company that developed and
distributed “zero-code” software intended to enable customers without computer coding

1
 Defendants and Relief Defendant executed consents in which they each agreed that “the
allegations of the Complaint shall be accepted as and deemed true by the Court,” for purposes of
the Commission’s motion for disgorgement and/or penalties.  See Dkt No. 2 at 2; Dkt. No. 3 at 2.

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experience to assemble custom computer applications using preexisting components.  Dkt. No. 1
(“Compl.”) ¶ 25.  In 2018, Sproule established two new companies, Crowd Machine SEZC and
Crowd Machine, Inc., with plans to build a “Crowd Computer” that would host Metavine’s zero-
code software and promote the development and exchange of software components using
blockchain technology.  Id. ¶¶ 26–27.  Between January and April 2018, defendant Craig Sproule,
Metavine, Inc., Crowd Machine, Inc. and Crowd Machine SEZC raised more than $33 million
from hundreds of investors in the United States and abroad through a fraudulent and unregistered
“initial coin offering” or “ICO” of digital asset securities, which they called “Crowd Machine
Compute Tokens” or “CMCTs.”  Id. ¶¶ 2.  Defendants represented that ICO proceeds would be
used to fund the development of a “global decentralized” peer-to-peer network, or “Crowd
Computer.”  Defendants claimed this Crowd Computer would run their existing “no-code”
application-development software from a network of users’ own devices instead of traditional
centralized servers.  Id.  Defendants further represented that users could compensate device
owners with CMCTs for the use of their surplus processing power.  Id.  Users also could pay
software developers in CMCTs for making available source code that users could compile into
custom applications “with unparalleled speed.”  Id.
In November 2017, Defendants began marketing the initial coin offering.  Id. ¶ 27.
Although Metavine’s zero-code software was operational and in use at the time of the ICO, the
“Crowd Computer” did not exist and, therefore, CMCTs had no use at the time they were offered.
Id.  In marketing this ICO, Defendants enticed investors with misleading statements.  Id. ¶ 63.  For
example, in offering materials and on social media, Defendants claimed that its technology had
been “battle tested” by “Fortune 500 companies” including GE and Anthem.  Id.  In a newsletter
sent to prospective investors, Defendants wrote that “ICO’s [sic] for companies who don’t have a
product yet are all about financial speculation – investing in an idea.”  Id.  “In contrast,”
Defendants claimed to “have a live, commercial product that we really want our loyal users and
community members to be able to invest in.”  Id.  In reality, none of the technology related to the
Crowd Computer was functional, and the only technology that had been “battle tested” by any
third parties was Metavine, Inc.’s existing application development software.  Id. ¶ 64.  The

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complaint alleges that many investors who purchased CMCTs in the ICO did so “primarily
because they hoped that the tokens would appreciate” and they “felt confident that they would
profit both because of CMG’s representations regarding the state of its existing technology in use
by Fortune 500 companies, as well as promises that experienced management would undertake to
build the Crowd Computer community, increase demand for CMCTs, list CMCTs on secondary
markets, and work towards realizing investors’ expectation of a ‘significant ROI.’”  Id. ¶ 65.
The CMCT ICO was held in two phases.  Id. ¶ 41.  Between January 28 and April 20,
2018, in what Defendants called a “private presale” (the “First Phase”), Defendants would offer
CMCTs through “Simple Agreements for Future Tokens” (“SAFTs”).  Id.  These SAFTs, which
Defendants have acknowledged were investment contracts, entitled investors to an unspecified
allotment of CMCTs in exchange for a payment of Ether, Bitcoin, or U.S. dollars.  Id.
Defendants claimed publicly that the First Phase of the ICO was limited to foreign
investors and accredited investors in the United States with a required minimum investment of
$100,000.  Id. ¶ 46.  According to the complaint, neither of these claims were true.  Id.  To secure
the bonuses offered to First Phase investors, groups of investors—known in the digital asset
community as “ICO Pools”—pooled resources to meet the $100,000 threshold and transferred
them to accredited investors who then purchased CMCTs on their behalf.  Id. ¶ 47.  These ICO
pools included U.S. investors who were not required to and did not verify their identities or
establish their accredited status before investing in the ICO.  Id. ¶ 48.  Defendants were aware that
investors representing ICO Pools purchased CMCTs in the First Phase of the ICO on behalf of
their underlying investors, but did not request documentation to ascertain the underlying investors’
identities or their accredited status.  Id. ¶ 49.  In some instances, Defendants’ employees and
agents knowingly solicited and facilitated investments by these ICO Pools.  Id.
In the Second Phase of the ICO, Defendants did not purport to limit participation to
accredited investors, and they made no public statements even suggesting that U.S. investors were
to be excluded.  Id. ¶ 51.  In fact, Defendants repeatedly wrote in their Telegram channel that U.S.
investors could participate in this phase of the ICO regardless of accredited status.  Id. ¶¶ 52–54.
In total, Defendants claimed to have raised the equivalent of USD $40.7 million through

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the sale of CMCTs to over 900 investors.  Id. ¶ 52.  Based on the market values of ETH and BTC
at the time of the ICO, Defendants actually collected the equivalent of only USD $33.5 million
after accounting for $7.25 million in offering proceeds that Defendants failed to collect.  Id. ¶ 53.
Contrary to Defendants’ representations, they allocated a significant portion of the ICO
proceeds to endeavors that were entirely unrelated to the development and marketing of the Crowd
Computer technology, the creation of an ecosystem in which CMCTs could be used, or efforts to
increase demand for CMCTs to promote trading on secondary markets.  Id. ¶ 78.  For example,
Defendants transferred at least $5.8 million to foreign gold mining companies, predominantly in
South Africa.  Id. ¶ 79.  At no point had Defendants disclosed that it intended to pay ICO proceeds
to foreign gold mining entities for any reason, and this information would have been material to
ICO investors’ decisions about whether to purchase CMCTs.  Id. ¶ 82.
II. PROCEDURAL HISTORY
The SEC filed its complaint in this matter on January 6, 2022.  Dkt. No. 1.  On January 11,
2022, with Defendants’ consent, the Court entered judgment against Defendants for violations of
Section 10(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) (15 U.S.C. § 78j(b)),
and Rule 10b-5 thereunder (177 C.F.R. § 240.10b-5); Section 17(a) of the Securities Act of 1933
(“Securities Act”) (15 U.S.C. § 77q(a)); and Section 5 of the Securities Act (15 U.S.C. § 77e).  See
Dkt No. 11.  In the Judgment, the Court ordered Defendants and Relief Defendant to pay, on a
joint and several basis, disgorgement of ill-gotten gains and prejudgment interest thereon.
As part of the Judgment, the Court ordered that “in connection with the Commission’s
motion for disgorgement and/or civil penalties . . . solely for the purposes of such motion, the
allegations of the Complaint shall be accepted as and deemed true by the Court.”  Id. at 5.  The
Court has already ordered that “in connection with the Commission’s motion for disgorgement
and/or civil penalties, and at any hearing held on such a motion: (a) Defendants and Relief
Defendant will be precluded from arguing that Defendants did not violate the federal securities
laws as alleged in the Complaint.”  Id. at 4–5.
III. ANALYSIS
In its Motion, the SEC seeks to disgorge the full amount Defendants raised in the token

