Crypto-CEO Faces US Extradition In Crypto Asset Fraud.
The U.S. Securities and Exchange Commission (SEC) has filed fraud charges against three companies and nine individuals implicated in schemes aimed at manipulating the cryptocurrency market. These schemes were designed to distort the markets for several crypto assets that were offered and sold as securities to retail investors. The accused are said to have misled investors by fabricating the illusion of vibrant trading markets for these assets, enticing them to make purchases based on artificially inflated trading volumes and prices.
The SEC summary highlighted that "This action arises from the defendants’ unregistered and fraudulent offers and sales of crypto assets being offered and sold as securities to the investing public and their manipulative trading of those securities."
Fraudulent Crypto Market Scheme
The complaints filed by the SEC detail that the promoters of crypto assets—Russell Armand, Maxwell Hernandez, Manpreet Singh Kohli, Nam Tran, and Vy Pham—worked in conjunction with three firms, ZM Quant, Gotbit, and CLS Global, which purported to act as market makers. Manpreet Singh Kohli, 43, appeared via video-link at Westminster Magistrates' Court in London at an early stage of his fight against extradition to the US.
These entities are accused of engaging in activities to manipulate the trading behavior of crypto assets. It is alleged that they offered "market-manipulation-as-a-service" to artificially enhance both the trading volume and price of the crypto assets that the promoters marketed to retail investors through unregistered transactions.
As outlined in the filings of the SEC, ZM Quant and Gotbit, acting on behalf of the promoters, engaged in market manipulation by creating artificial trading volume through self-trading, commonly known as wash trading. This practice entails the buying and selling of the same asset to fabricate the appearance of market activity.
The SEC further asserted that CLS Global executed a comparable scheme concerning another cryptocurrency developed under the supervision of the Federal Bureau of Investigation (FBI) as part of a distinct investigation into manipulation within the crypto asset market.
The SEC indicated that these deceptive practices misled retail investors into believing that the crypto assets were experiencing active trading and exhibited significant market demand, when, in fact, the trading activity was contrived and lacked any genuine economic purpose. In certain cases, the defendants utilized algorithms or trading bots that generated an enormous volume of transactions, resulting in up to quadrillions of transactions and billions of dollars in artificial trading volume daily on major cryptocurrency trading platforms.
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SEC Statement
The actions taken by the SEC are designed to ensure that those responsible for fraudulent activities are held accountable, particularly as these schemes have reportedly victimized retail investors by luring them with misleading promises of profitability in the unpredictable cryptocurrency markets. Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement, underscored the importance of these charges, stating: “Today’s enforcement actions reaffirm that retail investors are being exploited by fraudulent practices perpetrated by institutional players in the crypto asset markets.
With so-called promoters and self-proclaimed market makers collaborating to mislead the investing public with false profit assurances, investors must remain vigilant, as the odds may be stacked against them.”
The SEC has raised alarms regarding the increasing susceptibility of the crypto asset market to manipulation, particularly as these assets are continuously marketed and sold to the public as securities. Jorge G. Tenreiro, Acting Chief of the Division of Enforcement’s Crypto Asset and Cyber Unit (CACU), voiced his concerns regarding the extent of the deception: “The individuals behind these fraudulent schemes are reaping substantial profits at the cost of investors who have been misled into these markets, resulting in the loss of their hard-earned savings. We are dedicated to identifying and addressing such misconduct, especially when it pertains to securities.”
Legal Action and Charges
The five complaints filed by the SEC were submitted to the United States District Court for the District of Massachusetts. These complaints allege that all defendants have breached the antifraud and market manipulation provisions of U.S. securities laws, with some defendants also accused of failing to meet registration requirements.
- The SEC is pursuing various forms of relief in these matters, which include:
- Permanent injunctions to prevent the defendants from further violations of securities laws.
- Conduct-based injunctions to restrict specific actions related to market manipulation.
- Disgorgement of illicit profits, along with interest, to recover earnings obtained through unlawful activities.
- Civil penalties aimed at deterring future infractions.
Bars against certain officers and directors to prevent them from holding leadership roles in any companies regulated by the SEC.
In a notable development, three principal defendants — Armand, Hernandez, and Pham — have consented to settle the charges through bifurcated settlements. This settlement, which awaits court approval, would impose a permanent injunction against them for any further violations of federal securities laws and enforce conduct-based injunctions. Moreover, they would be prohibited from serving as officers or directors of any public companies. The court will subsequently determine the final amounts for disgorgement, prejudgment interest, and civil penalties applicable to these defendants.
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FBI and Criminal Actions
In a concurrent criminal investigation, the Federal Bureau of Investigation (FBI) and the United States Attorney’s Office for the District of Massachusetts have initiated actions against the individuals implicated in these fraudulent activities. The Securities and Exchange Commission (SEC) has commended the collaboration among agencies, which has facilitated both civil and criminal actions against the offenders.
These cases exemplify a comprehensive approach by regulatory and law enforcement bodies to combat market manipulation within the increasingly popular and occasionally volatile realm of cryptocurrency assets. As the SEC persists in its efforts to monitor and investigate fraudulent practices in the cryptocurrency sector, these enforcement actions serve as a cautionary message to potential manipulators that their conduct will be scrutinized and met with consequences. Investors are advised to exercise vigilance and conduct thorough research on cryptocurrency market offerings prior to investing their funds.
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