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From Securities Regulation Daily, November 6, 2014

Bitcoin Ponzi scheme arrest a first for federal prosecutors

By Anne Sherry, J.D.

The arrest this morning of Trendon Shavers at his Texas home marked the first federal criminal securities fraud charges involving a Bitcoin scheme. According to the charges unsealed today in the Southern District of New York, Shavers raised more than $4.5 million worth of bitcoins in a Ponzi scheme that promised returns of up to 7 percent per week (U.S. v. Shavers, November 3, 2014).

Mechanics of scheme. As FBI Assistant Director-in-Charge George Venizelos put it in a statement, “Shavers used a new currency, but the same old reprehensible tricks.” The charges allege that Shavers solicited readers of an Internet forum to loan bitcoins to his company, Bitcoin Savings and Trust (BS&T), at interest rates of up to 7 percent weekly. Shavers claimed that the investments would support a Bitcoin arbitrage strategy and offered a personal guarantee in the event of losses resulting from a market change.

In fact, Shavers allegedly failed to execute the arbitrage strategy, honor redemption requests, honor his personal guarantee, or deliver the agreed interest rates. Rather, he is claimed to have diverted the bitcoin investments for day trading in his own account and exchanged some of the invested bitcoins into dollars to pay personal expenses. Manhattan U.S. Attorney Preet Bharara said that Shavers “managed to combine financial and cyber fraud” in his scheme and that the prosecution “should serve as a warning to those looking to make a quick buck with unsecured currency.”

Civil enforcement action. In September, a district court in Texas granted the SEC’s motion for summary judgment against Shavers and BS&T. The defendants were jointly and severally ordered to disgorge approximately $40 million and were each ordered to pay penalties of $150,000. The court had previously determined that bitcoins are securities because they meet the definition of an investment contract.

The case is No. 14 MAG 2465.

Companies: Bitcoin Savings & Trust

MainStory: TopStory FraudManipulation Enforcement NewYorkNews

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