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sale, or in the alternative, the full amount raised minus certain operational expenses.  The SEC
also seeks a maximum statutory penalty from each of Crowd Machine, Inc. and Metavine, Inc.
The SEC relies upon the Declaration of Avron M. Elbaum, an Assistant Chief Accountant
in the Division of Enforcement and a Certified Public Accountant.  See Dkt. No. 41-6.  The
underlying evidence upon which his summaries are based are the Defendants’ own financial
records and the Updated Token Sale Profit and Loss Spreadsheet prepared by Defendants for
purposes of this litigation.  See Mot. 10.  Mr. Elbaum grouped the Defendants’ claimed expenses
into different categories, which the Court will adopt for ease of analysis.  Id.  Defendants claim to
have incurred $37,168,882.74 in legitimate business expenses associated with the Crowd Machine
project through April 30, 2021.  See Mot. 12.
A.  Disgorgement
I. Legal Standard
 The SEC bears the “burden of persuasion that its disgorgement figure reasonably
approximates the amount of unjust enrichment.”  SEC v. Platforms Wireless, 617 F.3d 1072, 1096
(9th Cir. 2010) (citing First Pac. Bancorp, 142 F.3d at 1191).  Once the SEC has met its burden,
the burden shifts to the defendant to show that the figure is not a reasonable approximation.  Id.
Disgorgement typically includes prejudgment interest to ensure that wrongdoers do not profit from
their illegal conduct.  See SEC v. Cross Fin. Servs., Inc., 908 F. Supp. 718, 734 (C.D. Cal. 1995).
The Supreme Court’s recent decision in Liu v. SEC, 140 S. Ct. 1936, 1945, 207 L. Ed. 2d
401 (2020), departed from the Ninth Circuit’s prior disgorgement precedent in recognizing that
such awards are limited to the net profits from a defendant’s wrongdoing, defined as “the gain
made upon any business or investment, when both the receipts and payments are taken into the
account.”  In the Court’s view, a rule to the contrary that “make[s] no allowance for the cost and
expense of conducting [a] business” would be “inconsistent with the ordinary principles and
practice of courts of chancery.”  Id. (quoting Tilghman v. Proctor, 125 U.S. 136, 145–146 (1888)).
“[W]hen the entire profit of a business or undertaking results from the wrongful activity,” then
“the defendant will not be allowed to diminish the show of profits by putting in unconscionable
claims for personal services or other inequitable deductions.”  Liu, 140 S. Ct. at 1945.  That

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exception, in turn, requires the court to ascertain whether expenses are legitimate or whether they
are merely wrongful gains “under another name,” with the aim of preventing defendants from
profiting from their own wrongdoing.  Id.  The Court did not provide guidance as to when a
defendant’s expenses “might be considered wholly fraudulent,” but noted that  “some expenses
from petitioners’ scheme went toward lease payments and cancer-treatment equipment” that
“arguably have value independent of fueling a fraudulent scheme.”  Id.  On remand, the district
court observed that the scheme appeared entirely fraudulent, but, acting “out of an abundance of
caution,” found administrative fees and costs for the construction of a cancer treatment center
consistent with their advertised business model to be deductible.  SEC v. Liu, No.
SACV1600974CJCAGRX, 2021 WL 2374248, at *6 (C.D. Cal. June 7, 2021), aff’d sub nom.
SEC v. Liu, No. 21-56090, 2022 WL 3645063 (9th Cir. Aug. 24, 2022), cert. denied sub nom. Liu
v. SEC, 143 S. Ct. 2495, 216 L. Ed. 2d 454 (2023).
The Ninth Circuit has applied this new framework in SEC v. Russell, No. 22-55093, 2023
WL 4946603 (9th Cir. Aug. 3, 2023), and SEC v. Yang, No. 21-55437, 2022 WL 3278995 (9th
Cir. Aug. 11, 2022).
2
  In Russell, the defendants derived their gross proceeds by “deceiv[ing]
[investors], often in elaborate fashion, into believing that they were buying shares in a fast-
growing cannabis business” that never got off the ground and was likely a sham.  2023 WL
4946603 at *2 (9th Cir. Aug. 3, 2023).  The Ninth Circuit noted that because Russell’s “entire
profit resulted from” securities fraud, the district court was not required to deduct any of Russell’s
business expenses from his improperly derived investor funds.  Id.  The Ninth Circuit nevertheless
affirmed the district court’s decision to deduct what it found to be legitimate business expenses
and only disgorge the funds spent on a yacht purchase, finding this figure to serve as a “reasonable
approximation” of the defendant’s ill-gotten gains.  Id.  Similarly, in Yang, the Ninth Circuit
affirmed a deduction of $1,000,000 used to pay back construction-related debt as a legitimate

2
 As unpublished Ninth Circuit decisions, Russell and Yang are not precedent, but may be
considered for their persuasive value.  See Fed. R. App. P. 32.1; CTA9 Rule 36-3.

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expense, while disgorging $1,414,250 of investors’ funds that Defendant used to pay back
personal loans.  2022 WL 3278995 (9th Cir. Aug. 11, 2022)
II. Analysis
Taking all allegations in the complaint as true, Defendants received $33,499,206.21 from
the ICO token sale.  The SEC deems this entire token sale fraudulent, noting that Defendants
misrepresented the state of the technology and failed to notify investors about its eventual use of
funds, which included a $5.8 million loan to a gold mining operation.  Compl. ¶¶ 1–9.  The SEC
argues that because all of Defendants’ gross revenue derived from this fraudulent sale, no
deductions are warranted.  Alternatively, recognizing the Court’s equitable discretion, the SEC
points to $13,748,904.94 in expenses that are “not clearly connected to the fraudulent scheme”
that the Court potentially could deduct.  Mot. 20.  The SEC rejects Defendants’ claim that
marketing, consulting, and legal expenses related in any way to the sale should be deducted.
Following the principles established in in Liu, Russell, and Yang, the Court notes that it
appears undisputed that Defendants’ business was not a complete sham.  Although Defendants
derived nearly $33.5 million from an unregistered token sale infected by fraud, the business
otherwise incurred significant operating expenses that did not “fuel” or “further” the token sale.
Russell, 2023 WL 4946603, at *1 (quoting Liu, 140 S. Ct. at 1950).
At the outset, Defendants contend that disgorgement is not appropriate because they did
not profit from the scheme.  The Ninth Circuit has rejected this argument.  See SEC v. Liu, No. 21-
56090, 2022 WL 3645063, at *2 (9th Cir. Aug. 24, 2022), cert. denied sub nom. Liu v. SEC, 143
S. Ct. 2495, 216 L. Ed. 2d 454 (2023) (“Appellants make this very argument: No net profit, thus
no disgorgement.  Clearly, this outcome would not produce an equitable remedy for Appellants’
fraud.”).  But deductions of legitimate operating expenses are appropriate in this case.  As
explained below, the Court deducts (1) certain expenses the SEC itself does not specifically deem
to be illegitimate; and (2) certain legal fees.
3

3
 Defendants concede that the $5.8 million sent to a gold mining entity is not a legitimate expense
to deduct in this context.  See Opp. 20.

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1. Expenses Not Specifically Contested by the SEC
The SEC maintains that if this Court decides to make certain equitable deductions to the
disgorgement amount, $13,748,904.94 in expenses can be characterized as “legitimate” and “not
clearly connected to the fraudulent scheme.”  Mot. at 20.  The Court therefore deducts this
amount.
2. Marketing and Consulting Expenses
Defendants incurred various expenses in marketing the token sale and retaining consultants
to advise on the sale.  The SEC argues that costs incurred to initiate the unlawful and unregistered
sale of securities, such as marketing and consulting costs to further the sale, do not have any value
“independent of fueling a fraudulent scheme.”  Liu, 140 S. Ct. at 1950; Russell, 2023 WL 4946603
at *1 (expenses not deductible if “they were incurred for the purposes of furthering an entirely
fraudulent scheme”) (quoting Liu, 140 S. Ct. at 1950).  The Court agrees.  These expenses
furthered an unregistered sale of securities that Defendants knew at the time to be subject to
fraudulent misrepresentations.  See Compl. ¶¶ 45–53, 63–64, 78, 79, 82; see also SEC v. Fisher,
No. 21-60624-CIV, 2022 WL 13650848, at *4 (S.D. Fla. Oct. 21, 2022) (“Any funds spent in
furtherance of drawing in more victims to [the] fraud are not, by any stretch of the imagination,
legitimate business expenses.”); SEC v. Navellier & Assocs., Inc., No. 17-CV-11633-DJC, 2021
WL 5072975, at *7 (D. Mass. Sept. 21, 2021) (“Defendants’ marketing expenses can also be seen
as the reinvestment of profits in expanding the fraud, rather than as an actual expense of the
business.”), SEC v. Owings Grp., LLC, No. CV RDB-18-2046, 2021 WL 1909606, at *4 (D. Md.
May 12, 2021) (“These expenses are not legitimate expenses to be deducted because they were
used to solicit investors into the fraudulent scheme”), aff’d sub nom. SEC v. Johnson, 43 F.4th 382
(4th Cir. 2022).  Accordingly, the Court will not deduct line items identified as “ICO marketing,”
“Token Sale Advertising,” “Token Sale Public Relations,” “Token Sale Trade Shows,” “Token
Sale Preparation Costs,” and “Token Sale Consultant Costs.”
3. Token Minting Expenses
Defendants claim that expenses related to minting tokens for the sale should be deducted
as legitimate, pointing to case law deducting “transaction costs” such as brokerage fees incurred in

