The U.S. Securities and Exchange Commission (SEC) has recently unveiled charges against three companies and nine individuals linked to fraudulent crypto market manipulation schemes. This intricate scheme aimed to manipulate markets for various crypto assets offered and sold as securities to retail investors, deceiving them with the false appearance of active trading markets for these assets.
The defendants, including Russell Armand, Maxwell Hernandez, Manpreet Singh Kohli, Nam Tran, and Vy Pham, were alleged to have collaborated with three entities – ZM Quant, Gotbit, and CLS Global, who posed as market makers. These companies purportedly provided “market-manipulation-as-a-service” to artificially inflate trading volumes and prices of the crypto assets offered to retail investors in unregistered transactions.
According to the SEC’s filings, ZM Quant and Gotbit engaged in wash trading under the promoters’ direction, generating artificial trading volume by buying and selling the same asset to create the illusion of market activity. CLS Global was also implicated in a similar scheme involving a crypto asset under FBI scrutiny in a separate probe into market manipulation.
The fraudulent activities misled investors by creating a façade of active trading and market demand, facilitated by algorithms and trading bots that churned out an astronomical number of transactions, yielding billions of dollars in artificial trading volume daily on various crypto trading platforms.
Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement, emphasized the agency’s commitment to holding perpetrators accountable for victimizing retail investors with false promises of profitability in the crypto markets. The maneuvers by purported promoters and market makers underscore the challenges faced by investors in navigating the volatile crypto landscape.
Jorge G. Tenreiro, Acting Chief of the Division of Enforcement’s Crypto Asset and Cyber Unit, expressed concerns over the deception’s scale, emphasizing the SEC’s dedication to rooting out misconduct involving securities.
The SEC’s enforcement actions, filed in the United States District Court for the District of Massachusetts, include charges of violating securities laws’ antifraud and market manipulation provisions, with additional accusations of registration violations against certain defendants.
The agency seeks relief such as permanent injunctions, conduct-based injunctions, disgorgement of profits, civil penalties, and officer and director bars to deter future violations and prevent defendants from holding leadership positions in SEC-regulated companies.
In a significant development, three key defendants – Armand, Hernandez, and Pham – have reached bifurcated settlements pending court approval. The settlements would enjoin them from further securities law violations, impose conduct-based injunctions, and bar them from serving as officers or directors of public companies.
Parallel criminal actions led by the FBI and the United States Attorney’s Office for the District of Massachusetts have been initiated against the individuals involved in these fraudulent schemes, highlighting cooperation between agencies to address market manipulation.
As regulatory bodies intensify efforts to combat fraudulent activities in the crypto sector, investors are advised to exercise caution and conduct thorough research before engaging with crypto market offerings. These enforcement actions serve as a warning to potential manipulators that illicit actions will face scrutiny and consequences in both civil and criminal proceedings.