Enforcement News: SEC Files Complaint in Connection with a $300 Million Ponzi Scheme and Affinity Fraud

• Posted on: Mar 25 2024

By: Jeffrey M. Haber

On many occasions, we have written about Ponzi schemes that have been the subject of enforcement actions brought by, and/or settlements with, the Securities and Exchange Commission (“SEC” or the “Commission”). E.g., here, here, here, here, and here. We remain unsurprised by the frequency with which people operate a Ponzi scheme and do so by exploiting the trust and friendship that exist in groups of people who have something in common, such as a religious group, an ethnic group, or a community – also known as affinity fraud.¹ [Eds. Note: we wrote about the intersection of Ponzi schemes and affinity fraud here, here, and here.]

Today, we examine an enforcement action brought by the SEC involving a Ponzi scheme that targeted the Latino community.

SEC v. Sanchez

On March 14, 2024, the SEC announced (here) that it charged 17 individuals for their roles in a $300 million Ponzi scheme (collectively, the “Individual Defendants”) that involved CryptoFX LLC, a Texas-based company engaged in trading in the crypto-assets and foreign exchange markets for investors.² According to the SEC, CryptoFX targeted more than 40,000 predominantly Latino investors in the United States and two other countries. The complaint (here) followed the SEC’s emergency action in September 2022. In the prior action, the SEC obtained a temporary restraining order halting the alleged fraud, as well as temporary orders freezing assets and granting other emergency relief. The SEC charged CryptoFX and its two main principals with violating, or aiding and abetting violations of, the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC also charged one of the principals with violating Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and violating the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act.

According to the SEC, CryptoFX purported to trade in the crypto asset and foreign exchange markets for investors. The SEC claimed that in reality, CryptoFX was a Ponzi scheme. The SEC alleged that, from May 2020 to October 2022, the Individual Defendants –  individuals from Texas, California, Louisiana, Illinois, and Florida – acted as leaders of the CryptoFX network and solicited investors by variously promising that CryptoFX’s crypto asset and foreign exchange trading would generate returns of 15 to 100 percent. The SEC alleged that CryptoFX raised $300 million from investors but did not use most of the funds for its claimed trading purposes.³ Instead, said the SEC, the Individual Defendants allegedly used investor funds to pay supposed returns to other investors, to pay commissions and bonuses to themselves and investors, and to fund their own lifestyles. The SEC further alleged that two of the defendants continued to solicit investments after the court issued orders to halt the CryptoFX scheme in September 2022, and one defendant instructed two investors to rescind their complaints to the SEC for them to recover their investments. Another defendant allegedly told investors that the SEC’s lawsuit was fake.

The SEC filed the complaint in the U.S. District Court for the Southern District of Texas.⁴ It charged six of the Individual Defendants with violating the antifraud, securities-registration, and broker-registration provisions of the federal securities laws. The SEC charged the remaining defendants with violating the securities-registration and broker-registration provisions. In addition, the SEC also charged one of the defendants with violating the whistleblower protection provisions of the federal securities laws. The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against each defendant.

Without admitting or denying the allegations in the SEC’s complaint, two of the Individual Defendants consented to the entry of final judgments, subject to court approval, that permanently restrain and enjoin them from violating the securities-registration and broker-registration provisions of the federal securities laws. They also agreed to pay more than $68,000 combined in civil penalties, disgorgement, and interest.

Commenting on the allegations, Gurbir S. Grewal (“Grewal”), Director of the SEC’s Division of Enforcement, stated: “We allege that CryptoFX was a $300 million Ponzi scheme that targeted Latino investors with promises of financial freedom and life-altering wealth from ‘risk free’ and ‘guaranteed’ crypto and foreign exchange investments. In the end, the only thing that CryptoFX guaranteed was a trail of thousands upon thousands of victims stretching across ten states and two foreign countries.” 

Grewal also commented on the SEC’s commitment to protect investors from fraud: “A scheme of that size requires lots of participants, and as today’s action demonstrates, we will pursue charges against not just the principal architects of these massive schemes, but all those who further their fraud by unlawfully soliciting victims.”

Footnotes

1. In 2014, the SEC issued an investor alert about affinity fraud. The alert can be found here.
2. CryptoFX was registered as a crypto trading platform in February 2020.
3. For example, the SEC claimed that the Individual Defendants misappropriated investors’ funds by falsely promising investments into potentially lucrative cryptocurrencies and nonfungible tokens.
4. SEC v. Sanchez, Case No. 4:24-00939 (S.D.Tx. 2024)

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.