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processing fraudulent transactions.  Opp. 18 (citing SEC v. Bronson, 602 F. Supp. 3d 599, 617–18
(S.D.N.Y. 2022), aff’d sub nom. SEC v. Bronson, No. 22-1045-CV, 2022 WL 5237474 (2d Cir.
Oct. 6, 2022), cert. denied sub nom. Bronson v. SEC, 143 S. Ct. 2643 (2023).  But unlike
brokerage expenses, the creation of these tokens was at the heart of the violations at issue:
Defendants minted the tokens to sell in an unregistered offering that was itself infected by fraud.
Costs to mint these tokens therefore should not be deducted.
4. Legal Fees
Defendants also argue that four categories of legal fees should be deducted:  (1) $520,066
spent litigating a token purchaser’s claim against them; (2) $455,162 spent defending the SEC
investigation; (3) $71,150 spent in “unspecified” legal expenses; and (4) $34,909 in legal fees
attributed to the token sales.  Opp. 18.  The SEC contends that these fees conferred no value
independent of the fraudulent scheme.  Mot. 18.
As to the first two categories, the Court agrees with the SEC that fees related to defending
against a private arbitration brought by an investor and this enforcement action—in other words,
defending the fraud itself after the fact—would be inequitable to deduct.  See SEC v. Navellier &
Assocs., Inc., No. 17-CV-11633-DJC, 2021 WL 5072975, at *7 (D. Mass. Sept. 21, 2021) (“As
these legal expenses are unrelated to the [legitimate activities conducted on behalf of investors]
they should not be deducted.”).
As to third category of $71,150 of “unspecified” expenses, Defendants argue that the
Memo/Description included with the Sale Profit and Loss Spreadsheet entries demonstrates that
all but $2,750 of the $71,150 was paid to a law firm that counseled Defendants at the time of the
token sale.  Opp. 18.  According to Defendants, this firm provided outside general counsel advice,
which included advice on Form D filing as well as advice regarding whether the CMCTs were
securities subject to SEC regulation.  Id.  The Court finds this expense to be legitimate.  Holding
otherwise would disincentivize good faith practices in seeking legal advice.  Moreover, the Court
notes that the offering materials explicitly earmarked a portion of the token sale receipts for legal
expenses.  Opp. 19.  Investors understood that part of their investment would be spent on legal
fees.  See Liu, 2021 WL 2374248, at *6 (permitting the deduction of administrative fees, including

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certain legal fees, because they were referenced in the private offering memorandum).  The same
holds true for the fourth category of $34,909 in legal expenses paid for legal advice related to the
token sales.  Opp. 19.  For the $2,750 in fees not accounted for, the Court again notes that
investors understood that their investment would defray certain legal fees.  Id.  In its discretion,
the Court thus deducts this $2,750 from the amount subject to disgorgement.
5. Cryptocurrency Depreciation
Defendants received nearly $33.5 million in cryptocurrency from the ICO, but claim that
the cryptocurrency depreciated in value by the time Defendants liquidated the assets.  Opp.  13.
Citing GAAP accounting principles, Defendants claim this depreciation should count as a
deductible business expense.  Id.  The SEC responds that this depreciation is not a business
expense at all.  Mot. 14.  The Court agrees with the SEC that such a loss does not amount to an
expense.  As noted, the Court could disgorge the full amount Defendants raised in the token sale
because it was derived from fraud.  Exercising caution based on Liu, the Court deducts expenses
incurred by the business that did not further the fraudulent nature of the token sale.  But treating
depreciation of an asset class as a legitimate business is a step too far—let alone depreciation of
assets taken by fraud.  Depreciation of a volatile asset class does not fall within the same category
as the reasonable and necessary expenses incurred in running a business as outlined in Liu and
cases following it.  And even if the Court characterized such a loss as covered by this “expense”
category, depreciation more closely resembles a dissipation of assets due to improper management
rather than an expense incurred in the regular course of business.  Prior to Liu, courts allocated the
risk of holding a volatile asset to the fraudster rather than to innocent investors by determining the
value of the asset as of the day Defendants improperly acquired it.  See, e.g., SEC v. JT
Wallenbrock & Assocs., 440 F.3d 1109, 1115-16 (9th Cir. 2006) (court may order disgorgement
even if the violator “is no longer in possession of such funds due to subsequent, unsuccessful
investments or other forms of discretionary spending”); SEC v. Aletheia Rsch. & Mgmt. Inc., No.
CV1210692JFWRZX, 2015 WL 13404306, at *3 (C.D. Cal. May 11, 2015), aff’d sub nom. SEC v.
Aletheia Rsch. Mgmt., 689 F. App'x 512 (9th Cir. 2017) (“mark-to-market embedded profit or loss
at the end of the day of allocation is precisely the gain that Eichler obtained for himself (or family

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members) as a result of his cherry-picking.”); In re L.C. Wegard & Co., SEC Release No. 34–
40046, 67 S.E.C. 552, 1998 WL 275929 at *6 (May 29, 1998), aff'd, 189 F.3d 461 (2nd Cir. 1999)
(“Disgorgement is an equitable remedy.  A manipulator is not relieved of its disgorgement
obligation simply because it chooses, for whatever reason, to retain manipulated securities until
their subsequent drop in price dissipates some or all of the manipulator's ill-gotten gains.”).
4

Stretching “legitimate expense” to include depreciation of an asset class taken by fraud necessarily
would turn this longstanding principle on its head.  As such, the Court does not deduct this
purported expense.
6. Accrued Expenses
Defendants claim that certain “accrued” expenses should also be deducted, arguing that
that if they had not incurred a net loss, they would have had the funds to pay these salaries.  Opp.
20.  According to Defendants, an accrued expense is a real expense that affects Defendants’
“actual profits” no differently than an expense that has already been paid.  The Court disagrees.
Disgorgement is properly based on Defendants’ “actual profits.”  See Platforms Wireless Int’l
Corp., 617 F.3d at 1096 (“Once the SEC establishes a reasonable approximation of defendants’
actual profits” the burden shifts to the defendant to show it is not a reasonable approximation).  It
does not appear that Defendants actually paid these expenses, so the $732,354.54 in accounting
accruals cannot be properly deducted.
7. Disgorgement for Relief Defendant Metavine Pty. Ltd.
During and after the ICO, Relief Defendant Metavine Pty. Ltd. received at least thirty
separate funds transfers from Metavine, Inc., Crowd Machine, Inc., and/or Crowd Machine SEZC,
totaling at least $5 million.  Compl. ¶ 89.  The SEC seeks disgorgement on a joint and several
basis from the Relief Defendant in the amount of investor money that it improperly received.
Mot. 21.  A court may order equitable relief against “a person who is not accused of wrongdoing

4
 See also SEC v. Shapiro, 494 F.2d 1301, 1309 (2nd Cir. 1974) (“To require disgorgement only of
actual profits in cases where the price of the stock subsequently fell would create a heads-I-win,
tails-you-lose opportunity for the violator: he could keep subsequent profits but not suffer
subsequent losses.”); SEC v. Mannion, 28 F. Supp. 3d 1304, 1308–09 (N.D. Ga. 2014) (“[E]very
circuit that has addressed the issue has held that disgorgement is properly based on a defendant's
unrealized ‘paper’ profits at the time of the illegal transaction.”).

