Bitcoin used in Ponzi scheme, SEC says

Agency alerts investors to similar schemes involving virtual tender

Jul 23, 2013 @ 3:43 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission today filed its first investor fraud lawsuit involving the popular virtual currency Bitcoin, claiming it was used to promote a Ponzi scheme.

The agency also issued a warning to investors about the potential for Ponzi schemes involving Bitcoin and other kinds of virtual tender.

The SEC alleges that Trendon T. Shavers, founder and owner of Bitcoin Savings and Trust, duped investors into participating in a bogus Bitcoin-trading operation. Mr. Shavers could not be reached for comment.

From September 2011 to November 2012, Mr. Shavers raised more than 700,000 BTC from 66 investors, a figure that totaled $4.5 million in cash based on the daily Bitcoin price at the time, according to the SEC. The value of the same number of BTC shares today is $60 million, the SEC said.

Bitcoin can be traded online for traditional currency, such as dollars, or can be used to purchase online goods and services.

“We are concerned that the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes in which these currencies are used to facilitate fraudulent, or simply fabricated, investments and transactions,” the SEC Investor Alert states. “Any investment in securities in the United States remains subject to the jurisdiction of the SEC, regardless of whether the investment is made in U.S. dollars or a virtual currency.”

Mr. Shavers promised 7% weekly interest based on Bitcoin arbitrage. In the online Bitcoin Forum, Mr. Shavers, posting as Pirate or pirateat40, assured potential investors that “risk is almost 0.”

The SEC said that Mr. Shavers did not trade Bitcoin but rather used the money he raised to pay off early investors in the scheme or diverted it to use in day trading or for personal expenses. He paid out 507,148 BTC to investors and transferred at least 150,649 BTC to his personal account. He netted 86,202 BTC, or $164,758, in personal day trading.

“Fraudsters are not beyond the reach of the SEC just because they use Bitcoin or another virtual currency to mislead investors and violate the federal securities laws,” Andrew M. Calamari, director of the SEC's New York regional office, said in a statement.

But the potential reach of investment fraud is expanded online. Mr. Shavers solicited his investors through the Bitcoin Forum.

“As with any movements in the market, up or down, I have enough order activity going on that my risk is very limited,” Mr. Shavers wrote Nov. 22, 2011. “In most cases, the coins go uncovered less than a few hours. I have yet to come close to taking a loss on any deal.”

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