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As regulatory scrutiny intensifies, crypto industry executives are increasingly embroiled in legal battles.
The recent case involving prominent crypto entrepreneur Sam Bankman-Fried (SBF) has further highlighted the challenges faced by those at the forefront of the digital asset revolution. Let’s delve into the top 10 crypto fraud cases so far.
Do Kwon and the collapse of Terra
In March 2023, Do Kwon, co-founder of Terraform Labs, a Singapore-based blockchain platform, was arrested in Montenegro. Kwon, a South Korean national, was charged with fraud in the United States and charged with eight counts, including securities fraud, wire fraud, commodity fraud and conspiracy.
He had been a fugitive for several months and South Korean authorities issued an arrest warrant for him in September 2022. Kwon was detained by Montenegrin police at Podgorica airport while trying to board a flight to Dubai with another South Korean citizen.
During the encounter, police found forged passports from Costa Rica and Belgium. Kwon’s identity was confirmed through a fingerprint match. He spent Thursday night in police custody and was scheduled to appear in court Friday night.
The collapse of TerraUSD and Luna, two digital currencies issued by Terraform Labs, in May 2022, wiped out an estimated $40 billion in the cryptocurrency market. In June, a Montenegrin court sentenced him to four months in prison for using a forged passport during his attempt to travel.
Avi Eisenberg
In December 2022, Avi Eisenberg, a cryptocurrency trader, was arrested in Puerto Rico on charges of price manipulation on the Mango Markets cryptocurrency exchange. He faced charges of commodity fraud, commodity market manipulation and wire fraud related to his shares in the decentralized cryptocurrency exchange Mango Markets.
Eisenberg was accused of fraudulently obtaining approximately $110 million in cryptocurrency by manipulating the price of specific perpetual futures contracts on Mango Markets. Eisenberg’s trial was due to begin on December 8, 2023, but was postponed to April 8, 2024.
This delay was granted after his legal team requested more time to prepare, given the complexity of the case involving complex legal and factual issues. Eisenberg’s alleged scheme posed challenges for both the prosecution and defense, making proceedings noticeably more complex than typical fraud cases.
Alex Mashinsky
Last July, Alex Mashinsky, former CEO of cryptocurrency lender Celsius Network, was arrested and charged with wire fraud and other crimes by US prosecutors.
He is accused of orchestrating a long-running scheme to deceive customers, which ultimately led to the collapse of Celsius Network with more than $1 billion in debt.
Prosecutors allege that Mashinsky inflated the price of his company’s cryptocurrencies to attract customers, allowing him to pocket tens of millions of dollars. Mashinsky has pleaded not guilty and his trial is scheduled for September 2024.
Su Zhu and the fall of 3AC
On September 29, Su Zhu, co-founder of the now-defunct hedge fund Three Arrows Capital, was arrested at Singapore’s Changi Airport while attempting to leave the country.
The arrest followed Zhu’s failure to comply with a court order, forcing him to cooperate with the process of liquidating Three Arrows Capital’s assets. Liquidation company Teneo obtained a prosecution order against Zhu, ordering Singapore police to detain him in prison for four months.
A similar order was reportedly issued for Zhu’s co-founder Kyle Davies, whose whereabouts remain unknown. While in prison, Teneo will liaise with Zhu on matters related to Three Arrows Capital, focusing on recovering assets belonging to the hedge fund or acquired with his funds.
The liquidators are determined to ensure Zhu’s full compliance with the court order. Three Arrows Capital filed for bankruptcy in July 2022, causing major disruptions in the cryptocurrency industry as major players had to adjust their operations and restrict customer withdrawals following a cryptocurrency market crash caused by due to the collapse of the Terra/LUNA project.
Thomas Smith, Kyle Nagy and Braden Karony
Thomas Smith, Kyle Nagy, and Braden Karony are the people behind the SafeMoon crypto token, a digital asset that was once valued at over $8 billion. They were charged with fraud and money laundering by both the United States Department of Justice and the Securities and Exchange Commission on November 1, 2023.
