SEC charges 11 people in a $300M crypto Ponzi scheme

On Monday, the Securities and Exchange Commission (SEC) announced that it had arrested 11 people for their roles in creating and promoting an alleged crypto pyramid and Ponzi scheme. The scam collected more than $300 million from investors.

The platform, known as Forsage, was marketed as a decentralized smart contract system. It also allowed millions of retail investors to use smart contracts to trade with one another.

The SEC claims that the smart contracts on the ethereum, Tron, and Binance blockchains were all counterfeit. However, according to the SEC, this setup functioned like a regular pyramid scheme for more than two years beneath the surface.

Forsage operations are likened to a “textbook pyramid and Ponzi scheme”

The Securities and Exchange Commission charged the operators of Forsage, a purported multilevel marketing scheme that promised to make hefty returns for investors. Users of Forsage received profits by recruiting new people to join the alleged fraud, which took place for over two years. Additionally, Forsage was accused of using money from fresh investors to pay earlier investors, as is typical with Ponzi scams.

According to an entity`s statement released Monday, Forsage allegedly obtained more than $300 million from retail investors worldwide, including the United States, for an illicit purpose. The organization’s four founders and several others were charged with promoting the nine-figure fraud.

Forsage, through its support platform, declined to offer a way for people to contact the company. The company also did not offer any comments. The watchdog has filed charges against four of the eleven individuals. Their current location is unknown. They were previously known to be residing in Russia, the Republic of Georgia, and Indonesia, according to the SEC.

Forsage was founded in 2020 by four people: Vladimir Okhotnikov from Georgia, Jane Doe, aka Lola Ferrari from Indonesia, Mikhail Sergeev, and Sergey Maslakov from Russia. Dapp analytics firm Dune Analytics says Forsage quickly grew to be one of the most popular decentralized apps (dapps) on the Ethereum blockchain, with a quarter of the network’s bandwidth and gas costs spiking as a result.

Nonetheless, while the fraud was still operational, the defendants allegedly continued to promote it via YouTube videos and other ways. Two defendants, who neither admitted nor denied guilt, agreed to settle the claims provided that court permission was obtained.

A YouTube channel that purports to be the official one for Forsage has over 170,000 views and around 6,500 subscribers. It contains videos—most of which are about a minute long—of individuals discussing how Forsage has impacted their lives.

Meanwhile, according to Forsage’s website, the company has attracted over 2 million participants. The site claims that in the last day, around 2,500 people have become members of Forsage and that the program has given away more than $1.35 billion in value.

SEC takes a new path in crypto regulation

The SEC has also accused three American promoters who promoted Forsage on their social media platforms. They were not named in the commission’s announcement. The two other defendants, neither admitted nor denied the claims, accepted responsibility and agreed to settle the charges, subject to court approval.

While the creators of Forsage are based outside the United States, Americans living in Illinois, Mississippi, Kentucky, and Florida have been charged by the regulation watchdog with allegedly assisting in the scheme’s promotion.

According to Carolyn Welshhans, the acting chief of the SEC’s Crypto Assets and Cyber Unit, which oversaw the probe; 

As the complaint alleges, Forsage is a fraudulent pyramid scheme launched on a massive scale and aggressively marketed to investors[…] Fraudsters cannot circumvent the federal securities laws by focusing their schemes on smart contracts and blockchains.

Carolyn Welshhans

In January 2020, Forsage was established, and regulators in numerous countries have attempted to shut it down over the next several months. The Securities and Exchange Commission arm of the Philippines brought a cease-and-desist order against Forsage in September 2020. Furthermore, in March 2021, the Montana commissioner of securities and insurance sought to bring it under the law.

The Crypto Crusaders, a group of crypto enthusiasts, produced infographics claiming to expose “Why Forsage Is Not a Pyramid Scheme!!” and distributed them on social media.

Each of the “Crypto Crusaders,” Sarah Thiessen, Carlos Martinez, Ronald Deering, Cheri Bowen, and Alisha Shepperd – has been charged with fraud and unregistered securities offering and selling. Samuel Ellis and Mark Hamlin, who produced YouTube films touting Forsage, have also been charged.

The SEC’s lawsuit against the remaining promoters and four founders seeks injunctive relief, disgorgement, fines, and civil penalties. Today’s update is the latest regulatory action by the SEC regarding a crypto project or business, as confirmed by this week’s news.

The regulation financial watchdog has recently been increasingly active in crypto law enforcement. The agency and the Department of Justice charged a former Coinbase employee for insider trading earlier this month. It has also accused Coinbase of providing classified information to clients.

Additionally, SEC Chair Gary Gensler stated last week that crypto exchanges should be regulated in the same way as securities exchanges and found “no distinction” between the two.

However, the SEC’s motion has not been well received in the crypto sector, with numerous industry leaders, lawmakers, and other regulators condemning it for “regulating by enforcement.”