SEC Charges Texas Man With Running Bitcoin-Denominated Ponzi Scheme

https://www.sec.gov/servlet/Satellite/News/PressRelease/Detail/PressRelease/1370539730583#.Ue6yMI1WZ8F

by seansoutpost • 13 years ago

66 57 13 years ago

dobbsbob6• 13 years ago

Lol they finally got Pirateat40. Not like I "invested" with his obvious ponzi/laundering scheme but kind of surprised he didn't flee to Brazil already.

sehrope2• 13 years ago

The SEC alleges that Shavers promised investors up to 7 percent weekly interest based on BTCST’s Bitcoin market arbitrage activity, which supposedly included selling to individuals who wished to buy Bitcoin “off the radar” in quick fashion or large quantities

Anybody that is not skeptical about 7% weekly returns on anything is just asking for it. That's 33x your money in 1 year. How can that sound legit to anybody?

In reality, BTCST was a sham and a Ponzi scheme in which Shavers used Bitcoin from new investors to make purported interest payments and cover investor withdrawals on outstanding BTCST investments.

Since the bitcoin ledger itself is public record anybody could analyze the addresses associated with the fund and see the inflows and outflows[1]. Even if new addresses are generated for each transaction at some point the fund manager would need to roll them up and combine them. It would be possible to see the ponzi flows in the ledger itself.

[1]: Assuming the fund manager isn't using some kind of bitcoin mixer. If he is then that's probably a sign that something bad is going on. https://en.bitcoin.it/wiki/Mixing_service

marshray• 13 years ago

Because if you anonymize your currency (e.g., use cash) you've got something to hide?

sehrope2• 13 years ago

If you're the one holding it behalf of someone else then yes. If you want it to be anonymous as the consumer of the service then it's fine to anonymize your deposit. If you're going out of your way to anonymize what I've given you (to prevent me from tracking it) then that would seem shady to me.

makomk2• 13 years ago

Anybody that is not skeptical about 7% weekly returns on anything is just asking for it. That's 33x your money in 1 year. How can that sound legit to anybody?

If you were following the Bitcoin forums at the height of the Ponzi, anyone who suggested it was a Ponzi was called a troll who was libelling pirateat40 by what felt like half the forum. Everyone insisted that unless they had actual proof it wasn't a genuine investment, they should shut up, and that the only reason for them to make a big fuss about it was to . This comment was about par for the course, and bear in mind this was after the scheme imploded: https://bitcointalk.org/index.php?topic=101377.0

A number of widely-respected members of the Bitcoin community supported the Ponzi and even ran pass-through schemes for it.

astrodust• 13 years ago

If you invest money with someone called "pirateat40" you get what you deserve.

nullc3• 13 years ago

At the same time— a lot of well respected people also called it out and did not participate.

(And made all the same points which are also obvious in hindsight...)

MichaelGG2• 13 years ago

Well what if he was sending them into MtGox and other exchanges? Would that not make it look rather legit? It'd further back up the story that he was working market arbitrage.

dobbsbob6• 13 years ago

His "fund" was a mixing service. He was getting mined coins in and paying out probably with SR coins. Originally I'm pretty sure he was laundering for himself or somebody else, or ran his own mixing service like bitcoinfog then it became a ponzi and fell apart. He was also a chronic gambler with delusions of being a good poker player, a lot of coins prob went to gambling

nullc3• 13 years ago

This was one of several rumors he benefited from (and carefully, quietly encouraged). There doesn't appear to be any strong factual basis for it beyond speculation, but it sure helped people believe the insane rewards.

It doesn't really make a ton of sense when you think about it: "Laundering" Bitcoin doesn't really do you a ton of good as you still end up with a bunch of inexplicable Bitcoin, and if you were laundering it a service where people put coins on deposit and then got returns forever doesn't produce the right kind of transaction patterns for laundering.

mrb2• 13 years ago

Shavers was running such a mixer service: he was laundering the bitcoins through his own mining pool (called GPUMAX). The way it worked is that he was redistributing the dirty bitcoins acquired through his Ponzi scheme to pool participants as mining rewards, while keeping the newly mined bitcoins for himself. And to entice people to use his pool he was paying a few extra percent more than what most other pools were paying. Pure genius.

