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Recent Enforcement Actions for January 2016

Jan 12, 2016

SEC Charges Bitcoin Mining Companies

The Securities and Exchange Commission recently charged a bitcoin mining company and its founder with conducting a Ponzi scheme to defraud investors.

"Mining" for bitcoin or other virtual currencies means using computer power to try to solve complex equations to verify a group of transactions in that virtual currency. The first computer or collection of computers to solve such an equation is awarded units of that virtual currency.

The SEC alleges that an individual perpetrated the fraud by purporting to offer shares of a digital bitcoin mining operation. In reality, he allegedly did not own enough computing power for the mining he promised to conduct, so most investors paid for a share of computing power that never existed. 

According to the SEC’s allegations, investors were misled to believe they would share in returns earned by the bitcoin mining activities when in reality the company directed little or no computing power toward any mining activity. The company allegedly sold more computing power than owned; therefore they owed investors a daily return that was larger than any actual return they were making on limited mining operations. The SEC further alleges that investors were paid back gradually over time out of funds that the company collected from other investors.


SEC Charges Pyramid-Ponzi Scheme Promoter

The Securities and Exchange Commission recently filed suit against an individual for their alleged participation in the fraudulent unregistered offer and sale of securities which was alleged to be an internet-based combined Ponzi and pyramid scheme. According to the complaint, approximately $850 million was raised from approximately one million internet customers nationwide and overseas through the website.

The complaint alleges that that the individual solicited investors through the Internet and other means to participate in the self-described "affiliate advertising division" for a companion website, through which the company operated penny auctions. The program offered customers several ways to earn money, two of which -- the "Retail Profit Pool" and the "Matrix" -- involved purchasing securities in the form of investment contracts. These securities offerings were not registered with the SEC as required under the federal securities laws.

According to the complaint, investors were lured to the site by promises of shares of the company's daily net profits in the form of daily profit share awards. The company's purported calculations consistently resulted in a daily award each day, fraudulently conveying the false impression that the company was extremely profitable. In fact, the daily award percentage was fabricated and investor payouts bore no relation to the company's net profits. Approximately 98% of total revenues and the "net profits" paid to investors were comprised of funds received from new investors in classic Ponzi scheme fashion. 

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