The United States Securities and Exchange Commission (SEC) filed a lawsuit against Ian Balina for allegedly offering and selling securities without proper registration and disclosures, in violation of federal securities laws.

The United States Securities and Exchange Commission (SEC) accused Ian Balina, a self-described crypto asset investor, promoter, and influencer, of violating Sections 5(a), 5(c), and 17(b) of the Securities Act, 15 U.S.C. §§ 77e(a), 77e(c), 77q(b). According to the SEC, in May 2018, Balina entered into a $5 million investment contract with Sparkster Ltd. for its initial coin offering (ICO) of a crypto asset security called SPRK Tokens. Allegedly, Balina promoted the ICO on social media, receiving a 30 percent bonus in tokens. The SEC contends that Balina organized a Sparkster investment pool, allowing individual investors to participate by purchasing SPRK Tokens from his allocation. The distribution of SPRK Tokens through this pool, facilitated by a smart contract program, is alleged to constitute an unregistered offering of securities. Consequently, the SEC pursued legal action seeking injunctive relief, disgorgement, civil penalties, and any other necessary equitable remedies.

Balina denied controlling the investor pool. He moved to exclude the testimony of SEC’s designated expert witness, Shimon Kogan, on the basis that his principles and methodology were unreliable. Kogan, provided four opinions after analyzing documents from the SEC and blockchain data:

Balina controlled the smart contract used by the Sparkster investment pool;
Balina’s control of the Sparkster investment pool is consistent with documentary and blockchain evidence of his control;
Balina invested at least $104,883 in the Sparkster investment pool and received a bonus of 30% on his investment; and
Promoters played a significant role in ICOs between 2016 and 2018.

Finance Expert Witness

Dr. Shimon Kogan has a Ph.D. in finance and is an associate professor of finance at the Wharton School, the University of Pennsylvania, and the Arison School of Business, Reichman University. His primary research interest is in financial technology, and he has researched, written, and taught on crypto markets and blockchain technology.

Discussions by the Court

The SEC enlisted Shimon Kogan, an expert with a Ph.D. in finance and a focus on financial technology, to provide testimony on Ian Balina’s Ethereum blockchain transactions related to the Sparkster ICO and the broader context of ICOs, cryptocurrency, and blockchain technology. Kogan asserted four opinions, including Balina’s control of the Sparkster investment pool and his financial involvement. Balina sought to exclude these opinions under Rule 702.

Balina contested the admissibility of Kogan’s first opinion, asserting it was irrelevant, flawed, internally inconsistent, and lacked sufficient factual basis. The Court, however, deemed Kogan’s opinion that Balina controlled the Sparkster investment pool as relevant, especially in light of the SEC’s allegation that Balina’s actions with the pool constituted an unregistered offering of securities. The Court acknowledged that Kogan’s testimony could assist the trier of fact in evaluating the SEC’s claim of federal securities law violations related to the Sparkster investment pool.

Balina contested the reliability of Kogan’s testimony, asserting a lack of clear methodology and reliance on snippets from other documents. Balina argued that Kogan’s report, based on SEC-provided documents and publicly available blockchain data, lacked a clear set of “principles and methods”
of analysis. Kogan collaborated with Integra FEC, a forensic data analytics and litigation consulting firm, to analyze the blockchain and transaction details. Kogan and Integra gathered transaction details from the Ethereum blockchain related to the Sparkster investment pool. They cross-referenced these transactions with documents supplied by the SEC and reportedly used by Balina, aligning blockchain addresses with an investors’ Google Forms spreadsheet and the pool provider’s database. In other words, they cross-checked Ethereum blockchain data with SEC-provided documents, attributing contributions in the investment pool to personal identities in the process. Balina objected, claiming the SEC failed to demonstrate the reliability of Kogan’s methodology under Daubert. However, the Court found Kogan’s methods, including cross-checking public information and SEC documents, sufficiently reliable. The Court noted that the immutability of record of transactions made on the Ethereum blockchain supported the analysis of past transactions with a high degree of confidence, and thus, Kogan’s testimony should not be excluded under Daubert.

Balina contested Kogan’s opinion, arguing that it should be excluded because Kogan did not personally obtain the public blockchain data or create the summarizing tables, and was assisted by Integra in writing his report. Kogan acknowledged the collaborative nature of the report, stating it would be “impossible for him to disentangle” sections prepared by Integra from his own. Federal Rule of Evidence 703 allows experts to base opinions on data they have been made aware of, even if they didn’t personally observe it. The Court observed that expert opinions are admissible when based on information reasonably relied upon in the field. Thus, the Court found that Integra’s assistance did not render Kogan’s opinions inadmissible.

