030: Bitcoin Ponzi Scheme Leads to $12 million in Fines

030: Bitcoin Ponzi Scheme Leads to $12 million in Fines

030: Bitcoin Ponzi Scheme Leads to $12 million in Fines 030: Bitcoin Ponzi Scheme Leads to $12 million in Fines

Learning Objectives

 Upon completion of this Case Study, participants should: 

•Understand aspects of commodities trading fraud, securities fraud, and wire fraud; 

•Describe a Ponzi Scheme operation;

•Understand the process involved with a grand jury leading to an indictment; and

•Explain restitution and penalties resulting from violations of federal law.

State of the Industry

The last decade has seen cryptocurrency rise in popularity. Many investors’ misperceptions lend themselves to scams and fraudulent activities. Anonymity adds to the popularity of using cryptocurrencies. The more popular cryptocurrencies become, the more regulation and government scrutiny investors can expect.  More regulation and government involvement can erode the fundamental premise for cryptocurrencies.  In this case study, we see two scammers who intentionally mislead investors and how federal regulators reacted.

Background and Analysis

This case study profiles Denver Colorado-based venture capital firm Venture Capital Investments, LLC (VCI), its owners David Wagner and Breonna Clark. It also profiles co-defendants Marc Lawrence and his company Cliniflow Technologies, LLC (CTL).

The Commodities and Futures Trading Commission (CFTC) investigated these defendants for suspected violations of their regulations. The investigators referred the case to the Department of Justice (DOJ) for prosecution.

After reviewing the information, prosecutors believed the people committed a crime and sought indictments against each of the defendants.

To get an indictment, prosecutors must empanel a grand jury. Members of a grand jury listen to testimony and evidence. They may ask questions. A defense attorney is not present. If the members of the grand jury determine that probable cause exist for a charge, the members of the grand jury return the formal criminal charge, known as an indictment. Most defendants puruse a plea agreement and plead guilty. If the defendants want to contest the charge, they may stand trial before a judge or a petite jury. The judge or members of the petite jury will make a finding of fact with a verdict.

According to investigators at the CFTC, defendants used illegal sales and marketing practices to draw more than 72 clients and investors into commodity pools. These commodity pools trade in digital assets, including Bitcoin and Forex. The United States capital markets permit trading in cryptocurrency, like Bitcoin. Forex trading involves purchasing one currency and selling another. Traded 24-hours a day, 5-days a week, Forex does not have a centralized exchange. Forex currencies trade over the counter in any market available at the time.

CFTC investigators revealed defendants told new investors their venture capital firms would provide “sales, operations, and management expertise to healthcare startups” as part of its investment portfolio. VCI and CTL referred to these startups as “portfolio companies” to help them bring new investors into the fold.

VCI and CTL investors also eventually worked for these companies as salespeople trying to find new investors. To become an employee-investor, defendants required new personal investments of $150,000 to $250,000. However, once these employee-investors deposited their money, they discovered the defendants lied and did not have access to capital funding. VCI and CTL had virtually no products to sell, the majority of VCI’s and CTL’s financing came from the employee-investors, and they routinely failed to make payroll.

In November 2020, Wagner pled guilty to two counts of securities fraud and one count of wire fraud. Wagner received a six-year prison sentence. He will also serve three years of supervised release. Lastly, Wagner agreed to pay $7.9 million of restitution and fines of $549,000.

Lawrence pled guilty to two counts of securities fraud and one count of wire fraud. According to the DOJ, each count carries a maximum sentence of 20 years in prison. As part of his plea agreement, Lawrence agreed to $4.55 million in restitution to victims of his criminal conduct. He also agreed to fines of $150,000 to the United States. 

Recommendation

We recommend compliance training that includes explanations of white-collar crime for any individual that builds a business in financial services. People that do not understand the collateral consequences of the decisions they make in business may be more susceptible to making decisions that deceive their clients—not understanding how those decisions can lead to the loss of liberty, as in this case.

Through his illegal actions, Wagner stole $10 million from approximately 40 investors. Wagner used those funds to repay prior investors and pay for personal expenses, including a Porsche for his daughter. Lawrence likewise abused his position of trust with his clients. He misappropriated investor funds for his own gain.

In all reality, Wagner started off his career as a law-abiding citizen. By not fully grasping the complications that come with noncompliance, he has lost his liberty and suffers financial harm.

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