Crypto Insider Trading and Misled Crypto Investors
Insider Trading, False Representation, and Mislead Investors - Today's Newsletter focuses on my favorite joking word at my previous work: Fraud!
TL;DR: Here are 5 different Crypto-related fraudulent crimes, and some food for thought as an Investor
Hi Curious Readers of Professional Curiosity!
Do you know anyone that runs a Solana-based business, or is part of one? I’m evolving my Crypto Financial Services, and I could use some help in finding the problems that need to be solved. Let me know via LinkedIn or on Discord: Sev#3471.
On wards to today’s piece.
I hold an unvalidated notion that much of the Crypto space is filled with con-artists and elaborate scammers. It’s expected in such an infant industry whose technology is incredibly fluid that it can change form and function faster than the legal system can interpret it. As fast as you can “make” money, you can lose it miraculously faster.
Today is a gathering of 5 different cases brought forth by the U.S. Department of Justice, 2 of which are first of their kind insider trading cases in the crypto space. These cases were announced in the last 2 months.
As always, you’ll find TL;DR: and graphics at the beginning of each section.
Cheers!
In Case You Missed It
Sections You Can Skim To
Insider Trading & Fraud Cases by the U.S. Department of Justice:
Crypto Currency Exchange (Coinbase)
NFT Marketplace (OpenSea)
Crypto NFT Project (Baller Ape Club)
Crypto Ponzi Scheme (EmpireX)
Crypto Initial Coin Offering (Titanium Blockchain Infrastructure Services)
General Thoughts
First Ever Crypto Currency Exchange
Insider Trading Charge
TL;DR: Product Manager and accomplices buy crypto before they get listed on Coinbase. Repeatedly.
Thursday, July 21, 2022
United States v. Ishan Wahi, Nikhil Wahi, and Sameer Ramani - At Coinbase, a Centralized Exchange, Ishan Wahi, a former Coinbase Product Manager, his brother Nikhil Wahi, and his friend Sameer Ramani, were charged by the U.S. Department of Justice for Insider Trading.
Using the then Ishan Wahi Coinbase Product Manager’s tips delivered between June 2021 and April 2022 at least, his brother and his friend were able to buy 25 specific crypto assets before their listing earning ~$1.1m. Of the 25, 9 of the assets the SEC claim are securities.
Questions to Explore: What is considered a tradable security in the Crypto Point of View, and what compliance tools does Coinbase have that would prevent trading activity like this?
First Ever NFT Marketplace
Insider Trading Charge
TL;DR: Product Manager responsible for listing projects on the homepage viewed by 50m people per month, profits greatly by buying NFTs before they get featured by him. Repeatedly.
Wednesday, June 1, 2022
United States v. Nathaniel Chastain - At OpenSea, an NFT Marketplace, Nathaniel Chastain, a former Product Manager at OpenSea, is accused to have secretly bought 45 NFTs on 11 separate occasions using confidential information that those tokens would be listed at OpenSea’s homepage, which got about 50m views in June 2022. He used anonymous digital wallets and accounts to do so.
Per the Justice Department, Nathaniel Chastain was responsible for selecting which NFTs were to be featured on OpenSeas, specifically between June 2021 to circa September 2021.
Questions to Explore: Did you know the U.S. has a National Cryptocurrency Enforcement Team? It was announced February 17, 2022. 5 months ago.
Another Crypto NFT Scheme (Rug Pull)
TL;DR: Man lures investors, rug pulls $2.6m.
Thursday, June 30, 2022
United States v. Le Ahn Tuan - Le Anh Tuan amassed $2.6m in investors for the Baller Ape Club. He and his co-conspirators then rug pulled, which means he basically scammed everyone by ghosting them, deleting the website, and running with the money. Here’s the legal indictment.
You can learn more about Rug Pull from a previously written post. They are quite common.
Questions to Explore: How do you know if a project is going to rug you? Well, for starters, if they are all anonymous, with no history, fake backing (how do you even tell?), those are probably your red flags. But sometimes, that isn’t enough.
