The Securities and Exchange Commission charged BitConnect, a now-defunct online crypto lending platform, and its founder, Satish Kumbhani, with defrauding retail investors out of $2 billion through a global fraudulent and unregistered offering of investments into a program involving digital assets.
In a complaint filed Wednesday in U.S. District Court for the Southern District of New York, the SEC alleged BitConnect and Kumbhani, as well as top U.S. BitConnect promoter Glenn Arcaro of Los Angeles, California, and his affiliated company, Future Money, conducted the scam via a “Lending Program” offered by BitConnect from early 2017 through January 2018.
The SEC previously reached settlements with two of the five individuals it charged in a related action for promoting the BitConnect offering.
In a parallel action, the Department of Justice announced Wednesday that Arcaro, 44, pleaded guilty to criminal charges. Arcaro admitted he earned at least $24 million from the BitConnect fraud conspiracy, all of which, according to court documents, he must repay to investors. Sentencing is scheduled to occur Nov. 15 at 9:30 a.m. before U.S. District Judge Todd W. Robinson.
“The BitConnect scheme is believed to be the largest cryptocurrency fraud ever charged criminally,” according to the office of Randy S. Grossman, acting U.S. Attorney of the Southern District of California. “BitConnect operated a textbook Ponzi scheme by paying earlier BitConnect investors with money from later investors.”
Arcaro and Kumbhani did not immediately respond to requests for comment on Thursday.
SEC Chairman Gary Gensler said last month that Congress should grant the securities regulator oversight authority over the cryptocurrency market or “a lot of people will be hurt.”
“To induce investors to deposit funds into the purported” program, BitConnect and Kumbhani falsely represented, among other things, that BitConnect would deploy its purportedly proprietary “volatility software trading bot” that, using investors’ deposits, would generate returns as high as 40% a month, according to the complaint.
However, rather than deploying investor funds for trading with the purported trading bot, BitConnect and Kumbhani “siphoned investors’ funds off for their own benefit, and their associates’ benefit, by transferring those funds to digital wallet addresses controlled by Kumbhani, Arcaro, other promoters, including the Arcaro Promoters, and other unknown individuals,” the complaint alleged.
The SEC’s complaint further alleged that BitConnect and Kumbhani established a network of promoters around the world and rewarded them for their promotional efforts and outreach by paying commissions, a significant portion of which they concealed from investors.
Those promoters included Arcaro, the lead national promoter of BitConnect for the U.S., who used the website he created, Future Money, to lure investors into the program, the SEC alleged.
The complaint charged the defendants with violating the antifraud and registration provisions of federal securities laws. The SEC is seeking injunctive relief, disgorgement plus interest, and civil penalties.