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Feds start to crack down on fraud as Bitcoin soars
Cryptocurrencies have been on a wild ride.
The premier digital currency, Bitcoin, crossed $17,000 in value Thursday before plunging back to $14,000. Others like it are gaining in popularity as prices climb to meteoric heights.
While these new digital currencies are helping some pioneering investors gain quick wealth, federal authorities are warning about their potential for fraud.
The Securities and Exchange Commission has warned investors to be on the lookout for “potential scams” involving Initial Coin Offerings.
ICOs are sometimes called “crowdsales” and function similarly to an Initial Public Offering on the stock market, but without the governmental regulation. They typically receive investments in the form of cryptocurrency in exchange for shares known as tokens. But ICOs can be for any sort of startup — they don’t necessarily have to be for cryptocurrency companies.
The SEC’s newly created Cyber Unit has started to take action on “pump and dump” schemes where fraudsters lure investors, take their money, and run.
The agency declined to comment specifically about the prevalence of fraud, but Todd Kornfeld, an attorney with Pepper Hamilton who specializes in financial regulations as well as ICOs and blockchain technology, said the feds are looking for obvious fraudsters.
“So far, the cases that have attracted regulatory scrutiny and enforcement actions appear to be blatant, outright frauds where apparently there were never any intentions of actually delivering a product or service, or so it has been alleged,” Kornfeld said.
On December 4, the SEC said it froze the assets of PlexCorps, a company that was running an ICO for its own cryptocurrency called PlexCoins. It marked the first action from a newly created Cyber Unit inside the SEC that’s looking to combat digital fraud.
The agency filed civil charges against Dominic Lacroix, his partner Sabrina Paradis-Royer and PlexCorps, for “misappropriating investor funds illegally raised through the fraudulent and unregistered” offer of PlexCoin. Before they were shut down, the ICO had raised nearly $15 million from thousands of investors since August by allegedly making false promises for a 13-fold profit in less than a month.
“We intend to contest this case not in the media but in a court of law,” said Jason Gottlieb, a lawyer for Lacroix and Paradis-Royer. “Once the court appreciates the facts and the applicable law, I am confident the court will come to see this case differently than the SEC has presented in its papers to date.”
The SEC complaint says Lacroix is “the subject of numerous proceedings related to fraudulent securities activities in Canada.”
In cases that are not so obvious, the agency said that investors can run free background checks on ICO providers through BrokerCheck on the Financial Industry Regulatory Authority’s website.
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There are other clues for detecting questionable ICOs, he said, like amateurish websites, a lack of coverage on news sites and industry blogs, a lack of official documentation, and a puffed-up sales technique that fails to warn of potential risks.
“Spotting a potentially fraudulent ICO is no different from spotting a fraud in anything you buy or a business arrangement that you enter,” Kornfeld said. “It’s partly a look and smell thing. Do things look right?”
Despite its Wild West atmosphere this relatively new market, which operates outside the tenets of regulated national currencies, is becoming increasingly hard for Wall Street to ignore.
Major exchanges are getting into the game. Starting this month, investors will be able to trade Bitcoin futures on the Chicago Board Options Exchange and the Chicago Mercantile Exchange, and the Nasdaq could join the list next year.
The feds continue to take notice. In November, the FBI charged Brooklyn businessman Maksim Zaslavskiy with securities fraud and conspiracy to commit securities fraud for allegedly bilking investors out of $300,000 through an ICO scam called REcoin which he claimed was “the first-ever cryptocurrency backed by real estate.” He was also hit with an SEC civil complaint.
He has pleaded not guilty. His lawyers, Jason Nagi and Mildred Whalen, said Zaslavskiy did not intend to defraud investors.
Spotting fraud may be easier than predicting cyber-security issues.
On Wednesday, NiceHash, a marketplace for mining digital currencies, said it was temporarily suspending its operations because hackers stole as much as $70 million in cryptocurrency.
Other exchanges have collapsed or disappeared under questionable circumstances, like the infamous Mt. Gox incident of 2020, where a bitcoin exchange in Japan shut down and froze hundreds of millions of dollars in funds. Some of the money was eventually returned from a “forgotten” digital wallet, but the company filed for bankruptcy with $64 million in debt. In 2020, Japanese prosecutors charged Mt. Gox founder Mark Karpelès with embezzlement. He pleaded not guilty and went to trial earlier this year.
