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Author Topic: BREAKING: SEC Charges pirateat40 With Running Bitcoin-Denominated Ponzi Scheme  (Read 17419 times)
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July 24, 2013, 12:14:02 PM
 #61

I'm reading... "....and while he paid back 507,148 Bitcoins to investors...." at http://www.theregister.co.uk/2013/07/23/bitcoin_ponzi_scheme/

Is that accurate? And if so, how did he pay back and when?

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July 24, 2013, 12:23:30 PM
 #62

I'm reading... "....and while he paid back 507,148 Bitcoins to investors...." at http://www.theregister.co.uk/2013/07/23/bitcoin_ponzi_scheme/

Is that accurate? And if so, how did he pay back and when?
That cannot be accurate.

This is his address, I think:

https://bitcointalk.org/index.php?topic=94675.0


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July 24, 2013, 12:26:32 PM
 #63

Quote from: Serenata link=topic=2I1290.msg2794399#msg2794399 date=1374668042
I'm reading... "....and while he paid back 507,148 Bitcoins to investors...." at http://www.theregister.co.uk/2013/07/23/bitcoin_ponzi_scheme/

Is that accurate? And if so, how did he pay back and when?
That refers to the monthly payouts i think.
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July 24, 2013, 12:27:48 PM
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Quote from: Serenata link=topic=2I1290.msg2794399#msg2794399 date=1374668042
I'm reading... "....and while he paid back 507,148 Bitcoins to investors...." at http://www.theregister.co.uk/2013/07/23/bitcoin_ponzi_scheme/

Is that accurate? And if so, how did he pay back and when?
That refers to the monthly payouts i think.

That it does.

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July 24, 2013, 04:50:58 PM
 #65

I miss Loup!

Which is why each and every one of us needs to look at our own belief structure and decide how the cost/benefit equation works for us personally. For some, working with the SEC and other investigators to pursue "traditional" justice will be the right call. Others might shy away from this because they don't trust the "traditional" methods to treat them right, or to stay out of a wider investigation that might net things as-yet unthought of to review. Yet others still might choose to find Trendon, and take their retribution out of him physically, or the threat of doing so out of his family unless he is willing to ransom their lives with his stolen gains.

And some may even go through different versions of this cycle to decide what is the right way for them personally. There is no universal truth on how to best prosecute a scumbag like pirate. Personally I think that having the SEC mess up his life for the next couple of years with an investigation is a damn good start, assuming they have frozen all of his assets and taken the sorts of precautionary moves that they and their wicked step-sisters at the IRS are known for. But the whole "hold a gun to his head until he decides to find honor" has a certain appeal too.

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July 25, 2013, 04:45:46 AM
 #66

The SEC should have deferred to BTCTalk for punishment.  A bunch of fucking idiots who believed 7% weekly returns are a possibility should be happy with their scammer tag above his avatar.  It would be a real shame if all of the fucking morons who threw their bit at such stupidity were able to recoup anything.  

They won't.  Reading between the lines, Pirate lost most (90%+) of the stolen funds day trading.  He siphoned off ~150K BTC of victims funds (~700K BTC deposited, ~550K BTC paid back as withdrawals & interest).  At the time 150K BTC was worth >$1M yet he had trading losses and withdrew less than $150K from the exchange account.  So most of what was stolen is either a)imaginary interest which is never coming back or b) money Pirate lost playing day trader.  

Of the remaining $150K I would imagine he has probably wasted a good chunk of that. Say there is $50K left, remember this was a BTC based scam and the price of BTC has risen 10x to 15x since then.  Today $50K/$100 ea = 500 BTC.   500 BTC out of ~150,000 BTC stolen isn't much of a recovery. 

TL/DR Pirate stole siphoned off ~150,000 BTC and best case scenario the feds might be able to recover 500 BTC (0.3%).  The feds may simply seek in reim forfeiture as the entire operation violated federal law and victims will never see a dime.  Not saying it is fair but honestly we are talking a 99% to 100% loss for investors.

A nifty visual representation:

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July 25, 2013, 05:18:42 AM
 #67

Wow, where did you get this? And also can they make this stuff public if he has not been found guilty yet?

http://www.techdirt.com/articles/20130723/16121723913/sec-confirms-that-bitcoin-savings-trust-was-ponzi-scheme-files-lawsuit.shtml

Official source of image: https://www.documentcloud.org/documents/739199-gov-uscourts-txed-146063-4-6.html
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July 25, 2013, 05:25:40 AM
 #68

Hopefully he will be spending a holiday in one of the country's run resort rather than a virtual jail.   And Hopefully he has a long long stay

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July 25, 2013, 05:36:53 AM
 #69

A nifty visual representation:

That lead me to a TechDirt article which I must quote here:
Quote
Either way, the real irony may be that those who chose not to invest with Shavers and to just hold onto their Bitcoins clearly were better off not just because they still had their Bitcoins, but because the (wildly fluctuating) value of Bitcoins rose even higher than the insane interest promises.

