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This is How 'Sheep Investors' Helped Build Alleged USD 722M Crypto Ponzi

This is How 'Sheep Investors' Helped Build Alleged USD 722M Crypto Ponzi 101
Source: iStock/ridvan_celik

U.S. law enforcement has arrested three men in connection with a USD 722 million cryptocurrency mining Ponzi scheme that targeted thousands of investors the conspirators called “dumb” and “sheep.”

The U.S. Attorney’s Office for the District of New Jersey said yesterday that, between April 2014 and December 2019, the defendants operated BitClub Network, soliciting money from investors in exchange for shares of purported cryptocurrency mining pools, feeding victims with fake figures on “bitcoin mining earnings.” The crypto Ponzi scheme rewarded those who had already invested in the Ponzi scheme for recruiting new investors.

“Those arrested today are accused of deploying elaborate tactics to lure thousands of victims with promises of large returns on their investments in a bitcoin mining pool, an advanced method of profiting on cryptocurrency,” said Paul Delacourt, the Assistant Director in Charge of the FBI’s Los Angeles Field Office. The defendants allegedly spent their victims' money to support their lavish lifestyles.

Meanwhile the Attorney’s Office also shared more details, how, according to them, this Ponzi scheme was built.

The conspirators discussed between themselves that their target audience would be “dumb” investors, and called them “sheep”. One of them said they were “building this whole model on the backs of idiots,” according to the New Jersey Attorney’s Office.

The indictment describes that investors paid a USD 99 membership fee to be part of BitClub Network which allowed them to buy a share in one of three mining pools, priced at USD 500, USD 1,000 and USD 2,000, respectively. The USD 500 share entitled its owner to earn a 50% profit on the investment with the other 50% being purportedly used to fund crypto mining operations and buy additional shares. For the USD 1,000 and USD 2,000 shares, the declared profit margin was 60% and 70%, respectively.

In February 2015, one of the defendants told his fellow conspirator to “bump up the daily mining earnings starting today by 60%”. The conspirator responded that “that is not sustainable, that is ponzi teritori [sic] and fast cash-out ponzi . . . but sure.”

In September 2017, the same defendant sent an email to another conspirator in which he suggested to “[d]rop mining earnings significantly starting now” so that he could “retire RAF!!! (rich as fuck),” according to the statement.

Two of the individuals were charged with conspiracy to commit wire fraud, and all three with conspiracy to offer and sell unregistered securities. The men were arrested in Colorado, Florida, and California, respectively, and two more defendants remain at large with their identities remaining under seal. The defendants conspired to sell BitClub Network shares, which were securities, without registering them with the U.S. Securities and Exchange Commission.

The wire fraud conspiracy charge is punishable by a maximum of 20 years in prison, and a fine of up to USD 250,000, while the conspiracy to sell unregistered securities charge is punishable by a maximum of five years in prison, and a fine of up to USD 250,000.

Meanwhile, outside the U.S., a Ponzi scheme bearing many similarities to the BitClub Network alleged fraud was recently discovered in Uganda where the police have reportedly arrested one of the directors of a crypto startup, Dunamiscoin Resources Limited. The company’s management is accused of defrauding investors of UGX 10 billion (USD 2.7 million), the Daily Monitor reports.

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