The Securities
and Exchange Commission announced late last week that it has filed an action involving
what it claims is a Bitcoin investment scam. The case involves the alleged fraudulent
offers and sales of securities in a Bitcoin-denominated alleged Ponzi scheme
founded and operated by a 30-year old Trendon T. Shavers from Texas.
The complaint
alleges Shavers was the founder and operator of BTCST (formerly known as First
Pirate Savings & Trust) an unincorporated entity with physical “brick and
mortar” operating presence or location. On
or about November 3, 2011, Shavers, under the Internet name pirateat40, posted a general
solicitation for BTCST, entitled “Looking for Lenders,” on the Bitcoin Forum[1] an
online forum dedicated to BTC where, among other things, numerous
BTC-denominated investment opportunities were posted. Shavers continued to post
what the SEC alleges was martially false or misleading statements as to the
purported investment opportunity.
According to the
SEC’s complaint filed in U.S. District Court for the Eastern District of Texas,
Shavers sold BTCST investments over the Internet to investors in such states as
Connecticut, Hawaii, Illinois, Louisiana, Massachusetts, North Carolina, and
Pennsylvania. Shavers posted general solicitations on a website dedicated
to Bitcoin discussions, and he misled investors with such false assurances
about his investment opportunity as “It’s growing, it’s growing!” and “I have
yet to come close to taking a loss on any deal,” and “risk is almost 0.”
Contrary to the representations made to investors, BTCST was not in the
business of buying and selling Bitcoin at all.
According to the SEC, from at least September
2011 to September 2012, Shavers, operating under the Internet name
“pirateat40,” offered and sold BTCST investments over the Internet, raising
more than 700,000 BTC in principal investments from BTCST investors, or more
than $4.5 million based on the daily average price of BTC when the BTCST
investors purchased their BTCST investments.
The SEC claims
that Shavers falsely promised investors up to 7% interest weekly based on
BTCST’s purported BTC market arbitrage activity, including selling BTC to
individuals who wished to buy BTC “off the radar,” quickly, or in large
quantities. But as the SEC argues, in reality, the BTCST offering was a sham
and a Ponzi scheme whereby Shavers used new BTCST investors’ BTC to pay the
promised returns on outstanding BTCST investments and misappropriated BTCST
investors’ BTC for his personal use.
During the
relevant period, Shavers obtained at least 700,467 BTC in principal investments
from BTCST investors, or $4,592,806 when converted to U.S. dollars based on the
daily average price of BTC when the BTCST investors purchased their BTCST
investments.
Shavers returned
at least 507,148 BTC to BTCST investors as withdrawals or purported interest
payments. He also transferred at least 150,649 BTC to his personal account at
an online BTC currency exchange which, among other things, he then sold or used
to day-trade (converting BTC to U.S. dollars and vice versa). As a result of
this activity, Shavers suffered a net loss from his day-trading, but realized
net proceeds of $164,758 from his net sales of 86,202 BTC.
The SEC further
claims that Shavers transferred $147,102 from his personal account at the
online BTC currency exchange to accounts he controlled at an online payment
processor and his personal checking account, which he then used for, among
other things, his personal expenses, including rent, car-related expenses,
utilities, retail purchases, casinos, and meals.
The SEC’s
complaint charges Shavers and BTCST with offering and selling investments in
violation of the anti-fraud and registration provisions of the securities laws,
specifically Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933,
Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule
10b-5. The SEC is seeking a court order to freeze the assets of Shavers
and BTCST in addition to other relief, including permanent injunctions,
disgorgement of ill-gotten gains with prejudgment interest, and financial
penalties.
What are Bitcoins?
In 1998, Wei Dai,
a so-called “Cypherpunk” proposed the concept of an anonymous digital currency. A cypherpunk is an activist advocating widespread
use of strong cryptography as a route to social and political
change. Originally communicating through the Cypherpunks electronic
mailing list, informal groups
aimed to achieve privacy and security through proactive use of cryptography.
Cypherpunks have been engaged in an active movement since the late 1980s.
Dai described "untraceable
pseudonymous entities utilizing a medium of exchange and the creation a
currency where government involvement "is not temporarily destroyed but
permanently forbidden and permanently unnecessary."[2]
With this in
mind, in 2009, Satoshi Nakamoto[3] developed bitcoin, the world's first decentralized digital
currency, a peer-to-peer Electronic Cash System. Bitcoin is an online digital currency that
relies on peer-to-peer technology for transaction management and distribution.
Bitcoins are computer files. They may be stored on a personal computer or
entrusted to an online service. Since the coins are simple files stored on a
computer, spending them is as easy as sending an e-mail over the Internet. In order to spend and accept bitcoins, all
transactions must be logged on a public ledger. This public ledger is a decentralized network
operated and maintained by thousands of home computers - similar to a
peer-to-peer music-sharing network - rather than a central server. Once the transaction has been cleared by
another bitcoin user on the network, the transaction is complete, and the
bitcoins have transferred from one user to another.
Bitcoin
transactions are supposedly: (1) secure; (2) efficient; and (3) free of third
party presence - whether that third party is a government, bank, payment
network, or clearinghouse. Security is accomplished through "cryptographic
proof," which allows parties to the transaction to deal directly with one
another without a third party authorizing the transaction. n32
Bitcoin
relies on the use of public-key encryption to secure the parties' privacy n34
and a widely-published "peer-to-peer distributed timestamp server" to
verify that the digital coins have not been double spent.
As
of this writing, more than eleven million bitcoins have been created and
circulated.
[3] Satoshi Nakamoto is a pseudonym for the person or group of people who
designed the original Bitcoin protocol in 2008 and launched the network in
2009. Except in connection with Bitcoin, the individual or individuals behind
this pseudonym remains publicly unknown. Nakamoto was responsible for creating
the majority of the Bitcoin software and was active in making modifications and
posting technical information on the BitcoinTalk Forum.
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