Crypto Capers
The highly publicized rise of “Crypto Kings”, those now billionaires who came up with the idea that the world needed a new form of currency, that operates through the blockchain, making it ‘immune’ from governmental regulations and interference, have been the poster children for the new world of virtual entrepreneurship that has begun to attract attention from global governments that are trying to both understand and find a way to regulate these unregulated markets. Names like Binance (pvt), Coinbase (COIN), FTX (), and Kraken (pvt) register billions of dollar volume each day in cryto-trading and have made billionaires of their owners, but while budding tycoons moon over posters of these new crypto-kings, things are not always as they seem.
Aside from China’s vocal denigration of crypro-currency and outright bans on mining, and the mostly embarrassing questions asked by politicians during Congressional hearing and testimony, regulators in many countries are trying to get a handle on the legalities of crypto as it opens a whole new world of fraud to those who invest. Higher level discussions about whether crypto exchanges should limit transactions with evil-doers have been ongoing, but have been pushed into the headlines as financial sanctions against Russia have supposedly pushed oligarchs to convert the falling Ruble into crypto, with many exchanges citing the ‘libertarianistic’ basis for crypto as a reason not to exclude such customers. But setting those aside, crypto is such a fertile ground for fraud that it begs for regulation by its very nature.
Here’s what we mean…
On March 3 the US District Court of the Eastern District of New York handed down an indictment against Dwayne Golden (Florida), Gregory Aggesen (New York), Marquis Egerton (North Carolina), William White (Pennsylvania) and a redacted defendant, along with EmpowerCoin and ECoinPlus, two entities that were operating between April 2017 and July 2017, and Jet-Coin, which operated between May 2017 and August 2017. The Grand Jury indictment states that during those periods thousands of investors were induced to invest in these companies under the false promises that the investors assets would be invested in Bitcoin, that Bitcoin would be traded by these companies on behalf of the investors, and that investors would earn large returns as a result of that trading activity. In truth the assets were used to repay other investors or simply stolen by the defendants, with the companies collapsing shortly after receiving the investor’s assets, without any trading activity.
The websites for these companies were nearly identical and guaranteed large returns that would be credited to customer accounts on a daily basis, with the defendants writing the advertising copy, contracting internet services, and writing the software to upload the content and maintain the sites. Investors were encouraged to invest cash or Bitcoin, in some cases by a promoter, by sending it to a different Bitcoin address. Some investors initially received small payments said to be ‘interest’, other investors soon realized they were not receiving returns and made complaints to the companies. The defendants changed the name of the company to ECoinPlus in June, 2017 and relaunched, with the updated promise that they were no longer able to promise daily returns but would instead promise a 1% daily return and that their investments would no longer double in two months but would take six months instead.
When investors were still unable to see returns and complained to the company, they were told there were technical difficulties and that the sites had been hacked, but the defendants again tried to relaunch the sites, even after using the investor capital for their own use. What is most astounding, is the fact that during the period between May 2017 and July 2017 the companies collected ~$21.7m from investors, that’s a rate of ~$236k/day (the final total was actually close to $40m) from investors that obviously did little or no due diligence, but to make matters worse, as the companies began to collapse the defendants began discussions as to what to do if the FBI caught wind of the ‘issues’. Those discussions continued until February 2018 when the FTC filed a civil complaint and a subpoena from one of the defendants concerning Jet-Coin at which point the defendants erased information from a laptop which it them provided to the FTC in New York and provided statements to an attorney containing falsehoods that were designed to obstruct any investigation. The lies were effective enough to convince the FTC not to depose the defendants and the case was settled and closed in November 2019.
Sad ending for the investors? Not yet, as in June of last year the FBI served the lead defendant with a subpoena for all records relating to the three companies and in July one of the defendants made ‘materially false and misleading statements that were passed to the US Attorney’s Office in New York’s Eastern District, resulting in the Grand Jury indictment consisting of 11 counts including Conspiracy to Commit Wire Fraud, Wire Fraud, Money Laundering, Tampering with Evidence, and obstruction of Justice, all of which would lead to up to 20 years in prison if the defendants are convicted, along with forfeiture of any assets (good luck with that). Of course, the defendants will have their day(s) in court to prove their innocence.
While not to the investors involved, this was a small case, with others, such as the September 2021 “BitConnect” fraud case (SEC) where $2b was raised (unregistered securities) by promoters promising returns as high as 40%/month along with ‘commissions’ to investors who brought in new investors (the result being the seizure of $56m in crypto) and a host of others, not only in the US. The point here is that the promotion of cryptocurrencies by companies, celebrities, and paid promoters, leads potential investors to believe that the risks involved are minimal, being blinded by the ‘potential’ for massive gains. As in every investment there is a risk/reward profile that can hopefully be determined by a careful examination of the assets involved and the history of transactions around the asset, but when it comes to cryptocurrecy, due to the nature of the blockchain, there is little transparency and in many cases no history. While investors are supposed to understand the risks involved in making investments, individual investors rarely have the time or inclination to do such due diligence and rely on promoters to be truthful. While we are not big fans of regulators in general, cryptocurrency scams will make Ponzi schemer Madoff look like an amateur unless regulations particular to the asset are devised. There are so many ways to use cryptocurrencies for illegal purposes that it is almost mandatory that evildoers gravitate toward anything crypto.