Ironically, investors who had simply bought and held bitcoins during the period the alleged Ponzi scheme was in operation would have made a killing. While one bitcoin was worth about $6.56 on average between September 2011 and September 2012, they were valued Tuesday at $95.30 each.

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July 25, 2013, 05:38:10 AM
 #70

When I saw the story, I thought the feds had finally busted BFL.  Perhaps some other day
I lol'd

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July 25, 2013, 05:45:08 AM
 #71

Hopefully he will be spending a holiday in one of the country's run resort rather than a virtual jail.   And Hopefully he has a long long stay

Well from my limited understanding of this, this is only a civil lawsuit where the SEC is trying to collect the few fiat dollars he has left.

The DOJ or someone else will have to file criminal charges if he is to be jailed.

Well I can see from the flow chart above that he at least used some of the money for day spas. That's a good thing because it will make his little white butt nice and supple for all the bruthas that want to squeeze it and make him their lil sistah girl.

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July 25, 2013, 05:55:17 AM
 #72

He better wax his asshole. Because that prison pussy is going viral

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July 25, 2013, 06:08:55 AM
 #73

If anyone wants more details then the press release additional docs are available (found via links from techdirt article).
http://ia800904.us.archive.org/35/items/gov.uscourts.txed.146063/gov.uscourts.txed.146063.docket.html


Some interesting ones:

The complaint filed (preview of SEC case):
http://ia600904.us.archive.org/35/items/gov.uscourts.txed.146063/gov.uscourts.txed.146063.1.0.pdf

The summons:
http://ia800904.us.archive.org/35/items/gov.uscourts.txed.146063/gov.uscourts.txed.146063.9.0.pdf
Looks like Mr. Shavers had 21 days to respond from the date of the summons (07/23/2013) or a summary judgement in the governments favor will be awarded (seizure of all funds listed in the order to freeze). 

Looks like the order to freeze accounts is supported by one "Philip Moustakis".  Does that name ring a bell?  IIRC someone was posting something about being contacted by someone in a government agency about the ponzi scheme.
http://ia800904.us.archive.org/35/items/gov.uscourts.txed.146063/gov.uscourts.txed.146063.4.1.pdf

If anyone naively thinks the SEC doesn't read this forum the doc above should finally squash that once and for all.  Detailed dates, times, posts, quotes, etc to provide supporting context.  

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July 25, 2013, 06:20:21 AM
 #74

LOLZ Pirate is more stupid then I thought.

From the above complaint.

Quote
III. SHAVERS’ ADMISSIONS
In an October 3, 2012 interview with Commission staff, Shavers admitted, among other
things, that:
Case 4:13-cv-00416-RC-ALM Document 3 Filed 07/23/13 Page 6 of 18 PageID #: 22SEC v. Trendon T. Shavers, et al. 6
Plaintiff’s Emergency Motion for Order to Show Cause, Asset Freeze and Other Ancillary Relief
a. His Internet name was pirateat40; he posted the November 3, 2011 BTCST
solicitation on the Bitcoin Forum; all other statements attributable to
pirateat40 on the Bitcoin Forum were his own; and he, alone, was responsible
for creating and operating BTCST (Id. at ¶ 27);
b. He sold BTCST investments to 446 investors, but claimed that he produced
documents to staff for only 46 BTCST investor accounts because all records
for closed accounts had been deleted (Id.);
c. He used new BTCST investor BTC to pay the promised returns on
outstanding BTCST investments (Id.);
d. He comingled BTCST investor BTC with his personal BTC and BTC received
from customers of GPUMAX Technologies, LLC (“GPUMAX’), a BTC
mining company he co-founded with friends (Id.);1
e. He made preferential redemptions to friends and longtime BTCST investors,
in August 2012, as he closed BTCST (Id.); and

f. He was still in possession, at the time of the interview, of approximately
100,000 BTC (Id.).