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in a securities enforcement action where that person: (1) has received ill-gotten funds; and (2) does
not have a legitimate claim to those funds.”  SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir.1998);
SEC v. Colello, 139 F.3d 674, 677 (9th Cir. 1998); SEC v. World Capital Market, Inc., 864 F.3d
996, 1003-04 (9th Cir. 2017).
The SEC argues that these funds necessarily included ill-gotten gains from the fraudulent
and unregistered ICO, as the total amount received greatly exceeded what could reasonably be
attributed to Metavine Pty. Ltd.’s earned revenue.  Mot. 22.  Defendants provide no rebuttal to this
argument.  Taking the allegations in the complaint as true, the Court infers that Relief Defendant
received ill-gotten funds.  See Compl. ¶ 89.  The SEC is also correct that as between the investors
and the Relief Defendant, the Relief Defendant has no legitimate claim to any of the investor
funds.  The holding in Liu that the SEC may not seek disgorgement “in excess of a defendant’s net
profits from wrongdoing,” Liu, 140 S. Ct. at 1946, “simply has no bearing on the propriety of the
judgment entered against [a relief defendant], which was not a defendant, was not accused of
wrongdoing, and which was not required to disgorge ‘profits,’ gross or net.”  SEC v. San
Francisco Reg’l Ctr. LLC, No. 17-CV-00223-RS, 2020 WL 4569844, at *2 (N.D. Cal. Aug. 7,
2020), aff’d sub nom. SEC v. Berkeley Healthcare Dynamics, LLC, No. 20-16754, 2022 WL
42807 (9th Cir. Jan. 5, 2022).  Accordingly, the Court holds that Relief Defendant Metavine Pvt.
Ltd. is liable to disgorge $5,000,000 in ill-gotten funds.
B. Civil Penalties
The Court’s judgment against Defendants Crowd Machine, Inc. and Metavine, Inc.
provides that they shall pay a civil penalty.  See Dkt. No. 11 at 4.  Section 77t(d) provides for three
tiers of penalties in this context.  Tier I penalties are available for all violations, and the amount of
the penalty “shall be determined by the Court in light of the facts and circumstances.” 15 U.S.C. §
77t(d)(2).  Tier II penalties require fraud, deceit, manipulation, or a deliberate or reckless disregard
of regulatory requirements, and Tier III penalties require Tier II elements, plus substantial losses
or significant risk of substantial losses to other persons.  Id.  The statutory tiers set forth the
maximum penalties to be imposed, but the amount is left to the discretion of the court based on the
particular facts of the case.  SEC v. Husain, 70 F.4th 1173, 1184 (9th Cir. 2023).  In deciding what

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is an appropriate civil penalty in this context, courts frequently consider the factors set forth
in SEC v. Murphy, 626 F.2d 633, 655 (9th Circuit 1980).  These factors include:  (1) the degree of
defendant’s scienter; (2) the isolated or recurrent nature of the infraction; (3) the likelihood that
future violations might occur because of defendant’s professional occupation; (4) the defendant’s
recognition of the wrongful nature of his conduct; (5) the sincerity of defendant’s assurances
against future violations; (6) the defendant’s cooperation with authorities; (7) whether the
defendant’s conduct created substantial losses or the risk of losses to others; and (8) the
defendant’s ability to pay.  Id.
The SEC requests a statutory maximum third-tier statutory penalty of $1,116,140 from
each of Crowd Machine, Inc. and Metavine, Inc.  The SEC notes that it makes this request in lieu
of seeking Defendants’ gross pecuniary gains of approximately $33.5 million.  Dkt. No. 55
(“Reply”) at 13.  It also notes that it declined to seek separate statutory penalties for each of
Defendants’ wrongful acts, which include more than thirty separate wire transfers to South African
gold-mining companies and multiple distinct misrepresentations to numerous investors in various
offering documents.  Id.  The SEC maintains that this narrower set of penalties is appropriate
because Defendants raised more than $33 million through a fraudulent and unregistered initial
coin offering; knowingly misrepresented the status of the technology related to the Crowd
Computer to derive these funds; and diverted investor funds to activities unrelated to those they
marketed to investors.  Mot. 24.
Defendants request at most a first-tier penalty of not more than $50,000, pointing to a
number of extenuating factors.  Opp.  22–25.  First, Defendants argue that they made a good faith
effort to understand the regulatory landscape in an emerging market.  Id. 23.  Second, they contend
that the scope of the fraud surrounding the token sale was not a years’ long, carefully orchestrated
scheme fueled by repeated behavior.  Id.  Third, Defendants point out that they cooperated with
the investigation and that they entered into a consent order when they learned the outcome of the
investigation.  Id. 23–24.  Fourth, Defendants note that this is a first-time offense and that
Defendants have no plans to participate in future ICOs.  Id.  Finally, Defendants contend that they
cannot afford to pay a disgorgement award, let alone anything close to the third-tier penalty

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amount the SEC seeks.  Id. 25.
The Court finds that a third-tier penalty is appropriate because Defendants admit to
fraudulent behavior and a deliberate (or at least reckless) disregard for regulatory requirements
that resulted in substantial losses to investors.  The Court applies the Murphy test to determine the
appropriate dollar amount of the third-tier penalty.
The first, second, and seventh Murphy factors favor a sizable third-tier penalty.  As to the
first factor, scienter, Defendants admit to knowingly misrepresenting key facts related to the sale.
The unregistered token sale presents a more difficult scienter question: the SEC issued guidance
urging cryptocurrency sellers to ensure compliance with securities laws, see Reply 12, but this
guidance did not definitively establish which digital assets qualified as securities.  Although
Defendants were on notice of the potential consequences of an unregistered sale, the Court notes
that Defendants conducted the sale after consulting with counsel, who advised that CMCTs likely
were not subject to registration as securities, see Opp. 4.  These facts somewhat mitigate wrongful
intent.  As to the second factor, the recurrent nature of the infraction, Defendants’ wrongdoing was
cabined to the activity surrounding the token offering, but Defendants nevertheless admit to many
separate fraudulent acts over an extended period of time.  And as to the seventh factor, Defendants
caused investors to lose substantial sums—nearly $33.5 million.
The remaining Murphy factors favor a lesser penalty.  As to the third and fifth factors, it
does not appear that Defendants are in a position to commit further securities violations.  As to the
fourth and sixth factors, Defendants recognized their wrongdoing and cooperated with the
investigation.  As to the eighth factor, Defendants credibly contend that they are unable to pay any
penalty whatsoever.
In its discretion, the Court acknowledges the extenuating factors raised and recognizes that
Defendants’ scheme as stipulated was not so pernicious and wide-ranging to warrant a maximum
statutory penalty.  The Court finds that these violations nevertheless warrant a $600,000 penalty,
which appropriately exceeds the statutory maximum for a second-tier penalty, for each of Crowd
Machine, Inc. and Metavine, Inc.

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IV. CONCLUSION
Accordingly, the Court GRANTS the Motion IN PART and DENIES the Motion IN
PART.  The Court holds that Defendants are liable to disgorge, jointly and severally,
$19,676,401.27 plus pre-judgment interest.  This award of disgorgement is calculated by
subtracting from the $33,499,206.21 that Defendants raised from investors (1) $13,748,904.94 in
expenses that the SEC does not specifically contest and (2) $73,900.00 in legal fees related to
advice for the token sale.  The Court also finds that Relief Defendant Metavine Pvt. Ltd., as jointly
and severally liable for the purposes of disgorgement, must disgorge $5,000,000.00 plus pre-
judgment interest.  The Court ORDERS the SEC to provide figures for pre-judgment interest
through the date of the Judgment on the above amount, as well as payment instructions, within 7
days to allow for entry of a final disgorgement order consistent with this Order.
Defendant Crowd Machine, Inc. and Defendant Metavine, Inc. are each ORDERED to pay
$600,000.00 to the SEC within 14 days after entry of this Order.
It is further ORDERED that the Commission may propose a plan to distribute the funds
paid pursuant to this Order, subject to the Court’s approval.  Such a plan may provide that the
funds shall be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-
Oxley Act of 2002.  The Court shall retain jurisdiction over the administration of any distribution
of the funds.
IT IS SO ORDERED.
Dated:  December 5, 2023
__________________________  ___________
HAYWOOD S. GILLIAM, JR.
United States District Judge

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UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF CALIFORNIA 

 

U.S. SECURITIES AND EXCHANGE 
COMMISSION,  

Plaintiff, 

v. 

 
CROWD MACHINE, INC., METAVINE, 
INC., and CRAIG DEREL SPROULE 

Defendants,  

and  

METAVINE PTY. LTD.,   

                        Relief Defendant.  
 

Case No.  4:22-cv-0076-HSG    
 
ORDER GRANTING IN PART AND 
DENYING IN PART MOTION FOR 
MONETARY RELIEF 

Re: Dkt. No. 40 

 

 

Pending before the Court is Plaintiff U.S. Securities and Exchange Commission’s Motion 

for disgorgement against Defendants Crowd Machine, Inc., Metavine, Inc., and Craig Sproule and 

Relief Defendant Metavine Pty. Ltd., and civil penalties against Defendants Crowd Machine, Inc. 

and Metavine, Inc.  Dkt. No. 40 (“Mot.”).  Defendants oppose the Motion.  Dkt. No. 52 (“Opp.”).  

The Court orders Defendants Crowd Machine, Inc., Metavine, Inc., and Craig Sproule and Relief 

Defendant Metavine Pty. Ltd. to pay the amounts detailed in this Order.   

