Wall Street watchdog charges 11 in ‘massive’ crypto Ponzi scheme

The Securities and Exchange Commission has charged 11 people in an alleged $300mn crypto pyramid scheme, highlighting how authorities are ramping up their enforcement in digital asset markets.

The Wall Street watchdog said the scheme known as Forsage raised the funds by using promoters to convince millions of investors worldwide to recruit others into the programme.

“Forsage is a fraudulent pyramid scheme launched on a massive scale and aggressively marketed to investors,” said Carolyn Welshhans, acting chief of the SEC’s crypto assets and cyber unit. “Fraudsters cannot circumvent the federal securities laws by focusing their schemes on smart contracts and blockchains.”

The SEC accused the operators of Forsage of raising the $300mn in the US and worldwide from at least January 2020 through an unregistered securities offering. The civil charges come just weeks after the regulator charged a former employee of crypto exchange Coinbase with insider trading related to coin listings. The former Coinbase staffer said through his attorney that he is “innocent of all wrongdoing”.

The cases underscore how the SEC is applying existing securities rules to police the digital asset market, which its chair Gary Gensler has called the “wild west”.

The SEC said in a complaint filed in federal court in Illinois that Forsage “did not sell or purport to sell any actual, consumable product to bona fide retail customers during the relevant time period and had no apparent source of revenue other than funds received from investors”.

Forsage used smart contracts — computers programs that allow crypto trading to take place without a central intermediary — to operate the scheme, the SEC said. The contracts traded on the Ethereum, Tron and Binance blockchains — digital ledgers that are widely used in the crypto industry, according to the regulator.

Investors in the project would earn compensation from others whom they recruited and the individuals those people pulled into the project. Investors also earned profit sharing fees from the broader community.

“All payouts to earlier investors were made using funds received from later investors,” the SEC said.

A Forsage representative reached through the group’s website, who described themselves as a volunteer for the decentralised organisation, said the SEC’s allegations are the “nonsense of cryptocurrency newcomers and are not true”.

The SEC’s charges include Forsage’s four founders — Vladimir Okhotnikov, Mikail Sergeev, Sergey Maslakov and an individual known by the alias Lola Ferrari. Okhotnikov’s and Ferrari’s last known locations were the Republic of Georgia and Indonesia respectively. Sergeev and Maslakov are both last known to be in Moscow. The individuals could not be reached for comment.

The SEC also charged three US-based promoters of the scheme, as well as members of a promotional group for the scheme called Crypto Crusaders that operated in at least five US states.