Stay informed with free updates
Eighteen people and companies are facing charges of “widespread fraud and manipulation” following an FBI investigation in which authorities created their own cryptocurrency token, federal officials said Wednesday.
The U.S. Department of Justice announced that five defendants had pleaded or agreed to plead guilty, and another three were arrested this week in Texas, Britain and Portugal in connection with a pump-and-dump investigation called ‘Operation Token Mirrors’, which also saw the seizure of more than $25 million in crypto assets.
The essence of the scheme was “on-demand market manipulation” on crypto trading platforms using algorithms or bots to generate “quadrillions of trades and billions of dollars in artificial trading volume every day,” according to the Securities and Exchange Commission.
Earlier this year, the SEC said, a so-called market maker called ZM Quant was brought in to support trading of a token called NexFundAI. On paper, NexFundAI was a way to invest in early-stage artificial intelligence projects.
ZM Quant employees allegedly advised NexFundAI backers on how to artificially inflate the token’s price before selling tokens to “cash out at the peaks,” federal officials said in an indictment. At one point in May, ZM Quant’s trades amounted to more than 80 percent of NexFundAI’s trading volumes, according to the SEC.
But ZM Quant was unaware that NexFundAI wasn’t just a new crypto token with dreams of a lofty valuation: it was a tool of federal law enforcement officials bent on dismantling the alleged pump-and-dump operation.
NexFundAI traded for just one day, on May 31, and generated $4,600 in artificial trading volume, according to the SEC.
“What we discovered has resulted in charges against the leadership of four cryptocurrency companies, and four crypto ‘market makers’ and their employees accused of running a sophisticated trading scheme that allegedly robbed honest investors of millions of dollars,” said Jodi Cohen. , an FBI special agent, said in a statement. “The FBI has taken the unprecedented step of creating its own cryptocurrency token and company to identify, disrupt and bring these alleged fraudsters to justice.”
Employees of market makers Gotbit Consulting, CLS Global FZC and MyTrade MM are also charged, as are those of crypto firms Saitama, Robu Inu, VZZN and Lillian Finance.
Saitama at one point had “a market value of $7.5 billion,” while its leadership “actively manipulated the market for the Saitama token and secretly sold their Saitama tokens for tens of millions in profit,” according to the DOJ.
Federal law enforcement officials traced Saitama’s alleged campaign of market manipulation back to July 2021, when one Saitama leader sent a private message to another about a plan to “create an illusion of mass purchases and new holders” that will “incentivize people to buy more ” .
“Yes,” replied another Saitama backer, who messaged later GIF decorated with the words “Pump it up”.
The defendants face a range of charges, including market manipulation, conspiracy to commit money laundering and bank fraud, which could carry prison sentences of up to 20 years.
“Wash trading has long been prohibited in the financial markets, and cryptocurrency is no exception,” Acting U.S. Attorney Joshua Levy said in a statement. “These are cases where an innovative technology – cryptocurrency – met an age-old scheme – the ‘pump and dump’.”