Bitcoin Ponzi Scheme Arrest In US

In the United States a Texas man and his company have been charged by the US Securities and Exchange Commission (SEC) for defrauding investors in a Ponzi scheme involving bitcoins.

Federal investigators said this was the first Ponzi scheme they have uncovered that involves bitcoins, but as in all Ponzi schemes the accused promised investors unrealistic profits.

Ponzi Scheme

According to the SEC, Trendon T. Shavers of McKinney, Texas, was founder and operator of Bitcoin Savings and Trust (BTCST) and sold bitcoin-denominated investments on the Internet using the names “Pirate” and “pirateat40.”

Shavers raised at least 700,000 bitcoins in BTCST investments, equivalent to more than $4.5 million (£2.9m) based on the average price of bitcoins in 2011 and 2012 when the investments were offered and sold. By today’s calculations, the value of 700,000 bitcoins is more than $60 million (£39m).

“Fraudsters are not beyond the reach of the SEC just because they use bitcoins or another virtual currency to mislead investors and violate the federal securities laws,” Andrew M. Calamari, director of the SEC’s New York Regional Office, said in a statement. “Shavers preyed on investors in an online forum by claiming his investments carried no risk and huge profits for them while his true intentions were rooted in nothing more than personal greed.”

According to the charges, Shavers promised investors up to 7 percent weekly interest based on BTCST’s bitcoin market arbitrage activity, which was said to include selling to individuals who wanted to buy bitcoins “off the radar” quickly or in large quantities. In actuality however, BTCST used bitcoins from new investors in a Ponzi scheme to make purported interest payments and cover investor withdrawals on outstanding BTCST investments, the SEC alleged. Shavers also stands accused of stealing investors’ bitcoins and exchanging them for US dollars to pay his personal expenses.

The complaint against Shavers was filed in US District Court for the Eastern District of Texas. Shavers sold BTCST investments over the Internet to investors in multiple states, including Connecticut, Hawaii, Illinois and Pennsylvania. According to the SEC, Shavers posted general solicitations on a Website dedicated to bitcoin discussions, and misled investors with false assurances that his company was growing and he had “yet to come close to taking a loss on any deal.”

Personal Profit

Shavers is accused of transferring at least 150,649 bitcoins to his personal account at an online bitcoin currency exchange. After selling 86,202 bitcoins, he realised a net profit of $164,758 (£107,027) despite suffering a loss from his day trading. According to the SEC, he transferred $147,102 (£95,558) from his personal account at the online bitcoin currency exchange to accounts he controlled at an online payment processor as well as his personal checking account. That money was used to pay his rent, utilities, car-related expenses as well as his food, shopping and gambling bills.

The SEC complaint specifically charges Shavers and BTCST with offering and selling investments in violation of the anti-fraud and registration provisions of the securities laws.

“Ponzi scheme operators often claim to have a tie to a new and emerging technology as a lure to potential victims,” Lori J. Schock, director of the SEC’s Office of Investor Education and Advocacy, said in a statement. “Investors should understand that regardless of the type of investment, a promise of high returns with little or no risk is a classic warning sign of fraud,” her statement said.

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Originally published on eWeek.