Fraudulent Crypto Trading Scheme Raises Millions in a Few Weeks
While there is virtually no end to offering fraud actions – schemes in which investors are sought to purchase securities based typically on false performance and safety issues – those tied to hot ticket items such as marijuana or crypto currency seem to be most lucrative. Consider, for example, the Commission’s latest case in this area, SEC v. Ackerman, Civil Action No. 1:12-CR-1181 (S.D.N.Y. Filed Feb. 11, 2020). There over $30 million was raised in a few weeks from a for a crypto currency trading scheme with a so-called proprietary software trading program. Unfortunately for investors who rushed to put in their capital, it was a fraud, according to the complaint.
Defendant Michael Ackerman, a former registered representative, formed the Q3 Trading Club with two business partners in July 2017. One of those partners was a member of a private Facebook group called Physicians Dads Group. A post on the group web page by that member explained that he was part of a club in which members pooled their funds to trade crypto currencies. Members of the Facebook group could request or be invited to participate. For those who joined the trading profits would be split, 50% with new members and 50% with the three founders. All investment capital was forwarded to an offshore digital trading platform.
A second offering began about one year later. It centered on an entity known as Q3 1. Over a 60 day period in late 2018 about $33 million was raised from over 150 investors using a PPM. That offering document told investors that their funds would be invested in a successful crypto trading program that was based on the use of a proprietary algorithmically driven software program. Profits would be split in the same manner as the club described above.
Mr. Ackerman, who directed the trading program, made a series of misrepresentations in connection with the offering. Key to attracting new investors was the success of the program. While trader Ackerman repeatedly reported to his two partners by text message that the amount of funds invested had increased significantly as did the profits, in fact the claims were false. In truth, Mr. Ackerman had only invested a fraction of the offering proceeds. For example, while Mr. Ackerman reported a trading account balance on September 1, 2019 of over $181,930,351, in fact it was only about $1.5 million.
The three founding partners also paid themselves about $4 million in licensing fees. Yet in fact no licensing fees for the software were due. Claims regarding the safety of the investment, keyed to alleged internal controls, were also false – the controls did not exist. Claims that investor funds would be used for trading were also false – Mr. Ackerman misappropriated about $7.5 million. The complaint alleges violations of each subsection of Securities Act Section 17(a), and Exchange Act Section 10(b). The case is pending. A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office.