Huge Diamond Bought Illegally With Crypto Proceeds, SEC Alleges

Allyson Versprille, Bloomberg News

DUBAI, UNITED ARAB EMIRATES - JANUARY 17: The Largest Faceted Diamond to ever come to Auction, The Enigma, at 555.55 carats is unveiled at Sotheby's Dubai, on January 17, 2022 in Dubai, United Arab Emirates. (Photo by Neville Hopwood/Getty Images for Sotheby's Dubai) , Photographer: Neville Hopwood/Getty Images

(Bloomberg) -- The creator of crypto token Hex illegally used millions of dollars of investor funds to buy a 555-carat black diamond known as “The Enigma,” according to the US Securities and Exchange Commission.

Wall Street’s main regulator alleged in federal court on Monday that Richard Schueler, who goes by Richard Heart, raised more than $1 billion by selling unregistered securities, including the Hex coin and other tokens affiliated with his PulseChain blockchain network and PulseX decentralized finance platform. Heart and PulseChain used at least $12.1 million of investor funds for personal luxury purchases, including the diamond, expensive watches and high-end automobiles, the agency said.

The price of the Hex token fell about 25% to a fraction of 1 cent after the lawsuit was announced, according to CoinMarketCap data. PulseChain’s PLS and PulseX’s PLSX tokens also plunged after the lawsuit was announced. Richard Heart didn’t immediately return a request for comment.

Even though the Hex coin is among thousands that trade at just a few cents or less, it amassed a significant following among digital-asset enthusiasts. Heart positioned himself at the center of the hype, projecting an over-the-top presence on social media with his designer track suits, expensive jewelry and luxury vehicles.

“Heart called on investors to buy crypto asset securities in offerings that he failed to register. He then defrauded those investors by spending some of their crypto assets on exorbitant luxury goods,” said Eric Werner, director of the SEC’s Fort Worth Regional Office.

In one specific allegation, the SEC said Hex investors “reasonably expected to derive profits” from their holdings through a staking offering that allowed them to lock up their tokens in exchange for additional coins in the future.

According to the SEC, Heart has repeatedly said that the purpose of the program was to “incentivize investors to lock up their Hex tokens — which reduced the number of Hex tokens in circulation — to drive up their price.” The SEC alleged that Heart and Hex advertised that investors would receive an average return of 38% for staking tokens.

The lawsuit is the latest in a string of SEC crypto enforcement actions this year. The regulator has also sued Coinbase Global Inc. and Binance Holdings Ltd. — the world’s largest crypto exchange.

--With assistance from Olga Kharif.