Crypto Currency and Cyber Security – The USAO’s Latest Case

Crypto currency is one of the hottest topics in the tech and investment world. The same is true of cyber security – it is one of the most talked about subjects in tech and, in addition, compliance. tThe Manhattan USAO’s latest case merges the two into the factual predicate for a securities fraud action. U.S. v. Montroll, No. 1:18-mj-1372 (S.D.N.Y.).

Defendant Jon Montroll was the operator of WeExchange Australia, Pty, Ltd. and BitFunder.com The former was a bitcoin depository and currency exchange service. The latter facilitated transactions in virtual shares of entities that listed on BitFunder.

Over a period of seven month beginning in December 2012 Mr. Montroll misappropriated a portion of investor bitcoins on the WeExchange. Subsequently, in July 2013 he began promoting Likyo.Loan, a security that Mr. Montroll urged investors to view as “a sort of round-about investment” in BitFunder and WeExchange, as well as a loan. The interests could also be redeemed at face value.

Hackers penetrated BitFunder’s programing code during the summer of 2013. The hackers caused the program to credit their accounts. Following the hack Mr. Montroll did not have the bitcoins necessary to cover those owed to users. Mr. Montroll did not disclose the hack to investors. Rather, he continued to promote Likyo.Loan, telling at least one investor that it was a commercial success – an incorrect statement.

Subsequently, the SEC opened an investigation. During testimony Mr. Montroll displayed a screen shot that supposedly documented the total number of bitcoins available to BitFunder users in the WeExchange Wallet as of October 13, 2013. The representations in the screen shot were false. During the testimony that followed Mr. Montroll falsified the details of the hack.

Mr. Montroll pleaded guilty this week to one count of securities fraud and one count of obstruction of justice. The date for sentencing has not been set. See also SEC v. Montroll, Civil Action No. 1:18-cv-01582 (S.D.N.Y. Filed Feb. 21, 2018).