The criminal activity surrounding cryptocurrency is a growing concern to law enforcement. The FBI has formed a new specialized team — the Virtual Asset Exploitation Unit — dedicated to cryptocurrency crimes. The Securities and Exchange Commission announced it’s nearly doubling the number of staffers in its unit responsible for protecting investors in crypto markets.
Investors by the thousands are being duped into investing in cryptocurrency-related fraud schemes. The scams range from bogus cryptocurrencies to people who have lost money believing they would profit from crypto mining ventures.
“New financial frontiers can also generate fresh opportunities for old-fashioned fraud,” said Damian Williams, U. S. Attorney for the Southern District of New York, after announcing charges against a New York man accused of misrepresenting to investors that he had purchased specialized cryptocurrency-mining computers.
I’m a student of scams. I’ve written about them in my column and uncovered one illegal scheme that led state authorities to shut it down.
I frequently read criminal complaints looking for the answer to what we natural-born skeptics wonder: How do con artists get people to believe their scams?
Even after I’ve exposed a fraud, victims blamed me for outing the con.
It’s not enough to say to potential victims, “If it’s too good to be true, it probably is.”
Victims clearly find the scams believable. So then: What’s the recipe for the trickery?
To find that answer, it helps to dissect the deceit.
Let’s look at the case involving another New Yorker, Eddy Alexandre, who was arrested and accused this month of running a cryptocurrency and foreign exchange trading Ponzi-like scheme that collected $59 million from investors.
A Justice Department complaint alleges Alexandre’s platform, EminiFX, invested relatively little money from the victims in crypto or foreign exchange trading. Instead the money collected from investors was used to fund his lavish lifestyle, including the purchase of a $155,000 BMW.
Alexandre primarily traded individual stocks, investing about $9 million of people’s funds and losing more than $6.2 million, according to the Commodity Futures Trading Commission (CFTC), which filed a civil enforcement action against Alexandre and EminiFX.
Alexandre is also charged with commodities and wire fraud. He has entered a plea of not guilty, according to the Justice Department.
The attorney representing Alexandre did not respond to requests for comment.
The accusations against Alexandre, like so many other similar cases, can be instructive in what not to do. So here are six signs of a classic Ponzi scheme.
Sign No. 1: Promise returns that seem plausible. Many people no doubt may recall that Bernie Madoff, the mastermind of one of the largest Wall Street Ponzi schemes, consistently paid out an annual return of about 12 percent, which seemed reasonable at that time.
That should have tipped folks off. Market returns are unpredictable.
In the complaint about EminiFX, the CFTC said the company promised potential participants that they would receive guaranteed returns of at least 5 percent “every single week.”
A photo, obtained by the FBI, showed a whiteboard in the EminiFX office that had the following wording: “Never less than 5%[,] never more than 9.98%!!!”
“This statement appears to indicate that the ‘weekly profit’ was not based on actual investment returns but was fictitious,” according to the FBI. “Returns could not be predicted to fall within a narrow range.”
If you are presented with a moneymaking opportunity promising easy earnings or extraordinarily consistent investment returns, I can assure you it’s very likely a scam.
Sign No. 2: Promoters’ ostentatious wealth display. Con artists want you to want what they have. They need to look like they have money. They wear expensive clothes or drive luxury vehicles. They host parties and hold regular conference calls bragging about their wealth.
Want to know what a millionaire looks like? Read “The Millionaire Next Door.”
Ordinary millionaires don’t have a need to prove their net worth, but scammers do.
Sign No. 3: Proprietary secrets prevent full disclosure. Madoff was very secretive about how he achieved returns for his investors.
On its website, EminiFX says investors earned relatively high returns through automated investments in cryptocurrency and foreign exchange trading. But when asked to explain the technology behind the business model, the FBI alleges Alexandre told investors it was a “trade secret.”
When it comes to investing full — verifiable — disclosure is your safety net.
Sign No. 4: Recruiting is key. A successful Ponzi scheme needs new money.
Who better to build trust for their scheme than the people investors know personally?
Sign No. 5: Participants brag about their payouts. What keeps a Ponzi scheme going is people bragging about how much money they’ve made.
I found several videos on YouTube of individuals sharing how they made money from EminiFX.
One thing stood out. They didn’t talk about how the money was made. They just boasted about their returns.
Sign No. 6: Cashing out becomes difficult. At some point, the Ponzi scheme collapses or law enforcement shuts it down.
To protect what may be left of investors’ money, EminiFX has been placed in receivership.
So far about 1,000 investors have reached out to Raines Feldman, the law firm handling the receivership, according to David A. Castleman, who has been appointed temporary receiver for EminiFX.
Castleman said investors should not continue to use the EminiFX online platform but instead send an email to [email protected] and include the name on their account, an email address, a mobile number, and the amount they invested.
But some investors will be hard to convince. “The minute we start accumulating wealth and raising our voices, that’s when the adversaries tackle us down,” one YouTube user wrote in the comment section of a video about the shutdown of EminiFX.
