A busy summer for DOJ and SEC - from insider trading by a former Coinbase employee to ICO scams

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A busy summer for DOJ and SEC - from insider trading by a former Coinbase employee to ICO scams

July 28, 2022

Over the last few weeks, we have seen law enforcement and regulatory action heat up from the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC).

While it may seem like there is a coordinated effort at shock and awe on crypto-related fraud and financial crime, the reality is that many of these cases have been pending for some time and are just now being resolved. However, it is true that crypto-related investigations tend to move quickly - see the recent Baller Ape Club NFT rug pull case and four other cases announced by the DOJ just a few weeks ago.

Read our wrap-up of DOJ and SEC actions related to insider trading at Coinbase, ICO scams and other crypto-related fraud, on TRM Insights.

U.S. DOJ brings insider trading charges in case against former Coinbase employee

Late last week, the U.S. Department of Justice announced the unsealing of an indictment charging Ishan Wahi, a former product manager at Coinbase, as well as his brother, and a friend, with wire fraud conspiracy in connection with an insider trading scheme.

As alleged in the indictment, defendant Wahi, a former Coinbase employee, had access to highly confidential information on the timing of token listings which he was strictly prohibited from sharing or taking action on.

On at least 14 occasions beginning at least in June 2021 and continuing through April 2022, Wahi knew in advance both that Coinbase planned to list particular crypto assets, and the timing of Coinbase's public announcements of those asset listings, and misappropriated this confidential information by tipping either his co-conspirators - his brother and/or his friend - enabling them to place profitable trades in those crypto assets in advance of Coinbase's public listing announcements. Following Coinbase public listing announcements, defendants sold the crypto assets for a profit.

"As a result of the insider trading scheme defendants collectively generated realized and unrealized gains totalling at least approximately $1.5 million."

To conceal their purchases of crypto assets in advance of Coinbase listing announcements, the defendants used accounts at other exchanges held in the names of others, and transferred funds, crypto assets, and proceeds of their scheme through multiple Ethereum wallets.

On April 11, 2022, Coinbase announced that it was considering potentially listing dozens of crypto assets on its exchanges. Based on Coinbase confidential information, defendants caused multiple Ethereum wallets to purchase large quantities of at least six of the crypto assets that were to be included in Coinbase's April 11, 2022 listing announcement. The purchase was called out on Twitter, which sparked an investigation by Coinbase.

Defendant Wahi attempted to flee the United States after being called to an in-person meeting with Coinbase security. Prior to boarding a May 16, 2022 flight to India, Wahi was stopped by law enforcement and prevented from leaving the country.

Interestingly, the case appears to have started from a tweet. According to reporting, and even a mention in the DOJ press release, a crypto Twitter user named Cobie tweeted, "Found an ETH address that bought hundreds of thousands of dollars of tokens exclusively featured in the Coinbase Asset Listing post about 24 hours before it was published, rofl."

According to the indictment, Cobie was tweeting about a wallet owned by Ramani. On April 13th, Coinbase's chief security officer replied to the tweet to say the company was investigating.

This case highlights the unique, open nature of the blockchain, which allowed an individual to identify suspect transactions in real-time and report them on Twitter, and another example of the community of users self-reporting and policing.

In a parallel action, the SEC has brought insider trading charges, saying that nine tokens are securities

The U.S. Securities and Exchange Commission (SEC) used its parallel investigation and charges in the Coinbase insider trading matter to assert that nine digital tokens are "securities." Unlike DOJ which must prove wire fraud beyond a reasonable doubt, the SEC, in order to make its case, must also show that the co-conspirators traded on insider information involving securities.

The complaint is the first time  that the SEC has identified several cryptocurrencies as securities without charging the issuers or the exchange listing the "securities."

The tokens listed were Flexa's AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX and KROM.

In a tweeted statement, Commodity Futures Trading Commission (CFTC) Commissioner Caroline Pham called the action a "striking example of 'regulation by enforcement.'"

The 62-page SEC complaint went through the nine tokens one by one to illustrate how each should be defined under the Howey Test as securities.