I. BACKGROUND1  

In 2013, Craig Sproule founded Metavine, Inc., a technology company that developed and 

distributed “zero-code” software intended to enable customers without computer coding 

 
1 Defendants and Relief Defendant executed consents in which they each agreed that “the 
allegations of the Complaint shall be accepted as and deemed true by the Court,” for purposes of 
the Commission’s motion for disgorgement and/or penalties.  See Dkt No. 2 at 2; Dkt. No. 3 at 2.  

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experience to assemble custom computer applications using preexisting components.  Dkt. No. 1 

(“Compl.”) ¶ 25.  In 2018, Sproule established two new companies, Crowd Machine SEZC and 

Crowd Machine, Inc., with plans to build a “Crowd Computer” that would host Metavine’s zero-

code software and promote the development and exchange of software components using 

blockchain technology.  Id. ¶¶ 26–27.  Between January and April 2018, defendant Craig Sproule, 

Metavine, Inc., Crowd Machine, Inc. and Crowd Machine SEZC raised more than $33 million 

from hundreds of investors in the United States and abroad through a fraudulent and unregistered 

“initial coin offering” or “ICO” of digital asset securities, which they called “Crowd Machine 

Compute Tokens” or “CMCTs.”  Id. ¶¶ 2.  Defendants represented that ICO proceeds would be 

used to fund the development of a “global decentralized” peer-to-peer network, or “Crowd 

Computer.”  Defendants claimed this Crowd Computer would run their existing “no-code” 

application-development software from a network of users’ own devices instead of traditional 

centralized servers.  Id.  Defendants further represented that users could compensate device 

owners with CMCTs for the use of their surplus processing power.  Id.  Users also could pay 

software developers in CMCTs for making available source code that users could compile into 

custom applications “with unparalleled speed.”  Id.   

In November 2017, Defendants began marketing the initial coin offering.  Id. ¶ 27.  

Although Metavine’s zero-code software was operational and in use at the time of the ICO, the 

“Crowd Computer” did not exist and, therefore, CMCTs had no use at the time they were offered.  

Id.  In marketing this ICO, Defendants enticed investors with misleading statements.  Id. ¶ 63.  For 

example, in offering materials and on social media, Defendants claimed that its technology had 

been “battle tested” by “Fortune 500 companies” including GE and Anthem.  Id.  In a newsletter 

sent to prospective investors, Defendants wrote that “ICO’s [sic] for companies who don’t have a 

product yet are all about financial speculation – investing in an idea.”  Id.  “In contrast,” 

Defendants claimed to “have a live, commercial product that we really want our loyal users and 

community members to be able to invest in.”  Id.  In reality, none of the technology related to the 

Crowd Computer was functional, and the only technology that had been “battle tested” by any 

third parties was Metavine, Inc.’s existing application development software.  Id. ¶ 64.  The 

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complaint alleges that many investors who purchased CMCTs in the ICO did so “primarily 

because they hoped that the tokens would appreciate” and they “felt confident that they would 

profit both because of CMG’s representations regarding the state of its existing technology in use 

by Fortune 500 companies, as well as promises that experienced management would undertake to 

build the Crowd Computer community, increase demand for CMCTs, list CMCTs on secondary 

markets, and work towards realizing investors’ expectation of a ‘significant ROI.’”  Id. ¶ 65.  

The CMCT ICO was held in two phases.  Id. ¶ 41.  Between January 28 and April 20, 

2018, in what Defendants called a “private presale” (the “First Phase”), Defendants would offer 

CMCTs through “Simple Agreements for Future Tokens” (“SAFTs”).  Id.  These SAFTs, which 

Defendants have acknowledged were investment contracts, entitled investors to an unspecified 

allotment of CMCTs in exchange for a payment of Ether, Bitcoin, or U.S. dollars.  Id.  

Defendants claimed publicly that the First Phase of the ICO was limited to foreign 

investors and accredited investors in the United States with a required minimum investment of 

$100,000.  Id. ¶ 46.  According to the complaint, neither of these claims were true.  Id.  To secure 

the bonuses offered to First Phase investors, groups of investors—known in the digital asset 

community as “ICO Pools”—pooled resources to meet the $100,000 threshold and transferred 

them to accredited investors who then purchased CMCTs on their behalf.  Id. ¶ 47.  These ICO 

pools included U.S. investors who were not required to and did not verify their identities or 

establish their accredited status before investing in the ICO.  Id. ¶ 48.  Defendants were aware that 

investors representing ICO Pools purchased CMCTs in the First Phase of the ICO on behalf of 

their underlying investors, but did not request documentation to ascertain the underlying investors’ 

identities or their accredited status.  Id. ¶ 49.  In some instances, Defendants’ employees and 

agents knowingly solicited and facilitated investments by these ICO Pools.  Id.  

In the Second Phase of the ICO, Defendants did not purport to limit participation to 

accredited investors, and they made no public statements even suggesting that U.S. investors were 

to be excluded.  Id. ¶ 51.  In fact, Defendants repeatedly wrote in their Telegram channel that U.S. 

investors could participate in this phase of the ICO regardless of accredited status.  Id. ¶¶ 52–54.   

In total, Defendants claimed to have raised the equivalent of USD $40.7 million through 

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the sale of CMCTs to over 900 investors.  Id. ¶ 52.  Based on the market values of ETH and BTC 

at the time of the ICO, Defendants actually collected the equivalent of only USD $33.5 million 

after accounting for $7.25 million in offering proceeds that Defendants failed to collect.  Id. ¶ 53.  

Contrary to Defendants’ representations, they allocated a significant portion of the ICO 

proceeds to endeavors that were entirely unrelated to the development and marketing of the Crowd 

Computer technology, the creation of an ecosystem in which CMCTs could be used, or efforts to 

increase demand for CMCTs to promote trading on secondary markets.  Id. ¶ 78.  For example, 

Defendants transferred at least $5.8 million to foreign gold mining companies, predominantly in 

South Africa.  Id. ¶ 79.  At no point had Defendants disclosed that it intended to pay ICO proceeds 

to foreign gold mining entities for any reason, and this information would have been material to 

ICO investors’ decisions about whether to purchase CMCTs.  Id. ¶ 82. 

II. PROCEDURAL HISTORY  

The SEC filed its complaint in this matter on January 6, 2022.  Dkt. No. 1.  On January 11, 

2022, with Defendants’ consent, the Court entered judgment against Defendants for violations of 

Section 10(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) (15 U.S.C. § 78j(b)), 

and Rule 10b-5 thereunder (177 C.F.R. § 240.10b-5); Section 17(a) of the Securities Act of 1933 

(“Securities Act”) (15 U.S.C. § 77q(a)); and Section 5 of the Securities Act (15 U.S.C. § 77e).  See 

Dkt No. 11.  In the Judgment, the Court ordered Defendants and Relief Defendant to pay, on a 

joint and several basis, disgorgement of ill-gotten gains and prejudgment interest thereon.   

As part of the Judgment, the Court ordered that “in connection with the Commission’s 

motion for disgorgement and/or civil penalties . . . solely for the purposes of such motion, the 

allegations of the Complaint shall be accepted as and deemed true by the Court.”  Id. at 5.  The 

Court has already ordered that “in connection with the Commission’s motion for disgorgement 

and/or civil penalties, and at any hearing held on such a motion: (a) Defendants and Relief 

Defendant will be precluded from arguing that Defendants did not violate the federal securities 

laws as alleged in the Complaint.”  Id. at 4–5. 

III. ANALYSIS  

In its Motion, the SEC seeks to disgorge the full amount Defendants raised in the token 

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sale, or in the alternative, the full amount raised minus certain operational expenses.  The SEC 

also seeks a maximum statutory penalty from each of Crowd Machine, Inc. and Metavine, Inc.   

The SEC relies upon the Declaration of Avron M. Elbaum, an Assistant Chief Accountant 

in the Division of Enforcement and a Certified Public Accountant.  See Dkt. No. 41-6.  The 

underlying evidence upon which his summaries are based are the Defendants’ own financial 

records and the Updated Token Sale Profit and Loss Spreadsheet prepared by Defendants for 

purposes of this litigation.  See Mot. 10.  Mr. Elbaum grouped the Defendants’ claimed expenses 

into different categories, which the Court will adopt for ease of analysis.  Id.  Defendants claim to 

have incurred $37,168,882.74 in legitimate business expenses associated with the Crowd Machine 

project through April 30, 2021.  See Mot. 12.  