Aside from China’s vocal denigration of crypro-currency and outright bans on mining, and the mostly embarrassing questions asked by politicians during Congressional hearing and testimony, regulators in many countries are trying to get a handle on the legalities of crypto as it opens a whole new world of fraud to those who invest. Higher level discussions about whether crypto exchanges should limit transactions with evil-doers have been ongoing, but have been pushed into the headlines as financial sanctions against Russia have supposedly pushed oligarchs to convert the falling Ruble into crypto, with many exchanges citing the ‘libertarianistic’ basis for crypto as a reason not to exclude such customers. But setting those aside, crypto is such a fertile ground for fraud that it begs for regulation by its very nature.
Here’s what we mean…
On March 3 the US District Court of the Eastern District of New York handed down an indictment against Dwayne Golden (Florida), Gregory Aggesen (New York), Marquis Egerton (North Carolina), William White (Pennsylvania) and a redacted defendant, along with EmpowerCoin and ECoinPlus, two entities that were operating between April 2017 and July 2017, and Jet-Coin, which operated between May 2017 and August 2017. The Grand Jury indictment states that during those periods thousands of investors were induced to invest in these companies under the false promises that the investors assets would be invested in Bitcoin, that Bitcoin would be traded by these companies on behalf of the investors, and that investors would earn large returns as a result of that trading activity. In truth the assets were used to repay other investors or simply stolen by the defendants, with the companies collapsing shortly after receiving the investor’s assets, without any trading activity.
The websites for these companies were nearly identical and guaranteed large returns that would be credited to customer accounts on a daily basis, with the defendants writing the advertising copy, contracting internet services, and writing the software to upload the content and maintain the sites. Investors were encouraged to invest cash or Bitcoin, in some cases by a promoter, by sending it to a different Bitcoin address. Some investors initially received small payments said to be ‘interest’, other investors soon realized they were not receiving returns and made complaints to the companies. The defendants changed the name of the company to ECoinPlus in June, 2017 and relaunched, with the updated promise that they were no longer able to promise daily returns but would instead promise a 1% daily return and that their investments would no longer double in two months but would take six months instead.
When investors were still unable to see returns and complained to the company, they were told there were technical difficulties and that the sites had been hacked, but the defendants again tried to relaunch the sites, even after using the investor capital for their own use. What is most astounding, is the fact that during the period between May 2017 and July 2017 the companies collected ~$21.7m from investors, that’s a rate of ~$236k/day (the final total was actually close to $40m) from investors that obviously did little or no due diligence, but to make matters worse, as the companies began to collapse the defendants began discussions as to what to do if the FBI caught wind of the ‘issues’. Those discussions continued until February 2018 when the FTC filed a civil complaint and a subpoena from one of the defendants concerning Jet-Coin at which point the defendants erased information from a laptop which it them provided to the FTC in New York and provided statements to an attorney containing falsehoods that were designed to obstruct any investigation. The lies were effective enough to convince the FTC not to depose the defendants and the case was settled and closed in November 2019.
Sad ending for the investors? Not yet, as in June of last year the FBI served the lead defendant with a subpoena for all records relating to the three companies and in July one of the defendants made ‘materially false and misleading statements that were passed to the US Attorney’s Office in New York’s Eastern District, resulting in the Grand Jury indictment consisting of 11 counts including Conspiracy to Commit Wire Fraud, Wire Fraud, Money Laundering, Tampering with Evidence, and obstruction of Justice, all of which would lead to up to 20 years in prison if the defendants are convicted, along with forfeiture of any assets (good luck with that). Of course, the defendants will have their day(s) in court to prove their innocence.
While not to the investors involved, this was a small case, with others, such as the September 2021 “BitConnect” fraud case (SEC) where $2b was raised (unregistered securities) by promoters promising returns as high as 40%/month along with ‘commissions’ to investors who brought in new investors (the result being the seizure of $56m in crypto) and a host of others, not only in the US. The point here is that the promotion of cryptocurrencies by companies, celebrities, and paid promoters, leads potential investors to believe that the risks involved are minimal, being blinded by the ‘potential’ for massive gains. As in every investment there is a risk/reward profile that can hopefully be determined by a careful examination of the assets involved and the history of transactions around the asset, but when it comes to cryptocurrecy, due to the nature of the blockchain, there is little transparency and in many cases no history. While investors are supposed to understand the risks involved in making investments, individual investors rarely have the time or inclination to do such due diligence and rely on promoters to be truthful. While we are not big fans of regulators in general, cryptocurrency scams will make Ponzi schemer Madoff look like an amateur unless regulations particular to the asset are devised. There are so many ways to use cryptocurrencies for illegal purposes that it is almost mandatory that evildoers gravitate toward anything crypto.
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