Crypto Ponzi and Unregistered Securities Scheme
TL;DR: Impossible returns promised by a suspended trader, with payouts to earlier investors using later investors money, with a dash of fleeing the country.
Thursday, June 30, 2022
United States v. Emerson Pires, Flavio Goncalves, and Joshua David Nicholas - The Founders of EmpireX, Emerson and Flavio, as well as their head trader, Joshua, were all 3 charged with several counts of fraud including conspiracy to commit securities fraud from a ponzi-scheme that generated $100m from investors.
EmpireX was a cryptocurrency investment platform and unregistered security offerings. The EmpireX platform offered 1% daily profits to investors, earned by the usage of trading bots and manual work of the head trader. The founders told their users that they filed to become a hedgefund with the SEC (spoiler alert, they didn’t). They fled in early 2022. The head trader was marketed as a licensed trader, but he was actually a suspended trader.
Questions to Explore: How do you tell someone that if it’s too good to be true, it’s too good to be true? Alternatively, is there a watch to watch the trades too? (I mean, you should be able to. Its the public blockchain).
Can such logic be applied to the DeFi Protocols that promise 20% APY?
Crypto Initial Coin Offering Scheme
TL;DR: Misrepresented mega financial relationship plus fraudulent documents to allure investors.
Thursday, June 30, 2022
United States v. Michael Alan Stollery - Michael Stollery is the CEO and founder of Titanium Blockchain Infrastructure Services, a cryptocurrency investment platform. He raised $21m in an initial coin offering (like an IPO, but with crypto), alluring investors with (as alleged by the Justice Deparment) falsified white papers, fake testimonials, fake relationships with the U.S. Federal Reserve, as well as prominent Fortune 50 companies.
Questions to Explore: How do people even find these projects?
General Business Thoughts
As I read these charges listed on the DOJ’s website, and their fight to uphold misrepresentation to investors, a couple of thoughts surfaced:
If I wanted to directly invest, co-own, or minority-stake own a Crypto Native Business, what do I need to be seeing?
A lot of the projects and companies above are passive bets made by investors, with a company giving the illusion of a white-glove service and promissory returns. There isn’t an element of direct involvement.
As an investor, you can take the position of a passive investment - less than 2% - and you can quite literally forget about it.
But what happens if you want to increase your influence into an investment in a simliar vein as a private equity company buys little companies, and venture capital partners invest in companys for a % portion of it?
What are the necessary disclosures they need to see? How much of it is traditional investors concepts (ala Web2 concepts), and how much of nuance is the Web3 part?
Following this line a thought: If you are a founder, or someone I’m talking business and financial metrics with:
How do I know how much of the businesses growth is because you and your team did it, and how much of it was because the general market happened to be good (and thus, the rising tides lifted all waters)?
How much of your business was organic growth, and how much of it was inorganic and extraordinary lucky one-time occurrences?
What other non-USD direct metrics and number should I be looking at that is directly, and uniquely, generated and tied to your business?
What are you doing to mitigate the gargantuan external market factors in a way that at least your business isn’t getting critically impacted by a 25 - 50% drop in Crypto price?
What’s your tokenflow (cashflow) of your operating businesses - pro forma?
What’s your token-treasury policy?
For NFTs: How much of your business is secondary market revenue, and how much of your business is platform fees, and how much of it is the gains & losses for holding an asset?
Above all else, just how do you know if your Crypto Native business is healthy at a business and even enterprise level?
Thanks for reading.
I’m Allen, and I currently provide Crypto Financial Consulting to support Crypto Businesses. If you are an LLC, S-CORP, or C-CORP, you probably have all kinds of financial and operating issues to contend with including compliance, all kinds of accounting, and reporting.
Do you know anyone that runs a Solana-based business, or is part of one? I’m evolving what I do, and I could use some help in finding the business problems that need to be solved. Let me know via LinkedIn or on Discord: Sev#3471.