In the same interview, Shavers claimed to generate BTCST investor returns by lending
BTCST investor BTC to anonymous borrowers he met online who wanted enough BTC to
manipulate or control the price of BTC on Mt. Gox, the leading BTC currency exchange
(headquartered in Tokyo, Japan), and other BTC currency exchanges. (Id. at ¶ 28.) Shavers
claimed these anonymous borrowers paid him at least 10% interest weekly on the BTC he lent to
them. (Id.) Shavers claimed to generate additional returns for BTCST investors, up to 4% daily,
by lending BTC to an online service which provided users with leverage for purposes of trading
BTC on BTC currency exchanges. (Id.)

All that will be used against him in any civil or criminal trial.  Miranda doesn't apply if he wasn't a suspect of any criminal investigation at the time. His statements (assuming they are recorded) make any defense much harder (dare I say impossible).  It now requires an affirmative defense.  If he did run BTCST and it lost funds "legitimately" he can't just rely on a lack of evidence, he needs to prove that.  

I also found e to be interesting.  While I am not sure the SEC will seek it (given the relatively small scale), they can attempt to locate those who benefited from the ponzi and clawback any net gains.  Also given how upstanding Shavers is, if pressed with even the possibility of jailtime I wonder who he will roll on and how much evidence he kept.

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July 25, 2013, 06:28:14 AM
 #75

Philip Moustakis ran the SEC investigation. He did send out the e-mails and collected evidence.

Well I guess the wheels of justice do indeed turn, too bad they turned soooooooo slowly that according to SEC docs Pirate already burned through or lost playing day trader 90%+ of what he defrauded.

Also looks like Mr. Moustakis asked the Eastern Texas courts for the right to appear "Pro Hac Vice".  Simple version Pro Hac Vice is a request for an attorney to practice in a specific case outside of their jurasdiction.  Rather than have the plantiff (SEC) be represented by a TX based attorney they petition the courts to allow Mr. M (who has license to practice law in NY) the right to appear in the TX court.  It would appear the request has been granted.

http://ia600904.us.archive.org/35/items/gov.uscourts.txed.146063/gov.uscourts.txed.146063.12.0.pdf

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July 25, 2013, 06:29:46 AM
 #76

f. He was still in possession, at the time of the interview, of approximately
100,000 BTC (Id.).

 Shocked

Quote
Shavers claimed to generate additional returns for BTCST investors, up to 4% daily,
by lending BTC to an online service which provided users with leverage for purposes of trading
BTC on BTC currency exchanges. (Id.)


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July 25, 2013, 06:45:29 AM
 #77

Some more interesting excerpts (whenever possible I like to go to the original source):

SEC rational for seizing his assets (and it looks like they will be seeking additional seizures and records if/when necessary).  Given they already know his exact trading losses I would assume MtGox has supplied detailed records.  I would hope MtGox waited until served rather than just hand over information without due process.  Maybe MtGox can comment? 

Quote
Here, the Commission easily makes a prima facie showing that Defendants: (1) operated
a Ponzi scheme in violation of Securities Act Section 17(a), and Exchange Act Section 10(b) and
Rule 10b-5; and (2) sold unregistered securities in violation of Securities Act Sections 5(a) and
5(c). Moreover, Shavers diverted BTCST investors’ BTC to a BTC currency exchange
headquartered in Japan, misappropriating it for his personal use. Given the nature the conduct
and these violations, a preliminary order freezing Defendants’ assets, authorizing expedited
discovery as to the location and extent of their assets, directing them to repatriate ill-gotten gains,
directing them to provide verified accountings, and requiring them to preserve evidence is appropriate
and necessary to preserve assets for possible recovery for victims of this fraud. For
the same reason, an order temporarily freezing Defendants’ assets and requiring the preservation
of evidence is warranted to preserve the status quo pending a preliminary injunction hearing.


The big one.  "Bitcoins based investments are investments".  This should silence any dubious claims that BTC based investments aren't "really" investments because they are based on play money, etc.