A.  Disgorgement   

I. Legal Standard   

 The SEC bears the “burden of persuasion that its disgorgement figure reasonably 

approximates the amount of unjust enrichment.”  SEC v. Platforms Wireless, 617 F.3d 1072, 1096 

(9th Cir. 2010) (citing First Pac. Bancorp, 142 F.3d at 1191).  Once the SEC has met its burden, 

the burden shifts to the defendant to show that the figure is not a reasonable approximation.  Id.  

Disgorgement typically includes prejudgment interest to ensure that wrongdoers do not profit from 

their illegal conduct.  See SEC v. Cross Fin. Servs., Inc., 908 F. Supp. 718, 734 (C.D. Cal. 1995).  

The Supreme Court’s recent decision in Liu v. SEC, 140 S. Ct. 1936, 1945, 207 L. Ed. 2d 

401 (2020), departed from the Ninth Circuit’s prior disgorgement precedent in recognizing that 

such awards are limited to the net profits from a defendant’s wrongdoing, defined as “the gain 

made upon any business or investment, when both the receipts and payments are taken into the 

account.”  In the Court’s view, a rule to the contrary that “make[s] no allowance for the cost and 

expense of conducting [a] business” would be “inconsistent with the ordinary principles and 

practice of courts of chancery.”  Id. (quoting Tilghman v. Proctor, 125 U.S. 136, 145–146 (1888)).  

“[W]hen the entire profit of a business or undertaking results from the wrongful activity,” then 

“the defendant will not be allowed to diminish the show of profits by putting in unconscionable 

claims for personal services or other inequitable deductions.”  Liu, 140 S. Ct. at 1945.  That 

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exception, in turn, requires the court to ascertain whether expenses are legitimate or whether they 

are merely wrongful gains “under another name,” with the aim of preventing defendants from 

profiting from their own wrongdoing.  Id.  The Court did not provide guidance as to when a 

defendant’s expenses “might be considered wholly fraudulent,” but noted that  “some expenses 

from petitioners’ scheme went toward lease payments and cancer-treatment equipment” that 

“arguably have value independent of fueling a fraudulent scheme.”  Id.  On remand, the district 

court observed that the scheme appeared entirely fraudulent, but, acting “out of an abundance of 

caution,” found administrative fees and costs for the construction of a cancer treatment center 

consistent with their advertised business model to be deductible.  SEC v. Liu, No. 

SACV1600974CJCAGRX, 2021 WL 2374248, at *6 (C.D. Cal. June 7, 2021), aff’d sub nom.  

SEC v. Liu, No. 21-56090, 2022 WL 3645063 (9th Cir. Aug. 24, 2022), cert. denied sub nom. Liu 

v. SEC, 143 S. Ct. 2495, 216 L. Ed. 2d 454 (2023).   

The Ninth Circuit has applied this new framework in SEC v. Russell, No. 22-55093, 2023 

WL 4946603 (9th Cir. Aug. 3, 2023), and SEC v. Yang, No. 21-55437, 2022 WL 3278995 (9th 

Cir. Aug. 11, 2022).2  In Russell, the defendants derived their gross proceeds by “deceiv[ing] 

[investors], often in elaborate fashion, into believing that they were buying shares in a fast-

growing cannabis business” that never got off the ground and was likely a sham.  2023 WL 

4946603 at *2 (9th Cir. Aug. 3, 2023).  The Ninth Circuit noted that because Russell’s “entire 

profit resulted from” securities fraud, the district court was not required to deduct any of Russell’s 

business expenses from his improperly derived investor funds.  Id.  The Ninth Circuit nevertheless 

affirmed the district court’s decision to deduct what it found to be legitimate business expenses 

and only disgorge the funds spent on a yacht purchase, finding this figure to serve as a “reasonable 

approximation” of the defendant’s ill-gotten gains.  Id.  Similarly, in Yang, the Ninth Circuit 

affirmed a deduction of $1,000,000 used to pay back construction-related debt as a legitimate 

 
2 As unpublished Ninth Circuit decisions, Russell and Yang are not precedent, but may be 

considered for their persuasive value.  See Fed. R. App. P. 32.1; CTA9 Rule 36-3. 

 

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expense, while disgorging $1,414,250 of investors’ funds that Defendant used to pay back 

personal loans.  2022 WL 3278995 (9th Cir. Aug. 11, 2022) 

II. Analysis      

Taking all allegations in the complaint as true, Defendants received $33,499,206.21 from 

the ICO token sale.  The SEC deems this entire token sale fraudulent, noting that Defendants 

misrepresented the state of the technology and failed to notify investors about its eventual use of 

funds, which included a $5.8 million loan to a gold mining operation.  Compl. ¶¶ 1–9.  The SEC 

argues that because all of Defendants’ gross revenue derived from this fraudulent sale, no 

deductions are warranted.  Alternatively, recognizing the Court’s equitable discretion, the SEC 

points to $13,748,904.94 in expenses that are “not clearly connected to the fraudulent scheme” 

that the Court potentially could deduct.  Mot. 20.  The SEC rejects Defendants’ claim that 

marketing, consulting, and legal expenses related in any way to the sale should be deducted.   

Following the principles established in in Liu, Russell, and Yang, the Court notes that it 

appears undisputed that Defendants’ business was not a complete sham.  Although Defendants 

derived nearly $33.5 million from an unregistered token sale infected by fraud, the business 

otherwise incurred significant operating expenses that did not “fuel” or “further” the token sale.  

Russell, 2023 WL 4946603, at *1 (quoting Liu, 140 S. Ct. at 1950).   

At the outset, Defendants contend that disgorgement is not appropriate because they did 

not profit from the scheme.  The Ninth Circuit has rejected this argument.  See SEC v. Liu, No. 21-

56090, 2022 WL 3645063, at *2 (9th Cir. Aug. 24, 2022), cert. denied sub nom. Liu v. SEC, 143 

S. Ct. 2495, 216 L. Ed. 2d 454 (2023) (“Appellants make this very argument: No net profit, thus 

no disgorgement.  Clearly, this outcome would not produce an equitable remedy for Appellants’ 

fraud.”).  But deductions of legitimate operating expenses are appropriate in this case.  As 

explained below, the Court deducts (1) certain expenses the SEC itself does not specifically deem  

to be illegitimate; and (2) certain legal fees.3   

 
3 Defendants concede that the $5.8 million sent to a gold mining entity is not a legitimate expense 
to deduct in this context.  See Opp. 20. 

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1. Expenses Not Specifically Contested by the SEC  

The SEC maintains that if this Court decides to make certain equitable deductions to the 

disgorgement amount, $13,748,904.94 in expenses can be characterized as “legitimate” and “not 

clearly connected to the fraudulent scheme.”  Mot. at 20.  The Court therefore deducts this 

amount.    

2. Marketing and Consulting Expenses 

Defendants incurred various expenses in marketing the token sale and retaining consultants 

to advise on the sale.  The SEC argues that costs incurred to initiate the unlawful and unregistered 

sale of securities, such as marketing and consulting costs to further the sale, do not have any value 

“independent of fueling a fraudulent scheme.”  Liu, 140 S. Ct. at 1950; Russell, 2023 WL 4946603 

at *1 (expenses not deductible if “they were incurred for the purposes of furthering an entirely 

fraudulent scheme”) (quoting Liu, 140 S. Ct. at 1950).  The Court agrees.  These expenses 

furthered an unregistered sale of securities that Defendants knew at the time to be subject to 

fraudulent misrepresentations.  See Compl. ¶¶ 45–53, 63–64, 78, 79, 82; see also SEC v. Fisher, 

No. 21-60624-CIV, 2022 WL 13650848, at *4 (S.D. Fla. Oct. 21, 2022) (“Any funds spent in 

furtherance of drawing in more victims to [the] fraud are not, by any stretch of the imagination, 

legitimate business expenses.”); SEC v. Navellier & Assocs., Inc., No. 17-CV-11633-DJC, 2021 

WL 5072975, at *7 (D. Mass. Sept. 21, 2021) (“Defendants’ marketing expenses can also be seen 

as the reinvestment of profits in expanding the fraud, rather than as an actual expense of the 

business.”), SEC v. Owings Grp., LLC, No. CV RDB-18-2046, 2021 WL 1909606, at *4 (D. Md. 

