Does Crypto Crime Pay?

Even if the SEC comes knocking, can crypto fraud still be lucrative?

By Alissa Fleck

On November 28, after months of rumor and innuendo, federal prosecutors in Dallas announced the arrest of AriseBank CEO Jared Rice Sr. on multiple counts of securities and wire fraud. According to the charges, he scammed hopeful investors who thought they were funding the “world’s first decentralized bank” out of at least $4.25 million.

Since Satoshi Nakamoto gave us Bitcoin, people have been finding ways to use cryptocurrencies to nefarious ends. From Silk Road to crypto-mining malware, scammers have proven to be nothing if not inventive. The authorities, meanwhile, have generally been a step or two behind, scrambling to keep up.

AriseBank’s ICO scam wasn’t the only high-profile crypto fraud in the news this year.  The day after Rice’s arrest, the SEC fined DJ Khaled and Floyd Mayweather close to a combined $800,000 for promoting a fraudulent ICO without disclosing their involvement. Two other companies that raised millions in 2017 ICOs — Paragon and CarrierEq — have also been ordered by the SEC to return all funds to their investors and pay heavy fines.

But no matter how large the financial penalties may be, does crypto fraud still pay? How much more did these companies squirrel away before the feds intervened? Is it possible to come out ahead, even after paying steep fines and making investors whole?

The AriseBank Crackdown

Following his arrest by the FBI, Rice pleaded guilty to a number of state felony crimes, including withholding evidence, and is currently on probation for the charges.

Before its ignominious collapse, the company advertised its public ICO on social media and through other means, even snagging an endorsement from legendary boxer Evander Holyfield.

The hammer fell on the 30-year-old Rice in January — one month into his public sale — when the SEC brought fraud charges against him for selling unregistered securities. Rice, his co-founder Stanley Ford and their team claimed at the time they’d raised $600 million from investors during an ICO in exchange for an allocation of AriseCoin, the project’s token. Their hard cap goal was set at $1 billion.

It remains unclear how much money the AriseBank team actually raised, and the exact amount may be impossible to determine. If the company accepted non-privacy coin crypto, all wallet and blockchain history should be publicly available and traceable on the ledger. Generally, ICOs begin by raising something publicly traceable, like Bitcoin or Ether. It’s what happens after the initial raise that can make it difficult to follow the money. Privacy coins like Monero, for example, don’t have public ledgers.

“If Rice converted to a privacy coin, then we would not be able to trace where it went and he would be able to freely spend it,” Andrew Gordon, managing attorney of Gordon Law Group, a fintech firm that works with blockchain startups and ICOs, told ICO Ranker. “After hacks of exchanges and the DAO, hackers took different efforts to hide their transactions — many of them were successful in doing so.”     

Converting some of the funds to a privacy coin would enable Rice to not only lie about how much he raised, but also to stash those funds away for future use, beyond the reach of any legal efforts to reclaim them for investors.

Facing the Repercussions

Then there is the issue of Rice’s claims.

From a legal perspective, is it to his advantage to walk back his braggadaccio and admit to raising just $4.25 million — the amount that authorities have been able to locate? Besides bruising his ego, this could lead to charges that AriseBank defrauded investors by dangling the $600 million claim.

Or is he better served by sticking to his outrageous $600 million boast, a decision which is likely to further aggravate the hornet’s nest at the SEC?

According to Gordon, he’s in bad shape either way.

“If he lied to investors, then he may have issues with the SEC, FTC and other government agencies,” Gordon told us. “If he sticks to a figure that’s higher than what he actually raised, he may be on the hook for that amount if the SEC goes after him.”

Rice and his team didn’t just scam their investors out of millions of dollars. Included in the venture’s other offenses are false claims of purchasing a 100-year-old bank that would allow them to dole out FDIC-insured accounts and offer investors a branded Visa card. Visa said it was never affiliated with AriseBank. The company also neglected to disclose the criminal records of some of its employees, including Jared Rice himself.  

Per a settlement with the SEC, Rice and Ford have agreed to a fine of $2.7 million, which includes charges for disgorgement, prejudgment interest and penalties. It’s unclear what will happen with the rest of the funds raised. The two are also permanently banned from serving as officers or directors of public firms, and from organizing securities offerings. Rice, meanwhile, faces up to 120 years in jail, pending the outcome of criminal charges.

What the Future Holds

Is the crackdown against AriseBank a sign of things to come? Gordon said he expects the SEC’s enforcement action against ICOs in 2018 to continue into the new year. This action should help clarify requirements for ICOs, which remain a major gray area in the brave new world of cryptocurrencies. Many companies wary of legal uncertainty are instead turning to STOs, which provide the flexibility of a token but the legal and financial familiarity of a traditional equity offering.

The SEC has also made it clear it means business — the legitimate kind.

“This is the first time the Commission has sought the appointment of a receiver in connection with an ICO fraud,” Steven Peikin, co-director of the SEC’s Enforcement Division, said in a statement. “We will use all of our tools and remedies to protect investors from those who engage in fraudulent conduct in the emerging digital securities marketplace.”

One place ICOs are not going, though, is away. “I believe ICOs will remain an option in coming years,” said Gordon. “But they will be done compliantly — under SEC regulations or exemptions.”  

 

Back to News




This website is for information and illustrative purposes only. It is not, and should not be regarded as "investment advice" or as a "recommendation" regarding a course of action, including without limitation as those terms are used in any applicable law or regulation. See Disclaimer.