September 19, 2014
By David Lee
SHERMAN, Texas (CN) – A Texas man must pay over $40.4 million for running a massive Ponzi scheme based on a Bitcoin operation he ran out of his home, a federal judge ruled.
The U.S. Securities and Exchange Commission sued Trendon T. Shavers, 31, of McKinney, and Bitcoin Savings & Trust in July 2013 for securities fraud and disgorgement.
It alleged he raised over 700,000 bitcoins from investors, promising up to seven percent interest every week based on BTCST’s claimed market arbitrage activity.
The SEC claimed Shavers’ fraudulent activities began in November 2011, when he posted a “Looking for Lenders” ad on the online Bitcoin Forum, offering one percent daily interest for “loans” of 50 bitcoins or more. The agency cited a dozen more of Shavers’ posts in which he claimed that business was great and that the “risk is almost 0.”
When the scheme collapsed in August 2012, Shavers made preferential redemptions to friends and longtime investors, the SEC claimed.
U.S. Magistrate Judge Amos L. Mazzant granted the SEC’s motion for summary judgment on Thursday, concluding investors lost over 265,000 bitcoins valued at $149 million at current exchange rates.
He did not believe Shaver’s claims that he loaned 202,000 bitcoins to an borrower who ran off with the funds.
“Shavers’ claims concerning the lending activity he supposedly undertook for BTCST are not possible based on the record evidence in this action,” the 25-page opinion states. “First, the identified sources of bitcoins obtained by Shavers do not include such borrowers; second, the amounts of bitcoins received by Shavers from unidentified sources fall far short of the amounts necessary to support the principal or interest payments Shavers claimed to be receiving from BTCST’s borrowers, or the rates of return Shavers otherwise claimed to be earning for BTCST investors; and, third, Shavers did not have nearly enough bitcoins in July 2012 to make a 202,000 bitcoin loan.”
The evidence shows Shavers “knowingly and intentionally operated BTCST as a sham and Ponzi scheme,” Mazzant wrote.
“In reality, Shavers, on the whole, either used new bitcoins received from BTCST investors to pay purported returns and withdrawals on outstanding BTCST investments, or diverted BTCST investors’ bitcoins for his personal use,” the opinion states. “Shavers admits he commingled BTCST investors’ bitcoins with his personal bitcoins and bitcoins from his GPUMAX activity as a “reserve fund” in his “main operating wallet” for BTCST.
Shavers admitted that he used the “reserve fund” – in classic Ponzi scheme fashion – to honor withdrawal requests from BTCST investors whenever he failed to generate sufficient returns from BTCST’s purported investment activities to do so. He also admitted that following his July 2, 2012, announcement that the rates of return for BTCST investments would be reduced, he received a ‘wave’ of withdrawal requests that wiped out the ‘reserve fund,’ even as he still owed bitcoins to BTCST investors.”
Shavers admitted he had no proof that the lending activities he engaged in generated returns, nor any proof he made the 202,000 bitcoin loan, Mazzant noted.
Two weeks after the SEC sued Shavers, Mazzant ruled against Shavers’ argument that the court had no subject matter jurisdiction because bitcoins are virtual currency, not actual money.
“It is clear that Bitcoin can be used as money,” Mazzant wrote at the time. “It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”
In April, Texas banking regulators issued regulations for virtual currencies, including Bitcoin, and their virtual exchanges. Texas Banking Commissioner Charles G. Cooper issued a supervisory memorandum that concluded the virtual currents are not money. He said they lack intrinsic value because they are not centralized, backed by a commodity or convertible by law.
Cooper concluded that since they are not money, cryptocurrencies themselves do not trigger licensing requirements under the Texas Money Services Act. He said the exchange of cryptocurrency between two parties for sovereign currency is therefore not a money transaction.
Neither is the exchange of one cryptocurrency for another or the transfer of cryptocurrency by itself.
“However, some common business activities relating to cryptocurrency that involve the receipt of government-issued currency can trigger the licensing requirements of the act,” the commissions said in a statement at the time.
Cooper said the exchange of cryptocurrency for sovereign currency through a third-party exchange like bankruptcy Bitcoin exchange Mt. Gox is “generally” a money transmission because Gox is an escrow like intermediary.
From Courthouse News.