The U.S. Securities and Exchange Commission (SEC) has announced fraud charges against three companies and nine individuals involved in crypto market manipulation schemes. This scheme was to manipulate the markets for various crypto assets offered and sold as securities to retail investors.
The defendants allegedly deceived investors by creating the false appearance of active trading markets for these assets, luring them into making purchases based on manipulated trading volumes and prices.
Fraudulent Crypto Market Manipulation Schemes
The that the crypto asset promoters — Russell Armand, Maxwell Hernandez, Manpreet Singh Kohli, Nam Tran, and Vy Pham — collaborated with three entities, ZM Quant, Gotbit, and CLS Global, which claimed to be market makers, to manipulate the trading activity of crypto assets. These companies allegedly provided “market-manipulation-as-a-service” to artificially inflate the trading volume and price of the crypto assets that the promoters offered to retail investors in unregistered transactions.
As described in the SEC’s filings, ZM Quant and Gotbit, under the employ of the promoters, manipulated the markets by generating artificial trading volume through self-trading, or wash trading, which involves buying and selling the same asset to create the illusion of market activity. The SEC also alleged that CLS Global carried out a similar scheme in relation to another crypto asset created under the direction of the Federal Bureau of Investigation (FBI) as part of a separate probe into crypto asset market manipulation.
According to the SEC, these fraudulent activities misled retail investors by fostering the belief that the crypto assets were being actively traded and had strong market demand, when in reality, the trading activity was fabricated and served no economic purpose. In some instances, the defendants employed algorithms, or trading bots, that generated vast numbers of transactions, producing up to quadrillions of transactions and billions of dollars in artificial trading volume per day on popular crypto trading platforms.
SEC Enforcement and Statements
The SEC’s actions aim to hold the perpetrators accountable for their fraudulent schemes, which the agency claims victimized retail investors by enticing them with false promises of profitability in the volatile crypto markets. Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement, emphasized the significance of the charges, stating:
“Today’s enforcement actions demonstrate, once more, that retail investors are being victimized by fraudulent activity by institutional actors in the markets for crypto assets. With purported promoters and self-anointed market makers teaming up to target the investing public with false promises of profits in the crypto markets, investors should be mindful that the deck may be stacked against them.”
The SEC highlighted the growing concern over the ease with which the crypto asset market can be manipulated, especially as crypto assets continue to be offered and sold to the public as securities. Jorge G. Tenreiro, Acting Chief of the Division of Enforcement’s Crypto Asset and Cyber Unit (CACU), expressed concerns over the scale of the deception:
“The wrongdoers behind these schemes are profiting handsomely at the expense of investors that have been deceptively lured into these markets and lost their hard-earned savings. We remain committed to rooting out instances of such misconduct when it involves securities.”
Legal Action and Charges
The SEC’s five complaints were filed in the United States District Court for the District of Massachusetts. The complaints charge all defendants with violating the antifraud and market manipulation provisions of U.S. securities laws, and some defendants are further accused of violating registration requirements. The SEC is seeking various forms of relief in these cases, including:
- Permanent injunctions to prevent the defendants from continuing to violate securities laws.
- Conduct-based injunctions to prohibit specific behaviors related to market manipulation.
- Disgorgement of ill-gotten gains, with interest, to recoup the profits made through illegal activities.
- Civil penalties to deter future violations.
- Officer and director bars against certain defendants to prevent them from serving in leadership positions in any companies subject to SEC regulation.
In a significant development, three of the key defendants — Armand, Hernandez, and Pham — have agreed to settle the charges under bifurcated settlements. This settlement, which is pending court approval, would permanently enjoin them from further violations of federal securities laws and subject them to conduct-based injunctions.
Additionally, they would be barred from serving as officers or directors of any public companies. The court will later determine the final amounts for disgorgement, prejudgment interest, and civil penalties for these defendants.
FBI and Parallel Criminal Actions
In a parallel criminal investigation, the Federal Bureau of Investigation (FBI) and the United States Attorney’s Office for the District of Massachusetts have also taken action against the individuals involved in these fraudulent schemes.
The SEC has praised the cooperation between agencies, which has enabled both civil and criminal proceedings to be brought against the perpetrators. These cases represent a broader strategy by regulatory and law enforcement agencies to clamp down on market manipulation in the increasingly popular and, at times, volatile world of crypto assets.
As the SEC continues to monitor and investigate fraudulent activity in the crypto space, these enforcement actions serve as a warning to would-be manipulators that their actions will not go unnoticed or unpunished. Investors, meanwhile, are encouraged to remain cautious and thoroughly research crypto markets offerings before committing their funds.