SEC charges 11 people in massive crypto Ponzi scheme

On Monday, The Securities and Exchange Commission arrested 11 people for their involvement in an alleged crypto pyramid scam worth $300mn, a move that signifies the authorities’ commitment to enforcing laws in the digital asset markets.

The scheme

Forsage, as the scheme is called, raised money by hiring promotors to recruit others. With a combination of aggressive marketing and grandiose promises, it managed to recruit millions of people all over the world. To run the scheme, Forsage used computer system packages that enable crypto trades without an intermediary. They traded on Binance, Ethereum, and Tron blockchains, which are widely used.

Beneath all the savvy tech talk, however, the Wall Street watchdog alleged that Forsage was an old-fashioned pyramid (or Ponzi) scheme, where investors gained profit from their recruits or downlines. As with other pyramid schemes, the SEC claimed that Forsage did not sell “any actual, consumable product”. Instead, it relied on aggressive recruitment tactics to gain profit. The funds given by later investors were used as payments to earlier investors. This criticism could be found in a federal court docked filled by the SEC in Illinois.

Carolyn Welshhans, acting chief of the SEC’s Crypto Assets and Cyber Unit, said that scammers would not escape the federal securities laws. This arrest showed the SEC’s determination in policing the digital asset market, or as its chair called it, the “wild west”.

Forsage's response

Through a representative, Forsage denied the allegations and called them “nonsense” made up by cryptocurrency skeptics. Four of its founders - Vladimir Okhotnikov, Mikail Sergeev, Sergey Maslakov, and someone who goes by the alias of Lola Ferrari - are among those arrested on Monday. None of them could be reached for comment, and their current whereabouts are unknown. They were last heard to be living in the Republic of Georgia, Indonesia, and Moscow. Aside from the foreign nationals, the SEC also charged three US-based promoters and several members of Crypto Crusaders, a promotional group that operated in more than five U.S. states. None of them were named in the civil complaint filed by the SEC.

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Subject to court approval, two defendants agreed to settle the charges without neither admitting nor denying the allegations.

Previous legal challenges

Finance regulators all over the world have tried several times to end Forsage’s operation. The first was the Philippines' SEC, which brought cease-and-desist actions against Corsage in September 2020. In March 2021, the Montana commissioner of securities and insurance followed in their footsteps. The defendants, however, allegedly continued to run the scheme and even published several YouTube videos denying the claims.

Pyramid scheme

A pyramid scheme is a scam model where profit is made by aggressive recruitment of new members, whose money will be used to pay the earlier recruits. On top of the pyramid sit the initial members who gain massive profit, while the newer recruits (who often lose money instead of making money) sit at the bottom. The scheme is also called a Ponzi scheme, after Charles Ponzi, the con artist who lived in the early 20th century. This scheme is illegal in many U.S. states.