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 Crypto Pump & Dump Fraud 

Michael Santos

Michael Santos

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$13 million cryptocurrency pump & dump scheme on Twitter led to securities fraud and money laundering indictment against John McAfee

CRYPTOCURRENCY SECURITIES FRAUD (McAfee Pump & Dump Case)

John McAfee’s $13 million cryptocurrency Twitter fraud schemes, including “pump and dump,” led to securities fraud, conspiracy, and money laundering indictments.

McAfee’s crypto indictment from earlier this year is one of the first cases brought against people for their role in promoting cryptocurrencies. As such, it provides some insight into the nature of cryptocurrency investments and upcoming enforcement.

INTRODUCTION

Cryptocurrency (“crypto”) news and developments continue to dominate headlines. Crypto, an emerging commodities market for the last decade, is now exploding in the United States and globally. 

Despite this explosion, most people remain unfamiliar with the cryptocurrency trading markets and the many different cryptocurrency types (i.e., the actual currency tokens like bitcoin). Federal law enforcement continues to warn the public that crypto scams and fraudulent schemes will only increase in the coming months and years.

Pump and dump schemes, also referred to as “scalping,” have plagued the securities markets for decades. The 2021 criminal allegations against John McAfee and other co-conspirators are a good reminder of how easily someone can become involved in a securities fraud investigation as an alleged perpetrator, co-conspirator, or victim. 

People enjoy sharing insights about crypto, stock picks, and investments on social media. However, beware of promoting or touting investments on social media without understanding all of the implications involved in such conduct. Depending on the circumstances, social media promotions can put people in the crosshairs of a government investigation as a target, subject, or victim.

Note: John McAfee died in June 2021 in Spain before resolving his criminal charges in the US.

DISCUSSION

As an electronic form of currency, cryptocurrency is exchanged online for goods and services. According to market research company CoinMarketCap.com, there are more than 6,700 publicly traded cryptocurrencies today. 

Cryptocurrencies work using Blockchain. As a decentralized technology, Blockchain spreads across many computers to manage and record transactions online. Many companies issue their own electronic or cryptocurrencies called Tokens. These tokens are traded, like cash, for the good or service that the company offers. Think of these cryptocurrencies as casino chips or amusement park tokens. These tokens, however, exist only in electronic form and cannot be placed in your purse or wallet and exchanged at your local bank.

The growing popularity of crypto as a form of currency will stymie the anonymity typically associated with using cryptocurrencies. Further, as cryptocurrencies become more popular, the more regulation and government scrutiny they will attract. 

THE McAFEE CRYPTO FRAUD ALLEGATIONS

John McAfee is the famous McAfee antivirus software maker. Earlier this year, the Department of Justice (DOJ) accused McAfee of conspiring with an adviser and bodyguard to facilitate a pump and dump scheme for an emerging cryptocurrency called “Altcoins.” Federal investigators charged McAfee for using his celebrity status on social media, especially Twitter, to trick close to a million followers into purchasing Altcoins. These purchases would pump up the share price. At the same time, McAfee and Watson dumped their own Altcoin tokens when the price rose, quickly reaping millions.

Criminal charges in the McAfee case include securities fraud and conspiracy, as well as money laundering. The indictment alleges that McAfee and his advisor/bodyguard Jimmy Watson misled investors regarding a crypto token known as Altcoins. 

Prosecutors claim that McAfee and Watson made close to $13 million through their deliberately deceptive social media posts. McAfee used his Twitter account to publish messages to close to a million Twitter followers touting Altcoins (and other cryptocurrencies). According to the grand jury indictment, McAfee and Watson used false and misleading statements about Altcoin and concealed their true, self-serving intentions to dump their holdings. For example, McAfee and others never disclosed that they had large ownership stakes in the cryptocurrencies they endorsed on Twitter.

PUMP & DUMP (OR SCALPING)

Specifically, investigators with the Federal Bureau of Investigation (FBI) and the Securities and Exchange Commission (SEC) gathered evidence to show how McAfee and Watson orchestrated a traditional pump-and-dump (or scalping) scheme. 

A pump-and-dump scheme boosts a stock or commodity through recommendations based on false, misleading, or greatly exaggerated statements. In a pump and dump scheme, people first overhype the stock or commodity using the internet (or other means), and then they sell their shares after the pump has led to higher share prices.

