San Francisco Man Charged In Alleged Cryptocurrency Investor Fraud Scheme
SAN FRANCISCO – Japheth Dillman was arrested today in connection with an alleged scheme to defraud victims into investing in a San Francisco-based cryptocurrency trading fund, announced U.S. Attorney Stephanie M. Hinds, FBI Acting Special Agent in Charge Sean Ragan and Internal Revenue Service, Criminal Investigation (IRS-CI) Special Agent in Charge Mark H. Pearson.
Dillman, 44, of San Francisco, was charged in a complaint filed April 26, 2022, and unsealed earlier today. According to the complaint, from June 2017 through July 2018, Dillman was a general partner of Block Bits Fund I, LP (Block Bits Fund), a limited partnership incorporated in Delaware with a principal place of business in San Francisco. Dillman is alleged to have represented to potential investors that Block Fits Fund was developing a novel autotrader that would automatically complete cryptocurrency arbitrage trades on different exchanges. Dillman told potential investors that Block Fits Fund would profit from exploiting the price differences between different cryptocurrencies being sold on various exchanges. According to Dillman, investor funds would be used to develop and operate the autotrader, which he told investors was functioning and already returning profits. The complaint further alleges that, together with another general partner, David Mata, 42, of Spokane Wash., Dillman raised approximately $960,000 from investors by misrepresenting the status and functionality of the technology underlying the autotrader and by making false representations regarding the manner investor funds were being used.
The misrepresentations Dillman allegedly made are described in the complaint. For example, Dillman represented to multiple investors in June and July 2017 that the autotrader was already functioning and returning a substantial profit to Block Bits Fund. In fact, according to the complaint, there was no functioning autotrader at the time, and any claims regarding the autotrader’s ability to generate profits were false. According to the complaint, Block Bits Fund was never able to develop a functioning autotrader at any point in its existence. Further, in August 2017, Dillman represented to investors in an email that the arbitrage autotrader was being tested and that it would be deployed for automated trades within a week. The complaint alleges that these representations were false. According to the complaint, there was no prospect that the autotrader could be developed and deployed within one week of the date of the email, as development of the autotrader had not yet begun.
In addition, the complaint describes how Dillman allegedly misrepresented how investor funds were being used by representing that funds were being placed in “cold storage” where they would return high rates of profit for investors. “Cold storage” refers to a way of storing cryptocurrency that is supposedly safe and not exposed to risky investments. Dillman informed investors on multiple occasions that Block Bits Fund had reached “cold storage” deals with third parties whereby investor funds would be placed in “cold storage” for a period of time and receive a significant profit at the end of the storage period. However, rather than place the investor funds in “cold storage” for safe keeping, Dillman and Mata instead diverted the funds and used them to invest in risky, cryptocurrency-related ventures, none of which involved “cold storage” or were related to the stated purpose of Block Bits Fund. Moreover, the complaint alleges Dillman and Mata sent misleading updates and profit reports to investors representing that their funds were being stored securely when, in fact, they were invested in risky ventures. According to the complaint, all of the investments failed and investors lost a substantial portion of their funds.
In sum, the complaint alleges Block Bits investors lost approximately $508,000 due to Dillman’s scheme. Dillman is charged with one count of wire fraud, in violation of 18 U.S.C. § 1343. Mata also is charged with one count of wire fraud in a separate document, an information filed earlier today. If convicted, Dillman and Mata face a maximum statutory prison sentence of 20 years. In addition, the charge carries a maximum $250,000 fine and 3 years of supervised release. However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. § 3553.
A criminal complaint and an information contain mere allegations and the defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.
Dillman’s next court appearance is scheduled for April 28, 2022, before U.S. Magistrate Judge Thomas S. Hixson. Mata’s next court appearance is scheduled for April 29, before Magistrate Judge Hixson.
The cases against Dillman and Mata are brought as a result of an investigation by the FBI and IRS-Criminal Investigation.
The case is being prosecuted by the Corporate and Securities Fraud Section of the U.S. Attorney’s Office for the Northern District of California. The U.S. Attorney’s Office appreciates the assistance of the San Francisco Regional Office of the Securities and Exchange Commission.