The charges revolve around allegations that the trio diverted millions of dollars for personal expenses, including luxury cars and real estate, and dishonestly obtained funds from investors.
They are accused of misleading investors about the liquidity of the token and making false promises about its features, claiming this would drive the price to record levels. The people charged in this case include founder Kyle Nagy, CEO Braden John Karony and former CTO Thomas Smith.
While Nagy is evading authorities, Karony and Smith have been detained. The charges against him include conspiracy to commit securities fraud, wire fraud and money laundering.
William Ulbricht
San Francisco-born Ross William Ulbricht, also known as Dread Pirate Roberts, is serving a life sentence without the possibility of parole. Ross William Ulbricht’s conviction stems from his creation and operation of Silk Road, a now-defunct online marketplace where people used bitcoin to buy drugs, hacking tools, and counterfeit passports.
Ulbricht was found guilty of seven crimes, including distribution of narcotics and conspiracy to distribute illegal property. He intentionally designed Silk Road as a platform for illegal activities, allowing users to buy and sell drugs and other illicit items anonymously, outside the reach of authorities. Ulbricht employed several methods to anonymize transactions on Silk Road.
The website operated as a hidden service on the Tor network, allowing the sale of narcotics and other illegal products and services. Ulbricht operated under the alias; Dread Pirate Roberts, a reference to a fictional character from The Princess Bride.
Charlie Shrem
Charlie Shrem is the former CEO of crypto exchange BitInstant. In 2014, Shrem was sentenced to two years in prison for knowingly transmitting almost a million dollars in bitcoin intended for drug trafficking on the Silk Road. Prosecutors also accused Shrem, who had served as vice president of the bitcoin Foundation, of using Silk Road to buy drugs. Shrem has since been released and now works as a crypto venture capitalist.
Mark Karpeles
Mark Karpeles is the former CEO of the bankrupt crypto exchange, Mt. Gox. Karpeles, a French entrepreneur and programmer, served as CEO of Mt. Gox, the world’s inaugural bitcoin exchange.
He took over Mt. Gox from Jed McCaleb in 2011 and initiated a software overhaul. The exchange faced a significant setback in 2014 when it lost nearly $500 million worth of bitcoin from investors, leading to its collapse.
Following this incident, Karpeles was arrested in Tokyo in 2015 and spent more than 11 months in custody. Karpeles was convicted of illegally manipulating Mt. Gox’s electronic records, falsely inflating the company’s holdings by $33.5 million.
Nathaniel Chastain
Nathaniel Chastain is a former employee of non-fungible token (nft) marketplace OpenSea. On June 1, 2022, Nathaniel Chastain was arrested in New York by the FBI.
He faced charges of wire fraud and money laundering. Chastain was accused of taking advantage of his insider knowledge of which tokens would appear on the cover of OpenSea. He would purchase these tokens right before they were displayed and sell them immediately to benefit from the increased attention, while conducting these transactions through anonymous digital wallets to hide his actions.
In May 2023, Chastain was found guilty of fraud and money laundering. He was subsequently sentenced to three months in prison, three months of home confinement, 200 hours of community service and a $50,000 fine.
Faruk Fatih Özer
Fatih Faith Ozer, founder and CEO of Thodex, a Turkish crypto exchange, was captured in Albania in August 2022. He had fled Turkey after his exchange abruptly closed in April 2021, leaving more than 400,000 users without access to deposits totaling $2. billion in cryptocurrencies.
Ozer was extradited to Turkey in June 2023, where he faced charges of money laundering, fraud and organized crime. Following a court verdict, he was sentenced to 11,196 years in prison, mainly for fraud-related crimes.
This case spread to Ozer’s family and senior employees, and his brother, sister and four other senior officials were also imprisoned. As part of the investigation, at least 83 people were detained.
The exact extent of the losses suffered by investors during the Thodex collapse remains uncertain, with various reports in the Turkish media, some estimating that losses could reach $2 billion. This incident had significant implications for the cryptocurrency landscape in Turkey, particularly considering the widespread use of cryptocurrencies as a hedge against inflation in the country.
