Texas Man Pleads Guilty In Manhattan Federal Court To Operating Bitcoin Ponzi Scheme
Guilty Plea in First Federal Securities Fraud Case Involving a Bitcoin-Related Scheme
Preet Bharara, the United States Attorney for the Southern District of New York, announced today that TRENDON SHAVERS, a/k/a “pirateat40,” pled guilty before U.S. Magistrate Judge Sarah Netburn to one count of securities fraud stemming from his involvement in a Bitcoin-related Ponzi scheme. SHAVERS was the founder and operator of Bitcoin Savings and Trust (“BCS&T”), which offered and sold Bitcoin-based investments through the Internet. In total, SHAVERS fraudulently obtained approximately 146,000 Bitcoin in BCS&T investments, which amounted to approximately $807,380 based on the average price of Bitcoin over the duration of the scheme. SHAVERS is expected to be sentenced before U.S. District Judge Lewis A. Kaplan on February 3, 2016.
Bitcoin are a decentralized form of electronic currency, existing entirely on the Internet and not in any physical form. The currency is not issued by any government, bank, or company, but rather is generated and controlled automatically through computer software operating on a “peer-to-peer” network. Bitcoin transactions are processed collectively by the software-enabled computers composing the network.
U.S. Attorney Preet Bharara said: “Trendon Shavers has admitted that his high-yield Bitcoin investment program yielded high returns for himself rather than his investors. Instead of reaping gains, his investors were largely swindled out of their money in a cyber-age Ponzi scheme. Shavers now awaits sentencing for his crime.”
According to the Indictment, other public records, and statements made today in court:
From at least September 2011 up through and including September 2012, SHAVERS operated a Ponzi scheme. Specifically, SHAVERS solicited investments in BCS&T on the “Bitcoin Forum” – a public, Internet-based forum where, among other things, Bitcoin investment opportunities were posted. SHAVERS’s offer to investors was straightforward: investors who loaned Bitcoin to BCS&T would be paid up to seven percent interest weekly – an annualized interest rate of 3,641% per year – and investors could withdraw their investments in BCS&T at any time. SHAVERS claimed that the Bitcoin invested by BCS&T investors would be used to support a Bitcoin market-arbitrage strategy, which included (i) lending Bitcoin to others for a fixed period of time; (ii) trading Bitcoin via online exchanges; and (iii) selling Bitcoin locally via private, off-markets transactions – i.e., “over-the-counter transactions.” SHAVERS also personally guaranteed that he would cover any losses in the event of a market change. In truth, SHAVERS largely failed to execute the claimed market arbitrage strategy, failed to honor all of his investors’ redemption requests as well as his personal guarantee, and failed to deliver the agreed-upon rates of interest.
In the end, BCS&T was simply a Ponzi scheme through which SHAVERS used Bitcoin from new investors to make purported interest payments and cover investor withdrawals on outstanding BCS&T investments. In addition, SHAVERS diverted investors’ Bitcoin for day trading in his own account on a Bitcoin currency exchange, and exchanged investors’ Bitcoin for U.S. dollars to pay his personal expenses. At the peak of the scheme, SHAVERS raised, and had in his possession, about seven percent of all the Bitcoin that was in public circulation at the time. At least 48 of approximately 100 investors lost all or part of their investment in BCS&T.
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SHAVERS, 33, pled guilty to one count of securities fraud, which carries a maximum sentence of 20 years in prison and a maximum fine of $5 million, or twice the gross gain or loss from the offense. The maximum potential sentence in this case is prescribed by Congress and is provided here for informational purposes only, as the defendant’s sentence will be determined by the judge.
On September 18, 2014, in a separate civil action, the United States District Court for the Eastern District of Texas entered final judgment against both SHAVERS and BCS&T, and ordered SHAVERS to pay more than $40 million in disgorgement and prejudgment interest, and a civil penalty of $150,000 related to BCS&T.
Mr. Bharara praised the work of the Federal Bureau of Investigation, and thanked the Securities and Exchange Commission for its invaluable assistance.
The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information on the task force, please visit www.StopFraud.gov.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Daniel S. Goldman and Michael Ferrara are in charge of the prosecution.