Former broker accused of $1 million crypto fraud

A former FINRA-registered broker and investment banker accused of bilking his friends, former classmates and industry colleagues of at least $1 million in a crypto Ponzi scheme has been indicted by federal authorities.

Last week was 27-year-old Rashawn Russell charged with committing a cryptocurrency investment fraud scheme in the United States Attorney’s Office for the Eastern District of New York.

The former Deutsche Bank investment banker faces a maximum of 20 years in prison if convicted. The Commodity Futures Trading Commission also filed a civil enforcement action against Russell.

“As alleged, Russell turned the demand for cryptocurrency investments into a scheme to defraud numerous investors to fund his lifestyle,” U.S. Attorney Breon Peace said in a statement. “This office will continue to aggressively pursue fraudsters who perpetrate these schemes against investors in the digital asset markets.”

In accordance court documents filed alongside the indictment On April 11, investigators allege that from at least November 2020 through July 2022, Russell facilitated a scheme to take advantage of several investors by promising them that money he collected from them would be used for cryptocurrency investments that generate large returns.

Russell asked investors to contribute to a proprietary digital asset trading fund called the R3 Crypto Fund. He accepted contributions in the form of bitcoin, ether and/or fiat currency.

He told potential investors that their contributions would be locked into the fund for a three-month period. When the period ended, Russell would give investors the option of either receiving their original investment plus any profits generated by his trading or rolling their contribution and all profits into another three-month fund cycle.

On some occasions, returns were presented as minimum 25% guarantees by Russell, court documents allege. Russell told investors they could get a flat 25% guaranteed return on their contribution at the end of the term, with any profits above that amount going to Russell.

Investors can also choose to receive 80% of all profits with 20% of total profits going to Russell as a management fee. Regardless, Russell guaranteed that the investor’s original contribution would be returned.

Throughout the scheme, Russell promised current and potential investors that his trades for the fund were profitable, at times generating returns as high as 50% or more, according to court documents. Investigators say in reality much of the investors’ money was misappropriated by Russell and used for his personal benefit to gamble and pay back other investors in a Ponzi-like scheme.

Russell is also accused of fabricating several documents that he sent to his clients to keep the deception afloat. Court documents say Russell sent an investor an altered image of a bank balance displayed on a bank website that purported to show Russell’s significant liquidity. A lawsuit says a bank statement sent from Russell to a client in February 2021 showed an account balance of about $355,000 at a time when the accused had a balance of no more than $35,000.

When another investor sought to recover his investment, Russell never sent the money, instead sending the investor a fabricated wire transfer confirmation that was presented as proof that the investor’s money had been returned.

Court documents said Russell often made excuses when investors moved to withdraw money from the fund, including lies that he was about to transfer money to them or that he would pay their contributions plus profits in the form of USDC – USD Coin, a digital stablecoin linked to the US dollar – to a digital wallet.

Russell delayed his responses to repeated requests from investors and eventually stopped responding altogether, court documents said. With limited exceptions, Russell’s investors were unable to recover any of their investments.

Financial planning Attempts to reach Russell for comment were not successful.

The charges are filed as Bitcoin does its best to make a comeback and regulators across financial services add crypto to their daily enforcement diets.

In the days that followed, Russell’s suit was filed, and the Texas Securities Board filed a final order against crypto firm Nexo Capital for the sale of securities that are not registered; and the SEC charged platform for trading cryptoassets Bittrex and its co-founder to operate an unregistered national stock exchange, broker and clearing agency.

The SEC also accused Bittrex’s foreign subsidiary, Bittrex Global GmbH, of failing to register as a national securities exchange in connection with the operation of a single shared order book with Bittrex. The SEC said since at least 2014, Bittrex has held itself out as a platform that facilitated the buying and selling of cryptoassets that the SEC’s complaint alleges were offered and sold as securities.

From 2017 to 2022, Bittrex earned at least $1.3 billion in revenue from transaction fees from investors while serving them as a broker, exchange and clearing agency without registering any of these activities with the commission.

In a statement released Monday by SEC Chairman Gary Gensler in connection with the Bittrex case, he said the enforcement actions make it clear that crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity.

“As alleged in our complaint, Bittrex and issuers it worked with knew the rules that applied to them, but went to great lengths to avoid them by directing issuer-applicants to ‘scrub’ and provide material with information indicating that certain cryptoassets were securities,” Gensler said. “Furthermore, Bittrex allegedly failed to register and comply with US securities laws as an exchange, broker-dealer and clearing agency.

“Cosmetic changes did nothing to change the underlying economic realities of the offerings and Bittrex’s behavior. Today, we hold Bittrex accountable for non-compliance.”

But veteran securities attorney Bill Singer, who is not involved in either case, said regulatory clarity remains an issue although crypto enforcement cases have become more common.

The US government has still not issued a clear set of rules for cryptocurrency and blockchain forms to operate within. In September 2022, The White House released its first comprehensive framework for the “responsible development” of digital assets.

Singer said that scams that were once considered complex or exotic because they are preceded by the word “crypto” have become entrenched and rely on the same tried-and-tested deceptions as the plots that have existed in the industry long before blockchain technology.

For him, that means excuses from regulators that more time is needed before definitive and concrete regulatory guidance on digital assets can be distributed are nearing their expiration dates.

“It’s just an old-fashioned scam. All he’s done is we’ve made it sexy by putting the word crypto in there … you’ve got a guy asking you to give you crypto. You’ve never heard of him. He do it He doesn’t really have much of a background. And he guarantees you 25%,” said Singer, who worked as a regional attorney for FINRA’s predecessor, the National Association of Securities Dealers. “I’ve been around for 40 years. I can remember in the late ’90s where we had this scam except people were told they’re going to be put into a dot-com company.”

He added that the Bitrex issue, which continued for five years, irks him because he said it represents a “highway that has been largely built by the SEC without any guardrails.

“What a lot of people complain about is that the SEC has litigated when it’s supposed to regulate our regulations. What people have been asking and begging the commission to do for at least five or six years is to decide and tell us what crypto is under the CFTC, and what it is under the SEC,” Singer said. “Every other week they propose a new rule. Now they propose to revise the rules they propose. And we have then the Department of Justice stepping in because the fraudsters have easily realized that if I keep using the word Bitcoin, it sounds very sexy. And since the SEC definitely not determines regulation and the CFTC does not definitively rule … as lawyers love the word penumbra, that’s where we are.”