Remaking the Classics: Cryptocurrency Companies and Market Makers Charged for Wash Trading and “Pump and Dump” Schemes

On October 9, 2024, the U.S. Attorney’s Office for the District of Massachusetts announced charges against 18 individuals and entities for wire fraud, market manipulation, conducting unlicensed money transmitting businesses, and conspiracies to do the same. Dubbed the “first of its kind” by prosecutors, the investigation allegedly uncovered a widespread fraud involving a newer technology — cryptocurrency — in a classic “pump and dump” scheme. Prosecutors also made extensive use of the defendants’ alleged communications using an encrypted messaging platform, another newer technology, and used those communications as the basis for the wire fraud charges. The federal wire fraud statute, a favored tool of white collar federal prosecutors, criminalizes schemes to defraud aided by an interstate wire transmission, be it telephone, email, or, in this case, Telegram chats. We break down the government’s allegations in this new crypto case below.

The Alleged Fraud

The alleged fraud involves four cryptocurrency companies, Lillian Finance LLC, Robo Inu Finance, Saitama LLC, and VZZN, which issued and promoted their own “crypto tokens.” These companies then allegedly paid “market maker” companies to engage in manipulative trading of the tokens on cryptocurrency exchanges. According to prosecutors, the goal of these trades was to artificially inflate the apparent trading volume to induce unsuspecting investors to purchase those tokens and increase the trading price. This practice is known as “wash trading.” After inflating the trading price (the “pump”), the crypto companies then sold their tokens at the inflated price (the “dump”) and realized significant profit.

The Investigation

Significantly, much of the evidence included in the charging documents came from private chatrooms and videoconferences on Telegram, an encrypted cloud-based messaging service. As alleged in the charging documents, the defendants communicated openly on this platform, sharing memes including the phrase “pump it up,” exchanging details about the timing and volume of wash trading activity, and chatting about migrating company operations overseas to evade prosecution.

Also of note, the Federal Bureau of Investigation (FBI) took what it called the “unprecedented step” of creating its own cryptocurrency token, the “NexFundAI Token.” FBI agents posed as NexFundAI promoters on videoconferences and in Telegram chats with the alleged fraudsters to collect key evidence of their alleged schemes. In one videoconference, a defendant is alleged to have explicitly told an FBI agent that his company’s bots could execute “pump and dumps” and use wash trading to “solve the cold start problem.” In another private Telegram chat, another defendant allegedly explained to an FBI agent, “I know it’s wash trading and I know people might not be happy about it.” The NexFundAI tokens were actually traded on cryptocurrency exchanges for a period of time until their trading function was disabled at the direction of law enforcement.

Key Takeaways

There are several key takeaways from this “first of its kind” investigation, including: 

• Cryptocurrency and cybercrime remain top DOJ priorities and law enforcement are undertaking creative approaches to uncover fraud in these areas.
• Encrypted messaging applications may not be as anonymous or secure as individuals think, as evidenced by DOJ’s extensive use of supposed secure chats and videoconference content.
• Wire fraud remains the bread and butter of federal white collar prosecutors and applies equally to innovative technologies such as cryptocurrency.

For questions on this or any other subject, please reach out to the authors or any of their colleagues in Arnold & Porter’s White Collar Defense & Investigations practice group.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.