Enforcement News: SEC, CFTC and DOJ Bring Separate Actions Against Pool Operators In Connection with a Global Cryptocurrency-based Ponzi Scheme that Bilked Investors Out of Millions of DollarsPrint Article
- Posted on: Jul 5 2022
By: Jeffrey Haber
As we have noted in prior articles, fraudulent schemes come in many forms. One type of fraud that has gained favor among the unscrupulous involves cryptocurrency: in particular, using cryptocurrency as an investment platform. Unbeknown to investors – at least, until it is too late –these investment opportunities are both a Ponzi scheme and a Pyramid scheme at the same time.
On May 13, 2022, the Commodity Futures Trading Commission (“CFTC”) announced (here) that it had filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Eddy Alexandre, and his company, EminiFX, Inc., charging them with fraudulent solicitation and misappropriation in connection with soliciting clients to trade foreign currency exchange (“forex”), commodity futures contracts, and cryptocurrencies.
According to the CFTC, since at least September 2021, defendants solicited and accepted at least $59 million from hundreds of people to purportedly trade forex and cryptocurrencies, as well as futures and options, in an investment club. Defendants allegedly guaranteed customers returns of 5% per week. Specifically, Alexandre falsely represented to investors that they would double their money within five months of investing by earning a 5% weekly return on their investment using a “Robo-Advisor Assisted account” to conduct trading. In fact, said the CFTC, defendants used only approximately $9 million of customers’ funds to trade forex and cryptocurrency. Defendants lost nearly 70% of that amount —approximately $6.2 million—through unprofitable trading and fees.
The CFTC also alleged that defendants misappropriated substantial amounts of the remaining customer money by sending it to accounts in Alexandre’s name, using it to pay other customers in a Ponzi-like scheme, and using it for Alexandre’s personal expenses.
In addition, defendants allegedly used a multi-level marketing (“MLM”) structure (i.e., a pyramid scheme) through which investors received commissions for recruiting others to join EminiFX. This MLM structure allegedly fueled the growth of EminiFX, especially online.
In a separate action, the U.S. Attorney’s Office for the Southern District of New York announced the filing of a criminal action for related conduct (here).
On June 30, 2022, the Securities and Exchange Commission (“SEC”), the CFTC and the Department of Justice (“DOJ”) announced the filing of parallel civil and criminal actions (here, here, and here) against Empires Consulting Corp., its founders, Emerson Sousa Pires and Flavio Mendes Goncalves, and its head trader, Joshua David Nicholas, for perpetrating a scheme similar in concept to the one at issue in the EminiFx action.
[Ed. Note: the allegations alleged by the SEC and CFTC in their respective complaints are set forth below.]
According to the complaints, beginning in or around September 2020, Empires Consulting launched EmpiresX as a means for individuals to purportedly gain “financial independence” and “[b]ecome involved in financial markets such as futures, options, stock exchange and cryptocurrency.” Since that time, defendants solicited individuals to invest money with EmpiresX to trade commodity futures and options and other products on their behalf. As noted by the SEC and CFTC, defendants solicited prospective participants through the company’s website (the “EmpiresX Website”); in online videos posted on YouTube, Instagram, and other social media platforms and websites; and in telephone calls and electronic messages.
Typically, defendants represented that individuals could invest funds with EmpiresX in one of two ways: either in a “private investment” pool directly managed by defendant Nicholas —described in numerous communications as EmpiresX’s “head trader” — or in a pool purportedly traded by an automated trading program known as the “EX Bot,” which defendants told participants would “trade the pool for you” using Nicholas’s trading as an input into its algorithm.
Investors who contributed money to the EmpiresX pools received login credentials to the EmpiresX website, where they could view their account balances, activate the EX Bot, and watch the EX Bot trade on their behalf. Participants were not required to sign an investment agreement before accessing their account, and they did not receive regular account statements.
Initially, defendants required participants to fund their accounts using cryptocurrencies, including Bitcoin, Ether, or Tether. Later, defendants allowed investors to fund their accounts using fiat currency. Defendants allegedly told investors that once EmpiresX received their funds, they would “start to receive their profits daily.”
In videoconferences with participants and prospective participants, defendants allegedly represented that “your money will always stay under your control” and that “you can …
withdraw whenever you want, and control trading, times, [and] profits ….” At certain times, defendants reportedly said that participants would be able to instantly withdraw funds from their account via cryptocurrency. At other times, defendants allegedly represented that EX Bot profits were available “Every Friday (Payments Every Monday)”, while profits purportedly generated through the private investment pool were available “Every last day of the month (Payment On the Next Monday).”
According to the SEC and CFTC, defendants also designed EmpiresX as a multi-level marketing scheme. In various video presentations, defendants allegedly promoted the “opportunity” for participants to choose between being an “Investor” or an “Affiliate.” To qualify as an Investor, a participant was required to pay $400 for an annual license to use the EX Bot, while Affiliates were required to pay $200 for an annual license to use the EX Bot. Defendants allegedly represented that Affiliates also could earn money by referring new participants to EmpiresX. Affiliates who “sold” the EX Bot could earn sales commissions ranging from 1% to 5% of the license fees. Investors and Affiliates were also promised 5% of the initial amount invested in EmpiresX by any referral, plus 0.2% (for Investors) or 0.6% (for Affiliates) of the daily profits generated by the referral’s trading. In addition, said the CFTC, Investors and Affiliates could each earn additional commissions if their referrals also brought in new participants.
To assure investors of the safety of their investments, defendants allegedly told investors that EmpiresX had filed paperwork with the SEC to register as a hedge fund. That representation, said the SEC, was untrue. Defendants also allegedly touted Nicholas as a licensed trader while concealing the fact that he was suspended by the National Futures Association from trading for misappropriating customer funds.
According to regulators, when the scheme began to collapse, defendants broke earlier promises that investors could easily withdraw their money and assurances of repayment. By early 2022, defendants allegedly began winding down EmpiresX’s operations.
In total, as alleged, defendants fraudulently solicited, accepted, and pooled at least $41.6 million, including more than $14.3 million from individuals in the U.S., through commodity interest pools under the name EmpiresX.
The SEC charged defendants with violating the registration and anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC seeks injunctions against future securities law violations, disgorgement of defendants’ ill-gotten gains, civil penalties, and officer and director bars against Pires and Goncalves.
“The defendants allegedly engaged in an unregistered offering with a slew of fraudulent statements designed to lure investors with the prospect of steady daily profits,” said Carolyn Welshhans, Acting Chief of the SEC Enforcement Division’s Crypto Assets and Cyber Unit. “The SEC’s investigation has uncovered the steps the defendants took to conceal their alleged fraud, and today’s action serves to protect investors by bringing that misconduct to light.”
The CFTC charged defendants with misrepresenting EmpiresX’s registration status to pool participants. It also alleged that Empires Consulting acted as a commodity pool operator, and Pires, Goncalves, and Nicholas acted as associated persons of a commodity pool operator, without registering as required. The CFTC seeks injunctions against future violations of the Commodities Exchange Act, civil monetary penalties, and remedial ancillary relief, including restitution to defrauded clients, disgorgement, and pre- and post-judgment interest.
The DOJ charged the individual defendants with one count of conspiracy to commit wire fraud and one count of conspiracy to commit securities fraud. Pires and Goncalves also were charged with conspiracy to commit international money laundering.
The SEC’s complaint can be found here.
The CFTC’s complaint can be found here.
Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.