Regulators uncover high-value deceptions relating to cryptocurrency investing
Crypto asset investors know that their money is at risk from an often volatile market, but many are also caught out by those who operate in the burgeoning investment space fraudulently.
Regulators on both sides of the border have this week highlighted how investors can fall victim to crypto fraud, with a combined $663 million involved.
Firstly, a British Columbia Securities Commission panel has found that a crypto platform based in the province committed fraud by lying to customers and diverting approximately $13 million in client funds to gambling activities.
The now defunct ezBtc was operated by former BC resident David Smillie and offered investors a platform to buy and sell crypto assets with the promise that they would be held in ‘cold storage’ where they would be safer from cyber-attack and unauthorized access.
However, the BCSC panel determined that over a three year period from 2016-2019, around one third of customers’ crypto assets were diverted to gambling sites, other crypto platforms, or Smillie’s own personal accounts. In one instance, a customer deposited a certain amount of bitcoin on ezBtc and just 14 minutes later the firm transferred that exact same amount of bitcoin to one of the gambling sites.
As customers were not able to withdraw their assets, the deception led to actual loss of approximately $13 million.
The panel concluded that Smillie should have been aware that the firm did not keep customers’ assets safe and that diverting funds into other accounts could result in financial loss for customers.
The panel will next consider what sanctions to impose, which could include monetary sanctions and bans from market participation.
SEC action
Meanwhile, the US Securities and Exchange Commission has charged Canadian firm NovaTech Ltd and its owners Cynthia and Eddy Petion for operating a fraudulent scheme that raised more than $650 million from customers worldwide.
The SEC alleges that the firm and its owners operated a multi-level marketing and crypto investment program between 2019 and 2023 in which around 200,000 investors participated. It was claimed, the regulator says, that investor funds would be invested in crypto asset and foreign exchange markets.
However, it’s alleged that instead of the promised safety for investor funds (that they would have instant access to their money) the SEC says that NovaTech used investor funds to pay existing investors and to pay commissions to promoters, using only a fraction of investor funds for trading. The owners are also accused of siphoning off millions of dollars for themselves.
NovaTech ultimately collapsed leaving investors unable to get their money back.
“NovaTech and the Petions caused untold losses to tens of thousands of victims around the world,” said Eric Werner, Director of the SEC’s Fort Worth Regional Office. “As we allege, MLM schemes of this size require promoters to fuel them, and today’s action demonstrates that we will hold accountable not just the principal architects of these massive schemes, but also promoters who spread their fraud by unlawfully soliciting victims.”
The SEC has also charged Martin Zizi, Dapilinu Dunbar, James Corbett, Corrie Sampson, John Garofano, and Marsha Hadley for their roles in promoting NovaTech to investors.
The British Columbia Securities Commission and the Ontario Securities Commission were both involved in the SEC’s investigation.
A CSA warning was issued in March 2023 stating NovaTech was not registered with a securities regulator in any province or territory in Canada and that it may have been operating in breach of provincial and territorial securities and derivatives law. The OSC issued a Cease Trade Order on March 2, 2023.