May 12, 2021) (“These expenses are not legitimate expenses to be deducted because they were 

used to solicit investors into the fraudulent scheme”), aff’d sub nom. SEC v. Johnson, 43 F.4th 382 

(4th Cir. 2022).  Accordingly, the Court will not deduct line items identified as “ICO marketing,” 

“Token Sale Advertising,” “Token Sale Public Relations,” “Token Sale Trade Shows,” “Token 

Sale Preparation Costs,” and “Token Sale Consultant Costs.”  

3. Token Minting Expenses  

Defendants claim that expenses related to minting tokens for the sale should be deducted 

as legitimate, pointing to case law deducting “transaction costs” such as brokerage fees incurred in 

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processing fraudulent transactions.  Opp. 18 (citing SEC v. Bronson, 602 F. Supp. 3d 599, 617–18 

(S.D.N.Y. 2022), aff’d sub nom. SEC v. Bronson, No. 22-1045-CV, 2022 WL 5237474 (2d Cir. 

Oct. 6, 2022), cert. denied sub nom. Bronson v. SEC, 143 S. Ct. 2643 (2023).  But unlike 

brokerage expenses, the creation of these tokens was at the heart of the violations at issue: 

Defendants minted the tokens to sell in an unregistered offering that was itself infected by fraud.  

Costs to mint these tokens therefore should not be deducted.  

4. Legal Fees  

Defendants also argue that four categories of legal fees should be deducted:  (1) $520,066 

spent litigating a token purchaser’s claim against them; (2) $455,162 spent defending the SEC 

investigation; (3) $71,150 spent in “unspecified” legal expenses; and (4) $34,909 in legal fees 

attributed to the token sales.  Opp. 18.  The SEC contends that these fees conferred no value 

independent of the fraudulent scheme.  Mot. 18.  

As to the first two categories, the Court agrees with the SEC that fees related to defending 

against a private arbitration brought by an investor and this enforcement action—in other words, 

defending the fraud itself after the fact—would be inequitable to deduct.  See SEC v. Navellier & 

Assocs., Inc., No. 17-CV-11633-DJC, 2021 WL 5072975, at *7 (D. Mass. Sept. 21, 2021) (“As 

these legal expenses are unrelated to the [legitimate activities conducted on behalf of investors] 

they should not be deducted.”).   

As to third category of $71,150 of “unspecified” expenses, Defendants argue that the 

Memo/Description included with the Sale Profit and Loss Spreadsheet entries demonstrates that 

all but $2,750 of the $71,150 was paid to a law firm that counseled Defendants at the time of the 

token sale.  Opp. 18.  According to Defendants, this firm provided outside general counsel advice, 

which included advice on Form D filing as well as advice regarding whether the CMCTs were 

securities subject to SEC regulation.  Id.  The Court finds this expense to be legitimate.  Holding 

otherwise would disincentivize good faith practices in seeking legal advice.  Moreover, the Court 

notes that the offering materials explicitly earmarked a portion of the token sale receipts for legal 

expenses.  Opp. 19.  Investors understood that part of their investment would be spent on legal 

fees.  See Liu, 2021 WL 2374248, at *6 (permitting the deduction of administrative fees, including 

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certain legal fees, because they were referenced in the private offering memorandum).  The same 

holds true for the fourth category of $34,909 in legal expenses paid for legal advice related to the 

token sales.  Opp. 19.  For the $2,750 in fees not accounted for, the Court again notes that 

investors understood that their investment would defray certain legal fees.  Id.  In its discretion, 

the Court thus deducts this $2,750 from the amount subject to disgorgement.  

5. Cryptocurrency Depreciation 

Defendants received nearly $33.5 million in cryptocurrency from the ICO, but claim that 

the cryptocurrency depreciated in value by the time Defendants liquidated the assets.  Opp.  13.  

Citing GAAP accounting principles, Defendants claim this depreciation should count as a 

deductible business expense.  Id.  The SEC responds that this depreciation is not a business 

expense at all.  Mot. 14.  The Court agrees with the SEC that such a loss does not amount to an 

expense.  As noted, the Court could disgorge the full amount Defendants raised in the token sale 

because it was derived from fraud.  Exercising caution based on Liu, the Court deducts expenses 

incurred by the business that did not further the fraudulent nature of the token sale.  But treating 

depreciation of an asset class as a legitimate business is a step too far—let alone depreciation of 

assets taken by fraud.  Depreciation of a volatile asset class does not fall within the same category 

as the reasonable and necessary expenses incurred in running a business as outlined in Liu and 

cases following it.  And even if the Court characterized such a loss as covered by this “expense” 

category, depreciation more closely resembles a dissipation of assets due to improper management 

rather than an expense incurred in the regular course of business.  Prior to Liu, courts allocated the 

risk of holding a volatile asset to the fraudster rather than to innocent investors by determining the 

value of the asset as of the day Defendants improperly acquired it.  See, e.g., SEC v. JT 

Wallenbrock & Assocs., 440 F.3d 1109, 1115-16 (9th Cir. 2006) (court may order disgorgement 

even if the violator “is no longer in possession of such funds due to subsequent, unsuccessful 

investments or other forms of discretionary spending”); SEC v. Aletheia Rsch. & Mgmt. Inc., No. 

CV1210692JFWRZX, 2015 WL 13404306, at *3 (C.D. Cal. May 11, 2015), aff’d sub nom. SEC v. 

Aletheia Rsch. Mgmt., 689 F. App'x 512 (9th Cir. 2017) (“mark-to-market embedded profit or loss 

at the end of the day of allocation is precisely the gain that Eichler obtained for himself (or family 

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members) as a result of his cherry-picking.”); In re L.C. Wegard & Co., SEC Release No. 34–

40046, 67 S.E.C. 552, 1998 WL 275929 at *6 (May 29, 1998), aff'd, 189 F.3d 461 (2nd Cir. 1999) 

(“Disgorgement is an equitable remedy.  A manipulator is not relieved of its disgorgement 

obligation simply because it chooses, for whatever reason, to retain manipulated securities until 

their subsequent drop in price dissipates some or all of the manipulator's ill-gotten gains.”).4  

Stretching “legitimate expense” to include depreciation of an asset class taken by fraud necessarily 

would turn this longstanding principle on its head.  As such, the Court does not deduct this 

purported expense.  

6. Accrued Expenses  

Defendants claim that certain “accrued” expenses should also be deducted, arguing that 

that if they had not incurred a net loss, they would have had the funds to pay these salaries.  Opp. 

20.  According to Defendants, an accrued expense is a real expense that affects Defendants’ 

“actual profits” no differently than an expense that has already been paid.  The Court disagrees.  

Disgorgement is properly based on Defendants’ “actual profits.”  See Platforms Wireless Int’l 

Corp., 617 F.3d at 1096 (“Once the SEC establishes a reasonable approximation of defendants’ 

actual profits” the burden shifts to the defendant to show it is not a reasonable approximation).  It 

does not appear that Defendants actually paid these expenses, so the $732,354.54 in accounting 

accruals cannot be properly deducted.  

7. Disgorgement for Relief Defendant Metavine Pty. Ltd.   

During and after the ICO, Relief Defendant Metavine Pty. Ltd. received at least thirty 

separate funds transfers from Metavine, Inc., Crowd Machine, Inc., and/or Crowd Machine SEZC, 

totaling at least $5 million.  Compl. ¶ 89.  The SEC seeks disgorgement on a joint and several 

basis from the Relief Defendant in the amount of investor money that it improperly received.  

Mot. 21.  A court may order equitable relief against “a person who is not accused of wrongdoing 

 
4 See also SEC v. Shapiro, 494 F.2d 1301, 1309 (2nd Cir. 1974) (“To require disgorgement only of 
actual profits in cases where the price of the stock subsequently fell would create a heads-I-win, 
tails-you-lose opportunity for the violator: he could keep subsequent profits but not suffer 
subsequent losses.”); SEC v. Mannion, 28 F. Supp. 3d 1304, 1308–09 (N.D. Ga. 2014) (“[E]very 
circuit that has addressed the issue has held that disgorgement is properly based on a defendant's 
unrealized ‘paper’ profits at the time of the illegal transaction.”).   

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in a securities enforcement action where that person: (1) has received ill-gotten funds; and (2) does 

not have a legitimate claim to those funds.”  SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir.1998); 

SEC v. Colello, 139 F.3d 674, 677 (9th Cir. 1998); SEC v. World Capital Market, Inc., 864 F.3d 

996, 1003-04 (9th Cir. 2017).   

