The USA government uncovers three crypto frauds by creating a token

A US government agency has created a fake token to expose some crypto frauds. 

The event was made public with an official press release from the Department of Justice, which is the government ministry that operates in the judicial field.

The crypto token of the USA government to uncover fraud

The statement reads that three market makers (ZM Quant, CLS Global, and MyTrade) were contacted by NexFundAI to perform wash trading.

NexFundAI is a crypto company created specifically at the behest of law enforcement to further investigations, and it has issued its own token on Ethereum.

The company asked some traders to manipulate the market, and they would have obliged. 

From the conversations between the alleged promoters of NexFundAI and the traders, one of them (Liu Zhou) reportedly described MyTrade MM as superior to CLS and Gotbit because those market makers “keep clients in the dark” and “control the pump and dump,” which means they “can do inside trading easily.” 

Zhou would have also described some details of how wash trading works. According to court documents, Zhou also revealed that the goal on the secondary markets [the exchanges] was to find other buyers to make them lose money in order to make profits.

Crypto frauds: the other tokens under the eye of the USA government

The defendants, in turn, had created crypto companies that had issued tokens, and they were accused of making false statements and conducting sham operations (wash trades) to create the appearance of trading activity that would make their tokens seem like good investments. 

With these deceptive tactics, they would have attracted new buyers to increase the price of their tokens. Subsequently, they were able to sell their tokens at artificially inflated prices, with the classic “pump and dump” scheme, unequivocally defined as fraud by the Department of Justice. 

In the official statement they write: 

“The largest of these crypto companies, Saitama, at one point had a multibillion market value”.

In order to perform the wash trade of their tokens in exchange for payments, these crypto companies would also have hired financial services companies, the market makers. One of these then agreed to plead guilty and described in detail the practice described above. 

The accuse

18 entities (3 crypto companies and 15 individuals) have thus been accused of operating internationally to defraud investors with widespread manipulations on the crypto markets. 

The companies are Gotbit Consulting LLC, ZM Quant Investment LTD, and CLS Global FZC, LLC. 

The 15 individuals are Aleksei Andriunin, Fedor Kedrov, and Qawi Jalili from Gotbit, Riqui Liu and Baijun Ou from ZM Quant, Andrey Zhorzhes from CLS, Liu Zhou from MyTrade MM, Manpreet Kohli, Haroon Mohsini, Nam Tran, Max Hernandez, Russell Armand, and Vy Pham from Saitama, Michael Thompson from VZZN, Bradley Beatty from Lillian Finance. 

The federal prosecutors in Boston have indicted these companies and these individuals, to the extent that the operation has already led to four arrests, the seizure of cryptocurrencies worth over 25 million dollars, and agreements with five people who have already pleaded guilty. 

According to prosecutor Joshua Levy, the defendants carried out fictitious operations to artificially inflate the trading volume of various tokens before selling them, “leaving innocent investors holding the short straw”.

Levy revealed that the classic “pump and dump” scheme, which has existed for centuries, was being used, and that the creation of the crypto company NexFundAI and its token was intended to lure the defendants by asking them to carry out a pump and dump. 

The investigative strategy 

The NexFundAI token was thus traded on the exchanges, but the authorities closely monitored its movements to minimize the risk that retail investors could purchase it before trading was disabled. 

Thus they discovered that Saitama, the largest of the companies involved, at a certain point had reached a market value of 7.5 billion dollars, after its executives had started to manipulate the trading of its tokens and to sell them secretly.

In fact, its CEO, Manpreet Kohli, is one of those who has been arrested. Additionally, three employees have already pleaded guilty.

Since the movements of tokens on Ethereum are public, the accused could not refute them, and since the investigators kept the records of the conversations, they could not even deny what they had stated. 

With this operation called “Token Mirrors” it’s a bit as if the judiciary had tricked the fraudsters to uncover them and catch them red-handed. 

Just as investors often do not check who is behind the tokens they buy, in this case the scammers did not check who was behind the token they were using to scam. 

This investigation is defined by the American Department of Justice as the first of its kind, and it has been commented that people who are thinking of making investments in the cryptocurrency sector should first understand how these scams work in order to protect themselves.