Balina also contended that Kogan’s first opinion lacked sufficient facts or data, but he failed to specify the missing details. The Court noted that if contradictory facts existed, they would affect the weight of Kogan’s opinion, not its admissibility, leaving such considerations for the jury. Citing Primrose Operating Co. v. Nat’l Am. Ins. Co., 382 F.2d 546, 562 (5th Cir. 2004), the Court denied Balina’s motion to exclude Kogan’s first opinion for these reasons.

Kogan’s second opinion asserted that blockchain evidence pointing to Balina’s control over the Sparkster investment pool aligned with other documentary evidence, including Telegram messages from Balina as well as a Google Form Balina sent to potential investors. Balina acknowledged the interconnected nature of Kogan’s first and second opinions and argued for the exclusion of the second opinion based on the same reasons as the first. The Court, consistent with its previous decision, denied Balina’s motion to exclude Kogan’s second opinion.

Kogan’s third opinion asserted that Balina invested a minimum of $104,883 (150 ETH) in the Sparkster investment pool and received a 30% bonus on his investment. Kogan also implied the possibility of Balina investing more, citing five unidentified Ethereum addresses. Balina sought to exclude this opinion, arguing that the stated $104,883 figure was undisputed, and Kogan’s speculation about Balina investing more money in the pool was unfounded. The Court, invoking Rule 702, found that the SEC successfully demonstrated the reliability of Kogan’s testimony regarding Balina’s $104,883 investment in the pool.

The parties disagreed on whether Kogan should be allowed to suggest that Balina might have invested more than $104,883 due to five unidentifiable Ethereum addresses. Balina argued that Kogan provided no methodology for linking these addresses to Balina’s account. The SEC countered that Kogan did not speculate about the owners of these addresses but rather highlighted the investigative facts and acknowledged limitations. The Court sided with the SEC, noting that Kogan refrained from speculating on the ownership of the unidentified Ethereum addresses. Kogan’s third opinion was grounded in his analysis of blockchain evidence, utilizing public Ethereum data and SEC-provided documents.

Kogan’s fourth opinion asserted that promoters played a significant role in ICOs from 2016 to 2018. Balina sought to exclude this opinion, contending it was unrelated to either Balina or Sparkster and was designed to confuse or prejudice the jury. Additionally, Balina requested the exclusion of any testimony related to the “Background” section of Kogan’s report, which covered terms like “Ethereum Blockchain and ETH,” “Ethereum Addresses and Wallets,” and “Smart Contracts and ERC-20 Tokens.” Balina argued that such terms were common and could be defined by agreement, rendering testimony on these topics unnecessary.

The Court acknowledged that experts are allowed to provide testimony on the background or “general principles” of their fields if Rule 702 requirements are met. Even if terms addressed by Kogan are commonplace in the financial technologies field, they may still be “beyond the comprehension of an average juror.” The Court found that offering background information on the terms and topics in Kogan’s fourth opinion and the background section of his report could be helpful to the jury.

Held

The Court denied Ian Balina’s Motion to Exclude the Testimony of the SEC’s Expert, Shimon Kogan. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.

Key Takeaways

This order demonstrates how courts evaluate the admissibility of expert opinions under the flexible Daubert standard. The main issues courts consider are the relevance, reliability, and helpfulness of the expert testimony to the trier of fact.

Here, the Court found Kogan’s testimony relevant because his opinions were related directly to the core allegations against Balina regarding the Sparkster investment pool. It deemed his methodology reliable because he used a process of cross-checking public blockchain data against documents provided by the SEC. This synthesis demonstrated internal consistency.

The Court also clarified that under Rule 703, experts can rely on facts and data collected by assistants, as long as the expert reviews everything and stands by the final work product. Additionally, it refused to exclude any testimony related to the “Background” section of Kogan’s report, which included topics such as the “Ethereum Blockchain and ETH,” “Ethereum Addresses and Wallets,” and “Smart Contracts and ERC-20 Tokens”, deeming it helpful to the jury.

Overall, this demonstrates Courts’ relatively permissive gatekeeping standard for expert opinions under Daubert and illustrates what factors determine admissible expert testimony in federal court. Disputed opinions often get presented to the jury rather than being excluded outright.

Tag: Securities