BitFunder Charged With Fraud By The SEC

Another day and another Bitcoin scam. The Securities and Exchange Commission on Feb. 21, 2018 charged a former bitcoin-denominated platform BitFunder and its operator Montroll with fraud.

BitFunder was an online platform, an unregistered securities exchange, through which users had the ability to create, offer, buy and sell virtual “shares” of various virtual currency-related enterprises in exchange for bitcoins.

Here are the details of what Montroll and BitFunder did:

From December 2012 through November 2013, Montroll operated the BitFunder online platform, an unregistered securities exchange, through which users had the ability to create, offer, buy and sell virtual “shares” of various virtual currency-related enterprises in exchange for bitcoins. Users deposited bitcoins into a virtual currency wallet maintained by WeExchange (the “WeExchange Wallet”), Montroll’s Australian virtual currency exchange. Users’ bitcoins were commingled in WeExchange’s Wallet, which Montroll controlled at all times. Throughout this period, Montroll misappropriated bitcoins belonging to BitFunder users from the WeExchange Wallet.

Beginning on July 18, 2013, Montroll offered and sold what he called “shares” of “Ukyo.Loan” (“Ukyo Notes”) on BitFunder’s platform, which were unregistered securities. Montroll told purchasers of the Ukyo Notes that the funds raised would be used for “private investment purposes” and he promised to pay purchasers a daily interest rate of 0.05%. Contrary to his representations, Montroll used a portion of the proceeds of the Ukyo Notes offering to pay personal and business expenses and to replenish bitcoins that Montroll had misappropriated from BitFunder prior to the offering.

Over the course of five weeks, beginning on July 28, 2013 and continuing through August 27, 2013, a group of BitFunder users engaged in a cyberattack on BitFunder’s platform that resulted in the theft of more than 6,000 bitcoins, which were valued at the time at approximately $775,075. Montroll failed to disclose the cyberattack and resulting bitcoin theft to any users of his BitFunder platform, including Ukyo Notes purchasers. Instead, through BitFunder, Montroll continued to solicit and accept bitcoin deposits from new Users, earn site fees and raise proceeds from Ukyo Notes purchasers. Montroll used bitcoin deposits from new users to fund withdrawal requests after the cyberattack.

Following the cyberattack and bitcoin theft, Montroll continued to operate BitFunder under a bitcoin deficit while misleading investors that it was an ongoing profitable platform. In early November 2013, users began experiencing problems withdrawing bitcoins from the WeExchange Wallet, which Montroll publically attributed to technical problems with BitFunder’s system and bitcoin software in general. In reality, however, BitFunder did not hold sufficient bitcoins to cover amounts owed to its users due to Montroll’s misappropriation and the cyberattack and bitcoin theft. Montroll shut down BitFunder on November 14, 2013.

The SEC’s complaint, filed in federal district court in Manhattan, charges BitFunder and Montroll with violations of the anti-fraud and registration provisions of the federal securities laws. The complaint seeks permanent injunctions and disgorgement plus interest and penalties.

The SEC’s investigation was conducted by Daphna A. Waxman, Daphne Downes, and Valerie A. Szczepanik in the New York Regional Office. Ms. Waxman and Ms. Szczepanik also are members of the SEC’s Distributed Ledger Working Group and the Enforcement Division’s Cyber Unit. The litigation will be led by Dugan Bliss. The case is being supervised by Lara S. Mehraban.

– Source SEC