The Securities and Exchange Commission today announced fraud charges against three companies purporting to be market makers and nine individuals for engaging in schemes to manipulate the markets for various crypto assets being offered and sold as securities to retail investors. As alleged, the schemes were intended to induce investor victims to purchase the crypto assets by creating the false appearance of an active trading market for them.
According to the SEC’s complaints, crypto asset promoters Russell Armand, Maxwell Hernandez, Manpreet Singh Kohli, Nam Tran, and Vy Pham (Promoters) hired so-called market makers ZM Quant and Gotbit to provide market-manipulation-as-a-service, which included generating artificial trading volume or manipulating the price of crypto assets that the Promoters offered and sold as securities to retail investors in unregistered transactions. The SEC also alleged that ZM Quant and a third so-called market maker, CLS Global, undertook similar schemes to manipulate the market of a crypto asset offered and sold as a security that was created at the direction of the Federal Bureau of Investigation as part of its parallel investigation into potential market manipulation in the crypto asset industry.
“Today’s enforcement actions demonstrate, once more, that retail investors are being victimized by fraudulent activity by institutional actors in the markets for crypto assets,” said Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement. “With purported promoters and self-anointed market makers teaming up to target the investing public with false promises of profits in the crypto markets, investors should be mindful that the deck may be stacked against them.”
The SEC alleged that ZM Quant and its employees Baijun Ou and Ruiqi Lau, Gotbit and its employee Fedor Kedrov, and CLS Global and its employee Andrey Zhorzhes manipulated markets on behalf of the Promoters by self-trading (commonly referred to as “wash trading”) on popular crypto asset trading platforms or by engaging in other trading practices that likewise served no economic purpose, and that they used algorithms (or bots) that, at times, generated quadrillions of transactions and billions of dollars of artificial trading volume each day.
“We remain concerned about the ease with which the market for a crypto asset can be manipulated and are committed to rooting out instances of such misconduct when it involves securities,” said Jorge G. Tenreiro, Acting Chief of the Division of Enforcement’s Crypto Asset and Cyber Unit (CACU). “The wrongdoers behind these schemes are profiting handsomely at the expense of investors that have been deceptively lured into these markets and lost their hard-earned savings.”
The SEC’s five complaints, filed in the United States District Court for the District of Massachusetts, allege that all defendants violated the antifraud and market manipulation provisions of the securities laws and that certain defendants violated registration provisions. The complaints seek permanent injunctions, conduct-based injunctions, disgorgement of allegedly ill-gotten gains plus interest, and civil penalties against all the defendants, as well as officer and director bars against certain defendants. Armand, Hernandez, and Pham consented to bifurcated settlements, subject to court approval, permanently enjoining them from further violations of the federal securities laws, subjecting them to conduct-based injunctions, and barring them from acting as officers or directors. The court will determine the amount of disgorgement and prejudgment interest, and any civil penalties.
The SEC appreciates the assistance of the FBI and the United States Attorney’s Office for the District of Massachusetts, which today announced parallel criminal actions.
The SEC’s investigations were conducted by David D’Addio, Amy Harman Burkart, Ivan Panchenko, Jeffrey Cook, and John McCann in the SEC’s Boston Regional Office, as well as Colin Missett and Joy Guo of the CACU. They were supervised by Amy Gwiazda, Michael Brennan, Donald Battle, and Mr. Tenreiro of CACU and by Celia Moore and John T. Dugan of the Boston Regional Office. The team also thanks the staff of the SEC’s Office of Strategic Hub for Innovation and Financial Technology for their assistance. The litigations will be led by Mr. D’Addio and Ms. Burkart.