I have been following the whole development of his Ponzi scheme. Yes it was obvious to some in the community that it was a Ponzi. I remember writing a few lengthy posts on bitcointalk.org accusing him of a Ponzi. But surprisingly, many people adamantly chose to believe in Shavers and argued against me, ignoring my warnings, telling me why I was wrong. Their argument boiled down to "it has to be legit since he has been paying everybody so far". Sigh... Money prevents people from thinking straight.

dustcoin2• 13 years ago

pirateat40's other service, GPUMAX, was effectively a mixing service. GPUMAX paid above market rates for hashing power, which gave the operator freshly minted coins in exchange for dirty coins distributed to miners.

gradys• 13 years ago

Since the bitcoin ledger itself is public record anybody could analyze the addresses associated with the fund and see the inflows and outflows[1]. Even if new addresses are generated for each transaction at some point the fund manager would need to roll them up and combine them. It would be possible to see the ponzi flows in the ledger itself.

Given this, is anyone algorithmically analyzing the ledger for anomalies like Ponzi schemes? That could be an interesting project.

fnordfnordfnord2• 13 years ago

Anybody that is not skeptical about 7% weekly returns on anything is just asking for it.

True enough. But crazy returns like that do occasionally exist, though I have never seen them be a "sure thing" nor an ongoing thing. That's just crazy, or cheating.

I was getting APR's in the hundreds of percent for a very short time by lending USD to margin traders. It happened over the course of a few weeks after the latest big gold rush. I was afraid the whole time that something would happen to the exchange and I would lose my (tiny) account.

notahacker• 13 years ago

You might have been able to achieve those returns over a short period of time [edit: posted too early] by actively investing and absorbing the risks, but would you have offered anyone who wanted you to manage their money a no-effort 7% weekly return on a liquid cash account when you could borrow on better terms from a loan shark?

mtgx• 13 years ago

I'm not arguing over what they're doing, the guy was asking for it, but it seems someone at a high level asked for more regulation and attention on the Bitcoin ecosystem.

dobbsbob6• 13 years ago

what happened was his forum passthru cheerleaders that got scammed when his ponzi popped ran screaming to every authority they could and finally somebody at the SEC noticed. Note these same people all trollish extreme libertarians that denounced all regulation until it affected them and they immediately deferred to authority

makomk2• 13 years ago

Doubt it. Pirateat40 was threatening to move anyone who considered legal action to the back of the queue or even drop them altogether, and his cheerleaders seemed to buy into that for the most part.

dustcoin2• 13 years ago

Most of the PPT operators promoted and profited off of pirate's scam, and should face legal action alongside pirate.

PPT operators did not have an incentive to go after pirate, unless they had also invested significant personal holdings in BS&T, because:

1) They were investing other peoples' money and taking a fee off the top

2) They could face investigation themselves if they went to the authorities.

sneak• 13 years ago

As was demonstrated, Ponzi schemes are already illegal, regardless of denomination.

No new laws or regulations required.

99% of the time in the USA, blatant fuckery is already illegal six ways from Sunday. The last thing we need are more laws.

foobarbazqux3• 13 years ago

Does Bitcoin make it easier to get away with a Ponzi scheme?

forrestthewoods2• 13 years ago

Are they? What about in video games? Eve Online had a gigantic ponzi scheme where players stole vast amounts of in-game currency. Is that illegal? I'm not being snarky, I genuinely don't understand when it is and is not illegal.

DanBC• 13 years ago

People wanting to discredit bitcoin would have left this scheme running and would not do anything to prosecute the people involved.

