The U.S. government has indicted 18 individuals and companies for fraud and market manipulation in the crypto industry.
Charges were unsealed in Boston, targeting leaders from four cryptocurrency firms and four financial service companies known as “market makers.”
These market makers, alongside employees of the crypto firms, are accused of orchestrating a massive fraud that involved manipulating the prices of crypto tokens through a series of sham trades, known as wash trades.
Fraudulent trading tactics and pump and dump schemes
Four of the defendants have already pleaded guilty, while another has agreed to do the same. Meanwhile, three more defendants have been apprehended in Texas, the UK, and Portugal.
So far, authorities have seized over $25 million in crypto and disabled many bots responsible for carrying out millions of dollars in wash trades across approximately 60 different tokens.
According to the charging documents, the accused companies engaged in deceptive practices to inflate the value of their tokens.
Once the prices of these tokens were artificially inflated, the defendants sold off their holdings at the higher prices in what is commonly referred to as a “pump and dump” scheme.
One of the largest companies involved in this fraud, Saitama, at one point had a market valuation running into billions.
One of the market makers, who has already agreed to plead guilty, reportedly described the strategy to a potential client, explaining that their goal on the secondary market was to attract buyers who did not know they were being scammed.
The market maker explained that in order for them to make any profit, they needed to make other buyers lose money.
ZM Quant, CLS Global, and MyTrade, and their employees were charged with wash trading and conspiring to wash trade tokens created by NexFundAI.
NexFundAI was a fake crypto company and token set up by the FBI to infiltrate the fraudulent market.
A fourth market maker, Gotbit, along with its CEO and two directors, was also charged for running a similar operation.
NexFundAI and Gotbit’s shadiness
This investigation is the first time law enforcement has used a government-created crypto to catch fraudsters.
The defendants, unaware they were dealing with a government setup, allegedly used the fake cryptocurrency to carry out their schemes.
Joshua Levy, the Acting United States Attorney for the District of Massachusetts, explained that wash trading has been illegal in traditional financial markets for years and that these regulations also apply to crypto.
He added that:
“These charges are also a stark reminder of how vigilant online investors must be and that doing your homework before diving into the digital frontier is critical. People considering making investments in the cryptocurrency industry should understand how these scams work so that they can protect themselves.”
The FBI spearheaded the investigation under the banner of “Operation Token Mirrors.” Special Agent Jodi Cohen said:
“What the FBI uncovered in this case is essentially a new twist to old-school financial crime. The FBI took the unprecedented step of creating its very own cryptocurrency token and company to identify, disrupt, and bring these alleged fraudsters to justice.”
Interestingly, just a year ago, on-chain investigator ZachXBT warned the community to be weary of any projects that are involved with Gotbit because some leaked reports show some “highly questionable services offered.”
According to him, Gotbit claims, “During the first minutes in the price discovery stage we are going to push the price up to 10x to create FOMO and accumulate as much buying power as we can to reach extreme Xs and sell maximum tokens on the subsequent spike”