Australian citizen Stefan Qin, aged just 24, has pleaded guilty in the USA to cheating 100 investors out of USD$90M invested into his hedge fund, Virgil Capital, following an investigation and prosecution by US Securities and Exchanges Commission (SEC).
Returns too good to be true
Since 2017, the self-proclaimed math prodigy had claimed to have devised an algorithm that monitored the digital currency market to take advantage of price fluctuations - ‘Profiting off bitcoin's wild swings’ asserting that the fund was 'not exposed to the ups and downs of the cryptocurrency market', 'No matter what happens, whether the market goes up or down or nowhere at all, we are unexposed and completely hedged against the risk of bitcoin'.
Just over a year into the advent of Virgil Capital, Qin was already boasting the fund was generating 500% returns in 2017, 'a claim that produced a flurry of new money from investors.'
Bloomberg reported that:
[Qin] became so flush with cash, [he] signed a lease in September 2019 for a $23,000-a-month apartment in 50 West, a 64-story luxury condo building in the financial district with expansive views of lower Manhattan as well as a pool, sauna, steam room, hot tub and golf simulator.
However, upset investors began to make complaints about missing assets and incomplete transfers. “It is now MID DECEMBER and my MILLION DOLLARS IS NOWHERE TO BE SEEN,”, one investor wrote, “It’s a disgrace the way you guys are treating one of your earliest and largest investors.”
New York lawyer Audrey Strauss explained:
Stefan He Qin drained almost all of the assets from the $90 million cryptocurrency fund he owned, stealing investors' money, spending it on indulgences and speculative personal investments, and lying to investors about the performance of the fund and what he had done with their money.
The house of cards
To meet the redemption demands of the increasingly upset investors in the former fund, Qin turned his attention to another fund he controlled, the VQR fund.
But to Qin's dismay, his attempt to withdraw $1.7 million dollars from the fund aroused the suspicions of VQR’s head trader, Antonio Hallak who refused to accept Qins claims that the money was destined for “Chinese loan shark” that “might do anything to collect a debt”. Reportedly Qin also told Hallak that “he had poor cash flow management” and “just didn't have the money right now”.
To surpass Hallak, Qin tried to take over the VQR fund, but by this point it was too late for Qin; the Securities and Exchange Commission was already on the case and within a week had filed a lawsuit against Qin for fraud.
Qin returned to the USA and turned himself in to authorities, and expressed his guilt:
I knew that what I was doing was wrong and illegal,” he told U.S. District Judge Valerie E. Caproni, who could sentence him to more than 15 years in prison. “I deeply regret my actions and will spend the rest of my life atoning for what I did. I am profoundly sorry for the harm my selfish behavior has caused to my investors who trusted in me, my employees and my family.”
What do we gather from cases like this?
Ponzi schemes are not new. Although an instance like this highlights the loopholes that need to be mended in the US system to the arrest of fraudsters, fraud in the most general sense of the word has been around since the dawn of commerce - and its slippery, evolving nature means it's here to stay.
What you should also keep in mind, however, is that scammers traditionally like to take advantage of ‘what's hot’ to better lure consumers into their cheap tricks. The author thinks that the Ontario Securities Commission comments about the founder's fraud revealed in the collapse of QuadrigaCX, also rings true here:
What happened...was an old-fashioned fraud wrapped in modern technology. There is nothing new about Ponzi schemes, unauthorized trading with client funds and misappropriation of assets.
Even in the most regulated areas Ponzi schemes can occur. Importantly this is not a reflection of the digital asset industry more broadly, just a demonstration that old tricks can permeate new technologies.