That would make people worried about buying bitcoin because, simplistically, "Bitcoin = scams".

philhippus• 13 years ago

My first thought at this story was that the action serves to legitimise bitcoin as a means of exchange. If the Ponzi scheme had been peanut-denominated, would the SEC have taken action?

biot• 13 years ago

It's just like what happened in EVE Online[0], only with real-world consequences instead of "that sucks, but player beware".

[0] http://www.tentonhammer.com/eve/news/eve-online-ponzi-scheme...

j_s• 13 years ago

Makes me curious if he'll be forced to repay what he owes 'investors' in Bitcoin...

nrivadeneira• 13 years ago

I think this is actually a really interesting parallel. They're both virtual currencies, but one carries actual legal risk and the other doesn't. The question is, are they really all that different?

sirsar• 13 years ago

EVE is very careful about keeping everything in "an alternate universe" which saves them from prosecution. Meanwhile the SEC, FinCEN, et al have decided to regulate Bitcoin, and there's no universe barrier to save it.

zaroth• 13 years ago

EVE's "ISK" does carry legal risk as they are an operator of a centralized virtual currency.

I think it's mostly a matter of FinCEN et. al. not yet training their sights on ISK, because ISK is not widely supported in terms of fiat-exchange and online purchases.

There's certainly no reason someone couldn't accept ISK on Silk Road in exchange for their magic mushrooms, but the reality is, why take ISK when you could take Bitcoin which has better tools/software for trading, better liquidity, and no centralized control?

MichaelGG2• 13 years ago

Why did he get caught? Looks like plain greed. If had been careful, used Tor, and kept the money in Bitcoin, then carefully withdrew over a long time period he'd have gotten away with it.

dobbsbob6• 13 years ago

He met people in vegas, promised them a bunch of fairy tales to their faces and then scammed them. They knew his name, Tor wont help you there. I have no idea why he didn't flee somewhere though, probably doesn't have any money left most ponzi operators when they go bust have nothing to show for it.

LekkoscPiwa• 13 years ago

and who is to charge the ones responsible for social security ponzie scheme. Not to mention monetary (QE) ponzie schemes of all sorts?

PublicEnemy111• 13 years ago

This guy is rumored to be Dread Pirate Roberts, the administrator of silk road

runn1ng• 13 years ago

Now that is an interesting speculation.

mindslight2• 13 years ago

This is yet another step on the path of Bitcoin exposing that it is not the operational-semantics/capability/irreversibility based cryptocurrency many people wishfully thought that it was. The POW-based solution to the Byzantine agreement problem was quite novel. It's unfortunate that this novelty was wasted on the same old title-based accounting rather than something more appropriate for a fungible commodity.

A system based on accounts with default linkability invites all the tired old thinking that plagues our modern transactions - fraud, taxes, involuntary/post-facto regulation, etc. In this instance, the status-quo masses, having developed an interest in Bitcoin, will be reading this comment and thinking 'but of course the SEC should pursue fraud', because it fits their pattern of how the world works - it feels like someone has been wronged, so the big man with the big stick comes and sets things right. The underlying idea of irreversible transactions and "it is how it works" won't enter their world view. And these status-quo infusions of ambient authority will encourage additional ones until the novel autonomy-attempting properties of Bitcoin have been completely mitigated.

I just hope adequate electronic currencies don't end up stillborn due to the Bitcoin vaccine.

modeless2• 13 years ago

This is good news, all things considered. A digital currency truly out of reach of regulators would just be outlawed. Exchanges would be raided and shut down. If regulators feel comfortable with bitcoin, it can grow and thrive for now. Then, when someone invents a truly anonymous currency, call it A-coin, bitcoin will be a stepping stone to it. Here's how it could work:

You will buy bitcoins at regulated, fully legal and non-anonymous exchanges. Then, you will exchange bitcoins for A-coins at anonymous, online-only exchanges. Since they can operate only on digital currency they need no physical presence and no connection to the regulated global financial system and will thus not be vulnerable to government regulation or control.