Quote
The BTCST Investments Are Securities as Defined by the Federal
 Securities Laws
The definitions of “security” under Section 2(a)(1) of the Securities Act [15 U.S.C. §
77b(a)(1)] and Section 3(a)(10) of the Exchange Act [15 U.S.C. § 77c(a)(10)] include both
“investment contract” and “note.” Courts “are not bound by legal formalism, but instead take
account of the economics of the transaction” to determine whether a security exists.
Reves v.
Ernst & Young, 494 U.S. 56, 61 (1990); see, e.g., SEC v. SG Ltd., 265 F.3d 42 (1st Cir. 2001)
(holding virtual shares in virtual company existing only online were securities). “Congress’
purpose in enacting the securities laws was to regulate investments, in whatever form they are
made and by whatever name they are called.” Reves, 494 U.S. at 61. (emphasis in original). The
BTCST investments qualify as both investment contracts and notes and, thus, are securities.
An investment contract is any contract, transaction, or scheme involving (1) an
investment of money, (2) in a common enterprise, (3) with the expectation that profits will be
derived from the efforts of the promoter or a third party. SEC v. W.J. Howey & Co., 328 U.S.
293, 298-99 (1946); see Long v. Shultz Cattle Co., Inc., 881 F.2d 129, 132-33 (5th Cir. 1989).
The “investment of money” element may be satisfied by consideration other than money. See
Int’l Bhd. of Teamsters, Chauffeurs, Warehousemen and Helpers of Am., 439 U.S. 551, 560, n.12
(1979) (the “investment” may take the form of “goods and services”). Moreover, BTC is money.
BTC may be used to purchase goods or services, or exchanged for conventional currencies,
including the U.S. dollar, Euro, Yen, and Yuan. Recognizing as much, the Department of the
Treasury issued guidance concerning the applicability of the regulations implementing the Bank
Secrecy Act to virtual currencies such as BTC. See Treasury Guidance (FIN-2013-G001) –
Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual
Currencies (Mar. 18, 2013). In the Fifth Circuit, the second and third elements of an investment
contract are met where investors are dependent upon a promoter’s expertise, just as the BTCST
investors were dependent upon Shavers’ supposed expertise in BTC market arbitrage, to generate
the returns promised on their investments. See Long, 881 F.2d at 140-41.
Any note is presumed to be a security unless the presumption can be overcome because
the note bears a strong resemblance to one of several judicially-enumerated instruments that are
not securities. Reves, 494 U.S. 56. The types of notes that are not securities include a consumer
financing note, a note secured by a mortgage on a home, a short-term note secured by a lien on a
small business or its assets, and a note which simply formalizes an open-account debt incurred in
the ordinary course of business. Id. at 65. The factors used to determine whether a note
sufficiently resembles these “non-securities” and, thus, is not a security under the federal
securities laws are: (1) the motivations that would prompt a reasonable buyer and seller to enter
into the transaction; (2) the plan of distribution of the instrument; (3) the reasonable expectations
of the investing public; and (4) whether some factor, such as the existence of another regulatory
scheme, significantly reduces the risk of the instrument, thereby rendering application of the
securities laws unnecessary. Id. at 65-67. Here, the transaction between Defendants and the
BTCST investors had all the earmarks of an investment, suggesting a security, and no
commercial or consumer aspect, as with the judicially-enumerated instruments that are not
securities. The BTCST investments were offered and sold to a broad segment of the public as
Plaintiff’s Emergency Motion for Order to Show Cause, Asset Freeze and Other Ancillary Relief
investments. Moreover, no risk-reducing factors existed to militate against a finding that the
BTCST investments were securities. No other regulatory agency oversees the BTCST
investments, and BTC itself is a virtual currency, with no single administrator, or central
authority or repository

The portion about "Courts are not bound by legal formalism, but instead take account of the economics of the transaction to determine whether a security exists." is rather important as it shows the SEC intent when it comes to virtual currency transactions. 

If a hypothetical "asset exchange" were hiding behind the paper thin defense that it's assets are just "play money" and don't represent real investment then it might be a good idea to get competent legal counsel to look at the cites the SEC provided.  Simply calling something a pretend asset on a pretend exchange for fun doesn't make it so.  What matters is the intent.  If investors are expecting real world profits, and issuers attract investors advising real world profits then it isn't "play money".

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July 25, 2013, 06:57:09 AM
 #78

I read an article about this today where the headline was "Bitcoin ponzi" and it just made me wonder.  Would they really be making the same headline if it was using USD?  It seemed almost like they were implying that bitcoin is a ponzi too.

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July 25, 2013, 06:59:49 AM
 #79

Oh and last thing looks like SEC is seeking $100,000 civil penalty on top of forfeiture of proceeds.

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July 25, 2013, 07:00:49 AM
 #80

I read an article about this today where the headline was "Bitcoin ponzi" and it just made me wonder.  Would they really be making the same headline if it was using USD?  It seemed almost like they were implying that bitcoin is a ponzi too.

That is intentional and reporting bias.  The reality is the SEC doesn't see Bitcoin as a ponzi they see ponzi involving Bitcoin to be equal to ponzi involving other "real" currencies (USD, EUR, etc).

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