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Eighteen people and companies face charges of “widespread fraud and manipulation” after an FBI investigation in which authorities created their own cryptocurrency token, federal officials announced Wednesday.
The U.S. Department of Justice announced that five defendants have pleaded or agreed to plead guilty and three others were arrested this week in Texas, the United Kingdom and Portugal in connection with a pumping and dumping investigation, dubbed “Operation Token Mirrors,” which also seized over $25 million in crypto assets.
The gist of the project was “on-demand market manipulation” on cryptocurrency trading platforms using algorithms or bots to generate “quadrillions of trades and billions of dollars in artificial trading volume every day” , said the Securities and Exchange Commission.
Earlier this year, the SEC said, a purported market maker called ZM Quant was retained to support trading in 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 drive up the token’s price before selling tokens to “cash out at the highs,” federal officials said in an indictment. At one point in May, ZM Quant’s trading accounted for more than 80% of NexFundAI’s trading volumes, according to the SEC.
But little did ZM Quant know that NexFundAI wasn’t just another fledgling crypto token dreaming of a high valuation: it was a tool of federal law enforcement agents determined to dismantle the alleged pumping operation and emptying.
NexFundAI traded for just one day, May 31, generating an artificial trading volume of $4,600, according to the SEC.
“What we discovered resulted in charges against the executives of four cryptocurrency companies, as well as four cryptocurrency “market makers” and their employees, accused of running a sophisticated trading scheme that allegedly defrauded honest investors out of millions of dollars,” Jodi Cohen said. , an FBI special agent, in a statement. “The FBI has taken the unprecedented step of creating its own cryptocurrency token and company to identify, disrupt and bring to justice these suspected fraudsters.”
Employees of market makers Gotbit Consulting, CLS Global FZC and MyTrade MM also face charges, as do those of crypto firms Saitama, Robu Inu, VZZN and Lillian Finance.
Saitama “at one point boasted a market value of $7.5 billion” while its executives “actively manipulated the Saitama token market and secretly sold their Saitama tokens for tens of millions in profits,” according to the DOJ.
Federal law enforcement officials traced Saitama’s alleged market manipulation campaign to July 2021, when one Saitama executive sent a private message to another about a plan to “create an illusion of massive purchases and new owners” which “would encourage people to buy more”. .
“Yes,” replied another Saitama contributor, who then sent a GIF emblazoned with the words “Pump it up.”
The defendants face a range of charges, including market manipulation, conspiracy to commit money laundering and wire fraud, which carry sentences of up to 20 years in prison.
“Wash trading has long been prohibited in financial markets, and cryptocurrencies are no exception,” Acting U.S. Attorney Joshua Levy said in a statement. “These are cases where an innovative technology – cryptocurrency – meets a century-old pattern – pump and dump.”
