The US Attorneys Office in the District of Massachusetts has unsealed criminal charges against 18 market makers, crypto projects and their founders/employees for alleged wire fraud, market manipulation and wash trading involving alleged market makers in the cryptocurrency markets.
The charges, brought in Boston, target the heads of four cryptocurrency companies, four market-making financial services firms, and various employees within those firms. This marks the first time that criminal charges have been filed against firms for these kinds of activities in the crypto space.
The Allegations
The defendants are accused of engaging in fraudulent schemes to artificially inflate the value of a number of cryptocurrency tokens through "wash trading"—a tactic where sham trades are executed to give the false appearance of trading volume, misleading buyers into believing a token has an available and liquid market. These companies then allegedly profited from the inflated token prices in classic "pump and dump" schemes, where the price of the token is artificially increased and the original holders sell their tokens at high prices.
The case involves several market makers and projects, including Saitama, which at its peak had an (allegedly inflated) multi-billion-dollar market cap. The market makers, including ZM Quant, CLS Global, and MyTrade, are accused of conspiring with cryptocurrency companies including NexFundAI, an FBI founded fake token, to manipulate token prices. One market maker is alleged to have admitted their goal was to deceive unsuspecting buyers: “we have to make [the other buyers] lose money in order to make profit."
Enforcement and Seizures
The ongoing investigation, dubbed "Operation Token Mirrors," has already led to four guilty pleas, the apprehension of several defendants across the US, UK, and Portugal, and the seizure of more than $25 million in cryptocurrency. Several automated trading bots responsible for millions of dollars' worth of wash trades, covering around 60 different cryptocurrencies, have also been shut down.
Federal authorities, including the FBI and the Securities & Exchange Commission (SEC), have drawn attention that innovative markets including cryptocurrency can still be subject to manipulation by old tactics like pump and dump schemes. There was a stark difference between the DOJ's announcement of the charges, and the SEC, with the latter asserting their new phrase to claim jurisdiction "crypto assets sold as securities" in their press release. The DOJ focused simply on the wrongdoing at the heart of the case.
A wake up call for buyers
In a statement, Acting US Attorney Joshua Levy warned that fraud in the cryptocurrency space will be aggressively prosecuted, emphasising the need for buyers to stay vigilant, saying:
If you make false statements to trick investors, that’s fraud. Period.
He further said:
These charges are also a stark reminder of how vigilant online investors must be and that doing your homework before diving into the digital frontier is critical. People considering making investments in the cryptocurrency industry should understand how these scams work so that they can protect themselves.
Jodi Cohen, Special Agent in Charge of the FBI’s Boston Division, reinforced the message, explaining that this case represents "a new twist to old-school financial crime." The fact that the FBI created its own cryptocurrency token and company to engage with alleged wrongdoers is novel.
With recent enforcement action in Australia over a pump and dump scheme targeting ASX stocks, market manipulation organised through social media channels has become an increasing focus for regulators not just in the crypto-asset sphere. Australia is also a participant in the global Operation Spincaster, aimed at combatting scammers targeting crypto users.
This case underscores that crypto-assets markets are not immune from regulatory scrutiny and that market integrity is gaining international focus with a coordinated action by authorities in multiple jurisdictions aimed at protecting investors. As crypto-assets become more integrated into global finance, market participants should remember the potentially sweeping application of criminal and civil laws targeting fraud and market manipulation in financial services and crypto-asset markets.
By Steven Pettigrove, Michael Bacina and Luke Misthos
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