Court rejects OSC’s crypto fraud allegations

A former broker accused of securities fraud and other offences in connection with a failed crypto startup and its initial coin offering, has been acquitted on all charges.

The Ontario Court of Justice found Stephan Katmarian, who was charged by the Ontario Securities Commission (OSC) with four securities law violations not guilty on all charges.

The charges — including fraud, misleading investors, unregistered trading and illegal distribution — stemmed from the failure of a startup, Peblik Inc., which sought to build a blockchain platform and create a crypto token backed by a stake in a copper mining venture. The company allegedly raised approximately $550,000 from investors in 2018 and 2019, but the venture ultimately failed.

According to the court’s decision, while Katmarian was the only one charged in connection with the company’s downfall, he was just one of several directors involved in the company. The defence pointed the finger at its former CEO, who was not charged in the case, as the reason for its failure.

Ultimately, the court found that the OSC failed to prove that any fraud took place. It found that the commission didn’t meet its burden in proving that investors were deceived in making their investments in Peblik.

“For most of the investors who did not deal directly with Stephan Katmarian, those representations could only have been through written materials or the website. But the investors did not rely upon those written materials or the website version at the time,” it said in its decision.

It also rejected allegations that there was evidence of “other fraudulent means” and concluded that “there was no fraud committed by Stephan Katmarian, either with respect to the first prong, or the second prong, as alleged by the commission.”

The court also found that the OSC failed to prove that Katmarian made misleading statements, and that while the planned tokens may have been considered securities, Katmarian didn’t trade or distribute them in violation of securities law.

“Stephan Katmarian did not sell any securities related to Peblik Inc. There was no profit produced from the trading. There is no evidence that anyone received any commissions from trading,” it said, adding that Katmarian was one of the directors involved in a multi-dimensional, startup project.

“The funds were raised from a relatively small number of investors over a period of a few months. The court agrees with the defence submission that this was a typical startup fundraising effort,” it said.

“In the end, based on all of the evidence in this trial and the findings of fact herein, Mr. Katmarian was not engaging in ‘trading,’ nor doing trading for a ‘business purpose,'” the court said, in finding him not guilty on that count.

Finally, it also rejected the allegation that Katamrian distributed securities without a prospectus.

“The commission put its theory of its case before the court in a very sloppy manner,” it said. “The court must rely on the theory of the case in its determination of whether there is proof of guilt based upon that theory.”

Ultimately, it concluded that all of the distributions he was involved with would have qualified for the private issuer exemption.

“The court will not deny Mr. Katmarian’s access to the private issuer exemption simply on the basis of an OSC policy that requires production of records and paperwork unable to be produced due to an uncharged party, the CEO of Peblik Inc., who did not retain or make available in the Peblik Inc. offices the paperwork following his departure,” it said.