mindslight2• 13 years ago

Except the exchanges will be heavily regulated and required to record your identity, and converting them to A-coins will be illegal. Even if enforcement is spotty, one can't take the process for granted and the common view will be that A-coins are for criminals. Primarily functioning as a temporary medium of exchange for identity-based systems means it's only a matter of time until the ambient authority infects the system through the exchanges, imposes changes to conform to its view of the world, and demands respect as middle man and final arbiter. The only way to create an anonymous digital currency is to concurrently develop the anonymous digital economy.

cmdkeen• 13 years ago

Intriguingly this is also very similar to the original scheme by Charles Ponzi in that it purported to make its money from arbitrage opportunities.

It's amazing how people will suspend their disbelief when the chance for a "too good to be true" return exists. In the original scheme the US Post Office put out a statement saying that whilst arbitration was possible the amounts allegedly being invested were simply not possible the in the market.

Given there are estimates of daily bitcoin volume the same principle applies - you could only carry out such profitable arbitrage on a very small scale, not the much higher scale the scheme claimed.

noname123• 13 years ago

How can the SEC regulate this? BTC is not a real currency but electronic messages being sent back and forth and logged in an electronic ledger. Not a legal tender currency or security registered or traded in a US-based exchange.

So apparently this is an SEC "Investor Alert," but do the legal minds here know if SEC can indict and prosecute this guy? This is important for people who are also running Bitcoin casinos, sports books and prediction markets.

rmah• 13 years ago

The SEC can go after ponzi schemes because those are effectively investment scams. Any ponzi scheme effectively issues IOU's (e.g. shares in a fund, debt instruments or just verbal promises of future payment). These are the securities involved and thus fall under the SEC's domain. The SEC regulates securities and exchanges. Not just registered public securities and public exchanges, ALL of them. And they say what is a security or an exchange, not you.

Gambling operations such as casinos and sports books are regulated by local, state and federal law enforcement. At the federal level, I think it's the FBI.

On another point, you write, "BTC is not a real currency but electronic messages being sent back and forth and logged in an electronic ledger". Most money is exactly that: entries in electronic ledgers and most money transfers are just electronic messages. You don't really think that banks reconcile transfers with big piles of $100 notes, do you?

nullc3• 13 years ago

Who cares about "real currency"?! It's irrelevant here.

Say you own a bunch of coal. Some guy tells you that if you "invest" your coal with him he'll return 7% of it per-week risk free. He returns a bit and then he vanishes with all your coal.

The fact that coal is not a currency is irrelevant. Its something valuable to you and you got scammed out of it by a phony investment.

smackfu• 13 years ago

So apparently this is an SEC "Investor Alert," but do the legal minds here know if SEC can indict and prosecute this guy?

Here's what they did:

The SEC’s complaint charges Shavers and BTCST with offering and selling investments in violation of the anti-fraud and registration provisions of the securities laws, specifically Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. The SEC is seeking a court order to freeze the assets of Shavers and BTCST in addition to other relief, including permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

mrb2• 13 years ago

For your information, the US govt is very much treating Bitcoin like a "real" currency.

In addition to the SEC prosecution, the US Treasury bureau FinCEN tacitly approved of Bitcoin ("virtual currencies") in http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001....

cmsmith• 13 years ago

Casino chips are not a 'real' currency either, but pieces of plastic which can be bought and sold for money.

mikeash• 13 years ago

The law is not a computer program that you can fool by giving it unexpected inputs.

Bitcoin is obviously a currency. Law that applies to currency applies to Bitcoin. Trying that "it's just electronic messages" thing in front of a judge will get you laughed out of court.

Everlag• 13 years ago

7% WEEKLY INTEREST and people thought it was legit. You'd be damn lucky to find a reliable place that'll get you 5% annually. I'm not condoning what the fellow did but really people, if you got taken by those kind of numbers without second thought you need to take a look at other areas of investment.

SEC Charges Texas Man With Running Bitcoin-Denominated Ponzi Scheme

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