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First-ever criminal charges filed for market manipulation and “wash trading” in cryptocurrency market

Cryptocurrency is a fast growing market that is particularly susceptible to fraud, due to the complex and largely anonymous nature of cryptocurrency. This month, the U.S. Attorney’s Office, District of Massachusetts announced charges against 18 entities and related individuals for wash trading and other market manipulation actions in the cryptocurrency industry. These criminal charges are the first-of-their-kind to be filed against financial services firms.

The charged entities allegedly engaged in schemes intended to spark investors to purchase crypto assets by creating the false appearance of active and heavily traded assets, which is called wash trading. The deceptive tactics made the tokens look like good investments and attracted new investors and purchasers, increasing the tokens’ trading prices.  The companies’ employees then allegedly sold their tokens at inflated prices, a scheme known as a “pump and dump.”

More than $25 million in cryptocurrencies have been seized in connection with the charges against the leaders of four cryptocurrency companies, four cryptocurrency financial services firms (identified as “market makers”), and employees at those firms. Also, four defendants have pleaded guilty, another has agreed to plead guilty, and three others have been apprehended in Texas, the United Kingdom, and Portugal.

The cryptocurrency market makers charged include Gotbit Consulting LLC, ZM Quant Investment LTD, and CLS Global FZC; charges were also brought against fifteen individuals who served as leaders and employees of these companies.

In addition to the criminal charges filed by the District of Massachusetts, the U.S. Securities and Exchange Commission (SEC) filed parallel civil charges alleging securities violations for the same actions against ZM Quant, Gotbit, and CLS Global and nine employees of the companies.

To catch the fraudsters, the FBI took the unusual step of creating a sham crypto token and firm, called NexFundAI.  The effort, dubbed “Operation Token Mirrors,” used the fake NextFundAI to target the digital asset developers, promoters, and market makers.  Market makers ZM Quant, CLS Global, and MyTrade allegedly provided market manipulation services to NextFundAI.

FBI Special Agent in Charge Jodi Cohen said, “What we uncovered has resulted in charges against the leadership of four cryptocurrency companies, and four crypto ‘market makers’ and their employees who are accused of spearheading a sophisticated trading scheme that allegedly bilked honest investors out of millions of dollars. … The FBI took the unprecedented step of creating its very own cryptocurrency token and company to identify, disrupt, and bring these alleged fraudsters to justice.”

Acting U.S. Attorney Joshua Levy said, “These are cases where an innovative technology – cryptocurrency – met a century old scheme – the pump and dump. The message today is, if you make false statements to trick investors, that’s fraud. Period. Our office will aggressively pursue fraud, including in the cryptocurrency industry.”

A Surge in Cryptocurrency Enforcement Actions

These actions brought by the District of Massachusetts and the SEC indicate that the boom of enforcement actions concerning cryptocurrency shows no signs of slowing down. The agencies recently brought blockbuster actions against cryptocurrency exchanges including FTX and Binance. Last year, the SEC brought 46 enforcement actions against cryptocurrency entities, the highest number in over a decade. The agency has identified cryptocurrency as a top enforcement priority—and actions like this bear out the agency’s commitment to that priority.

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If you know of cryptocurrency fraud and would like to speak to an experienced attorney, contact Phillips & Cohen for a confidential review of your case.

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