With the rise in popularity of digital assets, many fraudsters have emerged to lure retail investors into financially devastating scams. This often leads investors to suffering debilitating losses, as oftentimes the money they invest is never recovered from these fraudsters. It is important to remind investors to watch out for these new investment schemes. Digital assets include cryptocurrencies, non-crypto digital coins, and crypto-tokens such as those offered in so-called initial coin offerings (ICOs). These digital assets are regulated by, in part, the Security Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the US Treasury Department. Which agency has regulatory authority depends on the structure of the digital asset. The key question to making a determination about which agency has regulatory authority is analyzing whether a cryptocurrency product or technology is a security, which would make it regulated by the SEC, or a derivative, which would make it regulated by the CFTC, or whether it is a currency, which would make it regulated by the Treasury Department.
Investors in these types of digital assets tend to be less skeptical of investment opportunities that involve “cutting-edge” technologies, like blockchain. With the massive rise in price of some digital assets such as Bitcoin and Ethereum in recent years, some investors may be prone to getting caught up in the frenzy and fear of missing out on an opportunity to become very wealthy. This article will touch base on the latest government actions against crypto fraudsters and against crypto exchanges that have violated laws. One of the most recent crypto-related violations was a $124 million crypto fraud operation by two siblings that used misleading roadshows and YouTube videos.
In March 2022, the SEC charged the Barksdale siblings with defrauding thousands of retail investors out of more than $124 million through unregistered fraudulent offerings of securities involving a digital token called “Ormeus Coin.” According to the SEC’s complaint, from June 2017 through the present, the Barksdales offered and sold Ormeus Coin to investors on crypto trading platforms. Additionally, from June 2017 to April 2018, through a multi-level marketing business called Ormeus Global, the defendants offered and sold subscription packages that included Ormeus Coin and an investment in a crypto trading program. Allegedly, to promote the offerings, John Barksdale held roadshows around the world while him and his sister, Tina, produced social media posts, YouTube videos, press releases, and other promotional materials to lure in retail investors.
At the events, in the produced materials, and on Ormeus Coin’s website, the defendants falsely claimed that Ormeus Coin was supported by one of the largest crypto mining operations in the world. They allegedly falsely expressed that Ormeus Coin had a $250 million crypto mining operation and was producing $5.4 million to $8 million per month in mining revenues. In order to preserve the fiction that Ormeus Coin was successfully mining crypto, the Barksdales arranged for a public website to display a wallet of an unrelated third party showing more than $190 million in assets as of November 2021, even though the Ormeus wallets were worth less than $500,000. The complaint was filed in the U.S. District Court for the Southern District of New York, charging the Barksdales with violating the federal securities laws, and government attorneys seek injunctive relief, disgorgement plus interest, and civil penalties.
Another recently filed action by the SEC was against the crypto lending platform BitConnect and its top executives. The action was commenced on May 28, 2021. Bitconnect is perhaps the most well-known Ponzi scheme in the crypto world. According to the SEC complaint, BitConnect, its founder Satish Kumbhani, its top US promoter, and his affiliated company defrauded retail investors out of $2 billion through a global fraudulent and unregistered offering of investments into a program involving digital assets. From early 2017 through January 2018, the defendants conducted a fraudulent and unregistered offering and sale of securities in the form of investments in a “Lending Program."
The complaint filed in the USDC for the Southern District of New York, alleges that to induce investors to deposit funds into the purported Lending Program, the defendants falsely represented, among other things, that BitConnect would deploy its purportedly proprietary “volatility software trading bot” to generate fabulously high returns. The SEC, however, alleges that instead of deploying investor funds for trading with the trading bot, defendants BitConnect and Kumbani siphoned investors' funds for their own benefit by transferring those funds to digital wallet addresses controlled by them. The defendants were charged with violating the antifraud and registration provisions of the federal securities laws.
The CFTC has also recently with more frequency started targeting platforms offering cryptocurrencies based on theories that those companies have engaged in unlawful commodity futures transactions or on the grounds of failing to register with the CFTC. On September 28, 2021, the CFTC announced a settlement order with Kraken, one of the largest cryptocurrency exchanges in the US, for offering retail commodity transactions in Bitcoin and other cryptocurrencies, and for its failure to register as a Futures Commission Merchant. The Order required Kraken to pay a $1.25 million civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act.
As we see more and more adoption of cryptocurrencies and other types of related digital assets, investment opportunities in these digital objects will become more common. It is, however, important to be aware of certain red flags indicating potential fraud. For example, when the retail platform guarantees high investment returns and glamorizes purported showings of the returns on its website, be sure this website and investment opportunity is not run by fraudsters. Fraudsters post fabricated historical returns on their websites and make the site look particularly attractive to those wishing to run into a crypto investment. Be aware of unlicensed or unregistered sellers of crypto-related investments. It is important to always do your own research and find background information on anyone who offers investments in cryptos, securities, derivatives, and any other type of financial investment. Finally, never rely solely on testimonials from celebrities, promoters, or actors, as oftentimes, fraudsters pay these people to use them as a tactic to entice investors.