July 5, 2022

DOJ Charges Individuals with Cryptocurrency-related Fraud in Four Separate Cases

Ilan T. Graff Commentary by Ilan T. Graff

The DOJ indicted six individuals in four separate cases for their alleged roles in crypto-related fraud. The cases involve (i) defrauding investors in a Non-Fungible Token ("NFT") investment project, (ii) orchestrating a global Ponzi scheme involving the sale of unregistered cryptocurrency securities, (iii) fraudulently initiating a new coin offering and (iv) making misrepresentations to investors in a crypto-related unregistered commodity pool.

In the first indictment, filed in the Central District of California, the DOJ charged an individual with one count of conspiracy to commit wire fraud and one count of conspiracy to commit international money laundering. The DOJ alleged that the individual sold an NFT publicly and then, shortly after, engaged in a so-called "rug pull," through which a seller steals investor money without transferring ownership of the NFT. The DOJ further alleged that after stealing the money, the individual laundered the funds via "chain-hopping" in an attempt to cover his trail. The DOJ characterized the alleged offense as the largest NFT-related scheme charged to date.

The second indictment, which was filed in the Southern District of Florida, charged three individuals each with one count of conspiracy to commit wire fraud and one count of conspiracy to commit securities fraud. The charges come in connection with their roles in creating a cryptocurrency-based Ponzi scheme that generated $100 million in investments. The DOJ alleged that the individuals lied to attract new investors in their cryptocurrency investment platform and used new funds to repay earlier investors. Two of the individuals were also charged with conspiracy to commit international money laundering for laundering the funds through a foreign cryptocurrency exchange.

In the third indictment, filed in the Central District of California, one individual was charged with one count of securities fraud for allegedly orchestrating a cryptocurrency fraud scheme involving an initial coin offering. The DOJ alleged that the individual secured investors by using falsified white papers, planting fake testimonials on the company's website and fabricating purported business relationships with prominent companies.

In the final indictment, also filed in the Central District of California, an individual was charged with one count of conspiracy to commit wire fraud, four counts of wire fraud, one count of conspiracy to commit commodities fraud and one count of obstruction of justice for allegedly operating a fraudulent cryptocurrency investment platform. The DOJ accused the individual of making a range of false representations to investors, including that he traded using a bot that could execute thousands of transactions per hour on cryptocurrency exchanges and generate large-scale returns. These misrepresentations allegedly helped the individual raise approximately $12 million in capital.

Commentary

Like last month's digital asset trading indictment in the Southern District of New York (see related coverage here), the DOJ's coordinated announcement of these four cases highlights the degree to which illicit conduct in crypto markets is subject to such traditional white-collar enforcement theories as wire fraud, securities fraud and commodities fraud. If the crypto tide continues to recede, expect to see many similar prosecutions as market forces accelerate the exposure of Ponzi schemes and other fraudulent activity.

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