Article by Forbes: Walter Pavlo
We are in the middle of a cryptocurrency revolution. With over 7,000 digital currencies established in a short period of time, there are innovators, investors and fraudsters. However, defining which is which has been left mostly to the courts rather than legislation or regulation.
The Internal Revenue Service has stated that the sale or exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability. With regard to regulation, the US Commodity Futures Futures Trading Commission (CFTC) has jurisdiction over cryptocurrency under the Commodity Exchange Act. On September 26, 2018, Senior Judge Rya W. Zobel of the U.S. District Court for the District of Massachusetts, entered an order holding that the CFTC has the power to prosecute fraud involving virtual currency as a result.
There have been no real efforts to establish laws, rules or policies by the U.S. Congress. Like insider trading cases, where US prosecutors often pick up cases from Securities and Exchange Commission cases, we are going to see criminal enforcement used a means of defining what is and is not legal. A lot is at stake. One of the most important of these cases involves a guy named Randall Crater and My Big Coin.
My Big Coin (MBC) was created in 2013 by CEO John Roche. Its business model, like most cryptocurrency businesses, was to utilize blockchain technology in numerous business applications for the gaming and cannabis markets.
In 2014, Roche retained Randall Crater and his Greyshore Technology and Marketing Companies to build the technology to support the business model. Also originated and added to MBC was My Big Coin Pay which would add a layer of utilizations and revenue such as ATM machines and credit cards backed by the new currency. In its Twitter account on January 21, 2014, MBC stated that a price of $23.17 was transacted. MBC was being heavily marketed and peer-to-peer transactions were being transacted and disclosed by Roche on its own website and through a number of social media platforms, like Twitter. Like Bitcoin, MBC was going to limit the number of “coins” to 30,000,000. Users were being urged to create accounts and wallets to hold their MBC.
In one of the biggest announcements, on March 6, 2014. MBC announced that they had created a partnership with a company who would back all MBC coins with gold. This was an incredible declaration. MBC then stated that MBC was being transacted at $52.88, more than double the announcement just a few weeks prior. They had more good news …. owners could obtain a VISA/Mastercard backed by MBC … the card could be used at any store that accepted MBC … an IPO was imminent … MBC would going to become the #1 crypto currency in the world. With good news, another Tweet …. transactions were being made at over $102. By November, MBC claimed that an agreement with MasterCard was finalized. Another Tweet … MBC was being transacted at $121.38.
In mid-year 2014, MBC’s attorney Adam Tracy was looking into doing a reverse merger into a NASDAQ shell company (something that is legit but has been plagued by fraud). The Financial Industry Regulatory Authority (FINRA) started an investigation into MBC inquiring if they were selling shares not registered or exempted from registration. By the end of 2014, FINRA had written a letter to the SEC stating that their investigation was completed and they were not going to move forward with any further proceedings. Subsequently, the SEC did not pursue an investigation. However, what FINRA did do was pass along the case to the CFTC for investigation. Note to file, a recommendation from an interagency is a good way to get to the top of an inquiry pile.
On January 16, 2018, the CFTC filed a civil complaint in the Federal Court of Massachusetts (18-CV-10077). It named Randall Crater and My Big Coin as Defendants as well as an MBC salesman named Mark Gillespie. It also named Crater’s mother, wife and sister as relief defendants. It also named other entities controlled by Crater as marketing and technology companies. Most notably, the suit did not name the actual CEO of MBC John Roche.
The suit basically stated that MBC and MBC Pay was a Ponzi scheme crafted by Crater and all representations made on social media were false including that MBC was backed by gold and the claim that it had entered into an agreement with MasterCard was false. Gillespie is claimed to have controlled the Facebook page of MBC and also made false claims. It does not state who controlled the twitter account or who authorized the press releases.
On April 20, 2018, the CFTC filed an amended complaint in US District of Massachusetts and now named MBC CEO John Roche as well as a man named Michael Kruger. MBC and MBC Pay were already now defunct entities. All individually named Defendants, Roche, Gillespie and Kruger have defaulted. Only now Crater was left as an individual defendant.
On May 4, 2018, Defendants filed a motion under FRCP Rule 12(b) that the Court did not have jurisdiction to hear the case because My Big Coin was not a “commodity” as defined pursuant to the Commodity Exchange Act. The motion was written by Laura Greenberg Choa (Henshon Klein) and Katherine Cooper (Murphy & McGonigle). Cooper had over 20 years’ experience in the derivatives markets and had actually worked for the CFTC as a Senior Trial attorney. This was crucial issue because it granted authority to a federal Judge to interpret the law or intent of Congress rather than having a well written law that could have avoided a messy case like this.
The real issue is how much investigation was done by FINRA to push this case to the CFTC and, through the those actions, put MBC out of business. Was it MBG fraud, or the mere allegations of a fraud that led to MBC’s demise … the subsequent legal troubles for MBC’s executives? That’s when US prosecutors decided to get involved.
On February 26, 2019, the US Attorney’s office in Massachusetts indicted Crater on four counts of wire fraud and 3 counts of Unlawful Monetary Transactions (19-CR-10063). The case was submitted by AUSA Jordi Di Llano in Massachusetts, but the real powerhouse behind it is the DC Office by Caitlin R. Cottingham, a trial attorney who is back from private practice practice (Convington Burling) in the fraud section of the criminal division. Roche and Gillespie are named as “Individuals 1 and 2” in the indictment, but not indicted themselves. Most likely this is an approach by prosecutors to apply pressure to individuals as un-indicted co-conspirators to cooperate and testify against other defendants.
In a case like this, the data is voluminous and could take years to go through the legal process and the only ones getting rich are the law firms researching the case. Discovery alone would bankrupt any ordinary person. It will cost millions. Still, Crater vigorously claims his innocence and is determined to get his day in Court. He has retained Geoffrey Nathan in Boston and Ray E. Chandler from South Carolina.
Crater and his lawyers are preparing for a rigorous defense of the ever-changing allegations and it should be a case that helps define emerging cryptocurrency. Cases like this could offer a bit more clarity to the cryptocurrency world …. but at a pretty high cost to those charged in this case.