Texas Securities Case: SEC Alleges Ponzi Scam Involving Virtual Currency Bitcoin

The Securities and Exchange Commission is suing Trendon Shavers and his company Bitcoin Savings & Trust, accusing the two of them of running a Ponzi scam involving Bitcoin. In its Texas securities fraud case, the regulator contends that Shavers offered and sold the denominated investments online with the use of the names “pirateat40” and “Pirate,” purportedly raising at least 700,000 Bitcoin in BTCST investments.

Bitcoin is a virtual currency that is traded on online exchanges. Based on its average price in 2011 and 2012 when Bitcoin was on the market, the virtual currency at issue was worth over $4.5 million. Today, their value is greater than $60 million.

The SEC believes that Shavers told customers they could make up to 7% weekly interest due to BTCST’s “Bitcoin market arbitrage activity,” when actually BTCST was a Ponzi scheme that involved Shavers using Bitcoin from new investors to cover purported investor withdrawals on outstanding investments and interest payments. He also allegedly used investors’ Bitcoin to engage in day trading in his account while trading in some of their Bitcoin for US dollars to cover his own expenses.

The Commission said that Shavers took advantage of investors online by pretending that investing in Bitcoin came with big profits and no risk. The regulator says he was motivated by greed. It is charging him and BTCTS with antifraud and registration violations. The SEC wants the U.S. District Court for the Eastern District of Texas to grant an asset freeze, disgorgement, injunctions, prejudgment interest, and civil penalties.

Bitcoin isn’t run by a government or any company. It exists via an open-source software program. Users can purchase Bitcoin through exchanges that turn real money into virtual currency.

Earlier this year there were concerns after Bitcoin became subject to virtual attacks on two servers: Mt.Gox and Instawallet. Critics have said that because the virtual currency doesn’t have a central issuer and not that many businesses accept it, Bitcoin makes a great candidate for money laundering. A Pyramid scam-like effect is also possible, with the earliest investors benefiting the most.

Now, the SEC is warning investors about Ponzi scams involving virtual currencies. One reason that fraudsters are drawn to virtual currencies is that such transactions are supposedly more private and there is less regulatory oversight than when conventional currencies are involved. That said, any investment in securities in this country are subject to SEC jurisdiction even if the currency is virtual.

In April, over two days, Bitcoins’ price dropped over 70%, inciting a wave of activity that trading platforms found overwhelming.

Red Flags that You May Be Looking at A Possible Ponzi Scam (From the SEC):

• Supposed none or little risk for high returns • “Guaranteed” returns • Promises of consistent returns despite changing market conditions • Investments are not registered with the SEC or state regulators • Unlicensed/unregistered sellers (individuals or firms)
• Complex or “secret” fee structures or strategies • Lack of “accredited investor” criteria • Account statement mistakes • Inadequate or confusing paperwork • Nonpayment • Problems with being able to cash out
• “Affinity” connection, such that the investment opportunity came from someone in a group or community or affiliation to which you belong
Our Texas securities law firm represents investors throughout the state. Contact our Bitcoin fraud lawyers and ask for your free case assessment.

The SEC’s Complaint (PDF)

Bitcoin bubble may have burst, CNN, April 12, 2013

Ponzi schemes using virtual currencies, SEC (PDF)

Fears for virtual currency after cyber attacks on Bitcoin systems, The Telegraph, April 5, 2013

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