Florida Man Buys Massive Black Diamond with Ill-Gotten Crypto Gains, SEC Says

The Securities and Exchange Commission has charged Richard Schueler, who often used the alias Richard Heart, with securities fraud and offering unregistered securities.

Starting in December 2019, Heart allegedly sold over $1 billion in Hex crypto tokens and misappropriated $12 million in investor funds to purchase luxury goods, such as cars, watches, and the largest cut black diamond on earth for $4.28 million. The Hex tokens were not registered with the SEC, according to the complaint, and were offered over the PulseChain and PulseX platforms.

Heart is an American citizen who was born in Florida but currently resides in Helsinki, Finland, according to the SEC.

Heart told investors in a series of YouTube livestreams that Hex was an easy way to get rich saying “if you want to get rich, [Hex is] built for that,” according to the complaint.

Heart had a so-called “staking” scheme in which owners of Hex would “lock up” their tokens, or deposit them and waive their right to withdraw them for a period of one day to 15 years. This scheme would reduce the circulation of Hex and, according to Heart, drive up the price, so investors “could earn an average of 38% annual return in the form of additional Hex tokens.”

The Department of Labor allows for recordkeepers and plan sponsors to offer crypto currencies as an option in defined contribution retirement plans. But in a March 2022 notice it did advise using “extreme care” when adding the digital offerings to a retirement plan investment menu.

The July 31 SEC complaint argued that Hex is a security, as opposed to a commodity, and falls under the criteria of the Howey test: “Each of the Hex, PulseChain, and PulseX offerings involved investments of money in common enterprises with the reasonable expectation of profits to be derived based on the efforts of others.”

It has been the view of the SEC and its current chairman, Gary Gensler, that bitcoin is not a security, in part because it is not a “common enterprise” or an investment contract, because of its decentralized character. This complaint describes in detail, by way of explaining the staking scheme, that Hex is a security because it is a common enterprise with a reasonable expectation of profit, two prongs of the Howey test, and therefore under the jurisdiction of the SEC.

The complaint seeks to ban Heart from offering crypto securities, confiscate the alleged illegally acquired gains, and impose civil penalties.

Gensler has been highlighting his desire to bring the crypto field into compliance during his tenure and has described the industry as “rife with fraud and scams and hucksters.”

The case is SEC v Schueler et al, U.S. District Court, Eastern District of New York, No. 23-05749. Schueler does not yet have representation and could not be reached for comment.