Garrick Hileman, a senior research associate at the University of Cambridge Centre for Alternative Finance, said that it’s often hard to tell the difference between a failed ICO and a deliberate scam. But he said regulatory scrutiny is increasing, at the same time that the market is growing and Bitcoin’s price is soaring sky-high.
“I think the regulators have signaled very clearly that they’re watching the space very closely now and this is going to scare off some of the more blatant ICOs,” he said. “I think the ICOs we do see will be much better disguised. I think they’ll have to be, to avoid scrutiny.”
Binary options fraud ‘growing problem’
Binary options fraud is a “growing problem”, according to Action Fraud, with £18m lost in the first half of 2020 alone.
In the first six months of this year 697 people reported having lost money to this type of fraud.
A binary option is a financial option in which the payoff is either some fixed monetary amount or nothing at all.
Earlier this week the City of London Police, which runs Action Fraud, conducted a day of action and visited 20 offices in the City with Trading Standards.
Chief Superintendent Glenn Maleary, the City of London Police’s head of the economic crime directorate, said: “This multi-agency operation allowed us to speak with multiple businesses and gather significant intelligence around various investments currently being traded in the City.
“With our partners we want to ensure the City is a hostile environment for fraudsters to operate in and we will continue to do everything we can to ensure that this is the case.
“Throughout this year we have been raising awareness of binary options fraud and over the coming days we will be providing more advice on how people can beat the boiler rooms and protect themselves from all types of investment fraud.”
While binary options theoretically play a role in asset pricing, they are prone to fraud and banned by regulators in many jurisdictions as a form of gambling.
A total of 17 per cent of all investment product-related enquiries to the FCA between 1 December 2020 and 30 November 2020 were about this type of trading.
In August Money Saving Expert founder Martin Lewis warned that his name was being used to encourage consumers to invest in binary options “scams”.
The Action Fraud team, which was assisted by the FCA and HM Revenue & Customs, said it found “interesting results” including a business that had paid more than three months’ rent upfront to a serviced office provider and then disappeared.
Work will now take place to establish information about this company and investigate whether it was a boiler room.
Over the next six months an intelligence picture will be developed using the information gathered from the day of action to prevent investment fraudsters from operating in the City of London.
Steve Playle, Trading Standards manager for the City of London Corporation, said: “Working closely with our partners, we are deterring investment scammers who use City addresses to create an illusion of respectability that plays an important part in persuading people to part with their money.
“This day of action is raising public awareness so that we can all do our bit and report those that we think are involved in this miserable practice.”
UK’s Financial Conduct Authority (FCA), which is in charge of the financial markets and financial services providers in the country, including forex and CFD brokers, announced that from January 3, 2020 it is taking over the regulation of the binary options brokers, as well. Until now, the binary options companies in Great Britain were overseen by the Gambling Commission.
The new state of things would mean that the binary options brokers will be authorized and supervised by FCA, individual complaints will have to be referred to the Financial Ombudsman Service and consumers will have access to the Financial Services Compensation Scheme. This, however, does not mean that the compensation scheme will cover clients’ losses from trading. Rather, it will compensate the funds held in clients’ accounts in case the brokerage goes bankrupt.
In addition to the announcement, the FCA has warned of the risks associated with binary options, noting that they are very risky and highly addictive. The regulator quotes data, which proves that usually the consumers find it difficult to make sustained profits over a series of bets and end up losing their money, even when dealing with proper brokers.
Furthermore, the investors can become victims to a binary options fraud. According to the FCA statistics, since 2020, there have been a reported 2 605 victims who lost £59.4 million on binary options scams.
The FCA also notes that the binary options brokers licensed by the regulators of other countries within the EEA (EU + Iceland, Norway and Lichtenstein), can continue to operate legally in the UK and will only be entered in FCA’s register of financial services firms.
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SEC acts to crack down on stock option frauds
THE US Securities and Exchange Commission (SEC) has approved new rules to combat stock options fraud under the most substantial overhaul of benefit disclosure policy in 14 years.
The financial watchdog’s five commissioners, led by its chairman Chris Cox, voted unanimously on a raft of new rules designed to improve transparency on executive pay and benefits — in particular relating to stock options.
Federal regulators and the SEC are investigating about 70 US companies, including Home Depot, America’s biggest DIY retailer, to see if they fraudulently backdated the grant date of employee share options to a time when the stock price was lower, potentially increasing their payout.
The SEC’s new measures require companies to explain why they granted options on a certain date and to
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