Cryptocurrency startup BitConnect and two men have been sued by America's financial watchdog, which claims the now-defunct biz swindled investors out of billions by lying to them about an automated trading bot that could reap huge profits.
BitConnect founder Satish Kumbhani, 35, and promoter Glenn Arcaro, 44, are accused of breaking US fraud laws in a civil lawsuit brought this week by the SEC in New York City. The regulator alleges the pair touted a “volatility software trading bot,” and promised investors the automated system could generate returns as much as 40 per cent per month.
"We allege that these defendants stole billions of dollars from retail investors around the world by exploiting their interest in digital assets," said Lara Shalov Mehraban, associate regional director of SEC's New York office. "We will aggressively pursue and hold accountable those who engage in misconduct in the digital asset space."
All investors had to do was hand over their Bitcoin, or rather, lend BitConnect the cryptocurrency, and the biz's bot would use it to make trades and bank huge profits to return to the investors as interest payments. Instead, the SEC claimed, the digital money was funneled into electronic wallets owned by Kumbhani, Arcaro, and others for their own personal benefit.
A total of 325,000 Bitcoins, at the time worth about $2bn and today $16bn, was given to Kumbhani and BitConnect, the SEC claims. We're told Arcaro was hired to promote the scheme; he started his own company Future Money to entice people into trading with BitConnect and was paid commission fees every time he successfully got someone to join the lending program.
“These claims were a sham,” the SEC alleged in its court paperwork [PDF].
“BitConnect did not deploy investor funds for trading with its purported Trading Bot. Rather, BitConnect and Kumbhani siphoned investors’ funds off for their own benefit, and their associates’ benefit, by transferring those funds to digital wallet addresses controlled by Kumbhani, Arcaro, other promoters, including the Arcaro Promoters, and other unknown individuals.”
It's worth noting Arcaro has already pleaded guilty to criminal charges of misleading investors, in connection with the SEC's case, and agreed to return $24m.
“Arcaro has accepted responsibility for his actions of defrauding thousands of individuals worldwide to invest in BitConnect,” said special agent Eric Smith of the FBI’s Cleveland Field Office.
“He lined his pockets with millions of dollars, money from victims that believed their funds were being invested into a new cryptocurrency with a high rate of return. Those choosing to engage in financial criminal deception should know the FBI will not stop until all fraudsters are identified and held accountable.”
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Arcaro recruited a team of promoters through Future Money, knowing that there was no trading bot working behind the scenes, the financial watchdog's lawsuit claimed. When people asked for their returns, they were often given funds that had been previously deposited by other investors, the SEC claimed. BitConnect thus operated a “Ponzi-like scheme.”
BitConnect was founded in 2016 by Kumbhani and shut down two years later after regulators in the US and UK began sniffing around. It was sent multiple cease-and-desist letters, resulting in it pulling the plug on its website and closing its lending program in 2018. Its investors have not managed to recover much of their money.
You see, when investors wanted to participate in the program, they had to essentially exchange their Bitcoin for BitConnect tokens, called BCC, and to cash out, they had to sell their BCC for Bitcoin. When the company crashed, the value of BCC tanked and whatever digital assets investors were given back were worth much less than their previous Bitcoin.
“Investors found there was no market demand for their BCC tokens, and the price of BCC was so low that their investments were suddenly worth a small fraction of the value of just a week before. Any investor who had not cashed out before this point lost all or nearly all of his or her funds invested in the Lending Program,” according to the lawsuit.
Arcaro is due to be sentenced for wire fraud on November 15 in California. Kumbhani’s current whereabouts, however, are unknown. ®