The Howey Test is a 1946 Supreme Court case that interprets 1933 and 1934 securities laws and determines what qualifies as an "investment contract." Specifically, the case holds that an investment contract exists - and something is a security - if there is an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others." TRM Insights breaks down the Howey Test and what it might mean for crypto here.

This case and its implications for crypto regulation will play out over time. While the insider trading case is newly charged, there is a current pending case involving Ripple's XRP token that may be resolved sooner, providing some insight into what, if any, crypto assets will be considered securities. Watch TRM's Ari Redbord break down the DOJ and SEC insider trading cases on CNBC.

It's not only insider trading

It has been a busy few weeks for crypto-related prosecutions at the U.S. Department of Justice. In the last two weeks, in addition to the Coinbase insider trading case, the Department has made announcements in three additional cases.

Mid-Trial Guilty Plea In ICO Scam

An Atlanta man pled guilty to multiple counts of wire fraud, securities fraud, and money laundering charges mid-trial arising from his fraudulent promotion of two cryptocurrency-related investment schemes that cost investors millions in losses.

Specifically, in 2017 and 2018 the defendant promoted initial coin offerings (ICO) for a new entertainment streaming platform, FLiK - which he promised would surpass Netflix - and another venture, Coinspark. In order to increase, or pump, the price of FLiK and Coinspark coins, the defendant made a series of misrepresentations and diverted over $2.4 million in investor funds to finance an extravagant lifestyle.

New York man convicted in connection with crypto-related fraud

In this case, a New York man was convicted by a jury of 4 counts of money laundering in connection with a fraudulent scheme for "offering virtual payment services through a fraudulent digital currency, "My Big Coins," which he marketed to investors between 2014 and 2017 using misrepresentations about the nature and value of Coins," including that they were backed by stable assets.

"Over the course of the scheme, defendant misappropriated over $6 million of investor funds for his own personal gain, including spending hundreds of thousands of dollars on antiques, artwork and jewelry."

Titanium Blockchain CEO convicted in $21 million ICO scam

On Monday of this week, DOJ announced that the CEO of Titanium Blockchain Infrastructure Services, Inc. (TBIS) pled guilty "for his role in a cryptocurrency fraud scheme involving TBIS's initial coin offering (ICO) that raised approximately $21 million from investors in the United States and overseas." As DOJ Trial Attorney Kevin Lowell, who prosecuted the case, explained, this was the "first conviction from the Fraud Section's June 2022 National Cryptocurrency Enforcement Action."

Specifically, the defendant touted TBIS, as "a #cryptocurrency investment opportunity, luring investors to purchase "BARs," the cryptocurrency token or coin offered by TBIS's ICO, through a series of false and misleading statements. Although required to do so, Stollery did not register the ICO regarding TBIS's cryptocurrency investment offering with the SEC. "The defendant, in order to entice investors, falsified white papers and claimed that he had business relationships with the Federal Reserve and dozens of prominent companies to create the false appearance of legitimacy, and used investors money for personal expenses.

The defendant pleaded guilty to one count of securities fraud. He is scheduled to be sentenced on November 18 and faces up to 20 years in prison.

What does all this DOJ action mean?

Over the last few weeks we have seen a spate of announcements from DOJ. These are not new cases - in fact they are mainly guilty pleas which often take months or years - but rather the fruit of actions that the Department has taken since the creation of the DOJ Enforcement Framework almost two years ago. Since then, DOJ has stood up a National Cryptocurrency Enforcement Team (NCET) and worked closely across the Department, with U.S. Attorney's Offices, law enforcement and the private sector to root out crypto-related fraud and financial crime. While it might feel like there is a rash of scams and fraud at this moment, what we are actually seeing are the fruits of longer term investigations and prosecutions. And, we are likely to see more coming as crypto is used in a growing number of cases.

About TRM Labs

TRM provides blockchain intelligence to help financial institutions, cryptocurrency businesses, and public agencies detect, investigate, and manage crypto-related fraud and financial crime. TRM's risk management platform includes solutions for transaction monitoring and wallet screening, entity risk scoring - including VASP due diligence - and source and destination of funds tracing. These tools enable a rapidly growing cohort of organizations around the world to safely embrace cryptocurrency-related transactions, products, and partnerships.

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