The SEC argues that these funds necessarily included ill-gotten gains from the fraudulent 

and unregistered ICO, as the total amount received greatly exceeded what could reasonably be 

attributed to Metavine Pty. Ltd.’s earned revenue.  Mot. 22.  Defendants provide no rebuttal to this 

argument.  Taking the allegations in the complaint as true, the Court infers that Relief Defendant 

received ill-gotten funds.  See Compl. ¶ 89.  The SEC is also correct that as between the investors 

and the Relief Defendant, the Relief Defendant has no legitimate claim to any of the investor 

funds.  The holding in Liu that the SEC may not seek disgorgement “in excess of a defendant’s net 

profits from wrongdoing,” Liu, 140 S. Ct. at 1946, “simply has no bearing on the propriety of the 

judgment entered against [a relief defendant], which was not a defendant, was not accused of 

wrongdoing, and which was not required to disgorge ‘profits,’ gross or net.”  SEC v. San 

Francisco Reg’l Ctr. LLC, No. 17-CV-00223-RS, 2020 WL 4569844, at *2 (N.D. Cal. Aug. 7, 

2020), aff’d sub nom. SEC v. Berkeley Healthcare Dynamics, LLC, No. 20-16754, 2022 WL 

42807 (9th Cir. Jan. 5, 2022).  Accordingly, the Court holds that Relief Defendant Metavine Pvt. 

Ltd. is liable to disgorge $5,000,000 in ill-gotten funds.  

B. Civil Penalties 

The Court’s judgment against Defendants Crowd Machine, Inc. and Metavine, Inc. 

provides that they shall pay a civil penalty.  See Dkt. No. 11 at 4.  Section 77t(d) provides for three 

tiers of penalties in this context.  Tier I penalties are available for all violations, and the amount of 

the penalty “shall be determined by the Court in light of the facts and circumstances.” 15 U.S.C. § 

77t(d)(2).  Tier II penalties require fraud, deceit, manipulation, or a deliberate or reckless disregard 

of regulatory requirements, and Tier III penalties require Tier II elements, plus substantial losses 

or significant risk of substantial losses to other persons.  Id.  The statutory tiers set forth the 

maximum penalties to be imposed, but the amount is left to the discretion of the court based on the 

particular facts of the case.  SEC v. Husain, 70 F.4th 1173, 1184 (9th Cir. 2023).  In deciding what 

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is an appropriate civil penalty in this context, courts frequently consider the factors set forth 

in SEC v. Murphy, 626 F.2d 633, 655 (9th Circuit 1980).  These factors include:  (1) the degree of 

defendant’s scienter; (2) the isolated or recurrent nature of the infraction; (3) the likelihood that 

future violations might occur because of defendant’s professional occupation; (4) the defendant’s 

recognition of the wrongful nature of his conduct; (5) the sincerity of defendant’s assurances 

against future violations; (6) the defendant’s cooperation with authorities; (7) whether the 

defendant’s conduct created substantial losses or the risk of losses to others; and (8) the 

defendant’s ability to pay.  Id.   

The SEC requests a statutory maximum third-tier statutory penalty of $1,116,140 from 

each of Crowd Machine, Inc. and Metavine, Inc.  The SEC notes that it makes this request in lieu 

of seeking Defendants’ gross pecuniary gains of approximately $33.5 million.  Dkt. No. 55 

(“Reply”) at 13.  It also notes that it declined to seek separate statutory penalties for each of 

Defendants’ wrongful acts, which include more than thirty separate wire transfers to South African 

gold-mining companies and multiple distinct misrepresentations to numerous investors in various 

offering documents.  Id.  The SEC maintains that this narrower set of penalties is appropriate 

because Defendants raised more than $33 million through a fraudulent and unregistered initial 

coin offering; knowingly misrepresented the status of the technology related to the Crowd 

Computer to derive these funds; and diverted investor funds to activities unrelated to those they 

marketed to investors.  Mot. 24. 

Defendants request at most a first-tier penalty of not more than $50,000, pointing to a 

number of extenuating factors.  Opp.  22–25.  First, Defendants argue that they made a good faith 

effort to understand the regulatory landscape in an emerging market.  Id. 23.  Second, they contend 

that the scope of the fraud surrounding the token sale was not a years’ long, carefully orchestrated 

scheme fueled by repeated behavior.  Id.  Third, Defendants point out that they cooperated with 

the investigation and that they entered into a consent order when they learned the outcome of the 

investigation.  Id. 23–24.  Fourth, Defendants note that this is a first-time offense and that 

Defendants have no plans to participate in future ICOs.  Id.  Finally, Defendants contend that they 

cannot afford to pay a disgorgement award, let alone anything close to the third-tier penalty 

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amount the SEC seeks.  Id. 25. 

The Court finds that a third-tier penalty is appropriate because Defendants admit to 

fraudulent behavior and a deliberate (or at least reckless) disregard for regulatory requirements 

that resulted in substantial losses to investors.  The Court applies the Murphy test to determine the 

appropriate dollar amount of the third-tier penalty.  

The first, second, and seventh Murphy factors favor a sizable third-tier penalty.  As to the 

first factor, scienter, Defendants admit to knowingly misrepresenting key facts related to the sale.  

The unregistered token sale presents a more difficult scienter question: the SEC issued guidance 

urging cryptocurrency sellers to ensure compliance with securities laws, see Reply 12, but this 

guidance did not definitively establish which digital assets qualified as securities.  Although 

Defendants were on notice of the potential consequences of an unregistered sale, the Court notes 

that Defendants conducted the sale after consulting with counsel, who advised that CMCTs likely 

were not subject to registration as securities, see Opp. 4.  These facts somewhat mitigate wrongful 

intent.  As to the second factor, the recurrent nature of the infraction, Defendants’ wrongdoing was 

cabined to the activity surrounding the token offering, but Defendants nevertheless admit to many 

separate fraudulent acts over an extended period of time.  And as to the seventh factor, Defendants 

caused investors to lose substantial sums—nearly $33.5 million.   

The remaining Murphy factors favor a lesser penalty.  As to the third and fifth factors, it 

does not appear that Defendants are in a position to commit further securities violations.  As to the 

fourth and sixth factors, Defendants recognized their wrongdoing and cooperated with the 

investigation.  As to the eighth factor, Defendants credibly contend that they are unable to pay any 

penalty whatsoever.   

In its discretion, the Court acknowledges the extenuating factors raised and recognizes that 

Defendants’ scheme as stipulated was not so pernicious and wide-ranging to warrant a maximum 

statutory penalty.  The Court finds that these violations nevertheless warrant a $600,000 penalty, 

which appropriately exceeds the statutory maximum for a second-tier penalty, for each of Crowd 

Machine, Inc. and Metavine, Inc. 

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IV. CONCLUSION 

Accordingly, the Court GRANTS the Motion IN PART and DENIES the Motion IN 

PART.  The Court holds that Defendants are liable to disgorge, jointly and severally, 

$19,676,401.27 plus pre-judgment interest.  This award of disgorgement is calculated by 

subtracting from the $33,499,206.21 that Defendants raised from investors (1) $13,748,904.94 in 

expenses that the SEC does not specifically contest and (2) $73,900.00 in legal fees related to 

advice for the token sale.  The Court also finds that Relief Defendant Metavine Pvt. Ltd., as jointly 

and severally liable for the purposes of disgorgement, must disgorge $5,000,000.00 plus pre-

judgment interest.  The Court ORDERS the SEC to provide figures for pre-judgment interest 

through the date of the Judgment on the above amount, as well as payment instructions, within 7 

days to allow for entry of a final disgorgement order consistent with this Order. 

Defendant Crowd Machine, Inc. and Defendant Metavine, Inc. are each ORDERED to pay 

$600,000.00 to the SEC within 14 days after entry of this Order.  

It is further ORDERED that the Commission may propose a plan to distribute the funds 

paid pursuant to this Order, subject to the Court’s approval.  Such a plan may provide that the 

funds shall be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-

Oxley Act of 2002.  The Court shall retain jurisdiction over the administration of any distribution 

of the funds. 

IT IS SO ORDERED. 

Dated:  December 5, 2023 

__________________________ ___________ 

HAYWOOD S. GILLIAM, JR. 
United States District Judge 

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