 Pump and dump schemes are not difficult for federal investigators to uncover. For example, federal law enforcement agents in the crypto ecosystem know that schemes often coordinate on Discord and Telegram channels, sometimes with more than 100,000 members. Recent crypto investigations signal that law enforcement agents are now going after cryptocurrency fraud schemes more aggressively.  

McAfee and Watson allegedly ran their scheme between December 2017 to October 2018. McAfee used his verified Twitter account, which had around 1 million followers, to recommend a “Coin of the Day” or “Coin of the Week.” Significantly, the indictment says McAfee claimed to have no stake in Altcoins; in reality, McAfee allegedly bought large quantities beforehand using bitcoin, then offloaded his Altcoins after his followers had driven up the price.

Charges related to pump-and-dump schemes typically include what’s know as Touting Fraud. According to the SEC, in a typical Touting Fraud case, criminals advertise positive information about companies to inflate their stocks’ potential value (or here cryptocurrency) without adequately disclosing their ownership interest in those companies.

INITIAL COIN OFFERINGS (ICOs)

The SEC also alleged involvement in a separate scheme. McAfee again used his Twitter account to publicly tout cryptocurrency sales pitches called “initial coin offerings” (ICO). ICO’s take place when a new cryptocurrency becomes available for public sale (similar to stock IPOs or Initial Public Offerings). 

Startup companies who want to sell their cryptocurrency publicly must have an Initial Coin Offerer issue and sell tokens qualifying as securities to the investing public. Touting Fraud occurs when the marketers conceal the compensation they receive from ICO issuers for their marketing efforts. 

SEC investigators believe McAfee and others committed Touting Fraud related to the ICOs mentioned in their tweets. McAfee and his cryptocurrency advisors used his Twitter account to promote Initial Coin Offerings without disclosing that the ICO issuers were paying him to do so. 

On money laundering, the government explicitly claims that from December 2017 to October 2018, McAfee and Watson had someone else engage in banking transactions to launder the proceeds of the fraudulent ICO touting scheme. 

POTENTIAL PENALTIES

According to prosecutors, McAfee and his team raked in $13 million from defrauding investors, including $2 million from the pump-and-dump scheme. 

Charges similar to the ones in the McAfee/Watson indictment carry a substantial risk of prison:

  • one count of conspiracy to commit commodities and securities fraud: up to 5 years in prison;
  • one count of conspiracy to commit securities and Touting Fraud: up to 5 years in prison; 
  • two counts of conspiracy to commit wire fraud: up to 20 years in prison;
  • two counts of substantive wire fraud: up to 20 years in prison; and 
  • one count of conspiracy to commit money laundering: up to 10 years in prison.

In addition to substantial prison time, these types of cases expose people to significant financial penalties. Each of the above charges comes with associated fines and penalties that could reach millions of dollars. The sentencing judge can also order restitution to the victims of their crimes or to a victim restitution fund. The sentence can include the disgorgement of personal and real property to pay these debts.

CONCLUSION

The indictment in the McAfee case is one of the very first against people for their role in promoting cryptocurrencies. As such, it provides some insight into the nature of cryptocurrency investments and prosecution theories to expect in the future. 

In addition, the criminal allegations in the McAfee case are a reminder to approach cryptocurrency promotion on social media carefully. People enjoy sharing and consuming insights about crypto, stock picks, and investments on social media. However, beware of promoting or touting investments on social media without understanding all of the implications involved in such conduct. Depending on the circumstances, social media promotions can put people in the crosshairs of a government investigation as a target, subject, or victim.

Click here for more from Prison Professors Blog about cryptocurrency enforcement and regulation: Crypto World Under Siege.

Full Sealed Indictment in McAfee case available HERE.

Anyone under investigation or criminal charges for a crime based on cryptocurrency investing should consult with experienced criminal defense counsel. 

Prison Professors, an Earning Freedom company, works alongside (not in place of) civil and criminal defense counsel to help clients proactively navigate through investigations and prosecutions. Our team also helps clients prepare mitigation and compliance strategies.

If you have any questions or are uncertain about any of the issues discussed in this post, schedule a call with our risk mitigation team to receive additional guidance.

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