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Eighteen people and companies face charges for “widespread fraud and manipulation” after an FBI sting investigation in which authorities created their own cryptocurrency token, federal officials said on Wednesday.
The US Department of Justice announced five defendants have pleaded or agreed to plead guilty and another three were arrested in Texas, the UK and Portugal this week in connection with a pump-and-dump probe, dubbed “Operation Token Mirrors”, which also seized more than $25mn in crypto assets.
The gist of the scheme was “on-demand market manipulation” on crypto trading platforms using algorithms or bots to generate “quadrillions of transactions and billions of dollars of artificial trading volume each day”, the Securities and Exchange Commission said.
Earlier this year, the SEC said, a supposed market maker called ZM Quant was retained to support trading in a token called NexFundAI. On paper, NexFundAI was a way to invest in early-stage artificial intelligence projects.
Employees of ZM Quant allegedly counselled the backers of NexFundAI on how to artificially drive up the price of the token before selling tokens to “cash out at the peaks”, federal officials said in an indictment. At one point in May, ZM Quant’s trades amounted to more than 80 per cent of NexFundAI’s trading volumes, according to the SEC.
But ZM Quant was unaware that NexFundAI was not just another fledgling crypto token with dreams of a lofty valuation: it was a tool of federal law enforcement agents bent on dismantling the alleged pump-and-dump operation.
NexFundAI traded for only a single day, on May 31, generating $4,600 in artificial trading volume, according to the SEC.
“What we uncovered has resulted in charges against the leadership of four cryptocurrency companies, and four crypto ‘market makers’ and their employees who are accused of spearheading a sophisticated trading scheme that allegedly bilked honest investors out of millions of dollars,” said Jodi Cohen, an FBI special agent, in a statement. “The FBI took the unprecedented step of creating its very own cryptocurrency token and company to identify, disrupt and bring these alleged fraudsters to justice.”
Employees of market-makers Gotbit Consulting, CLS Global FZC and MyTrade MM also face charges, as do those of crypto companies Saitama, Robu Inu, VZZN and Lillian Finance.
Saitama at one point “boasted a market value of $7.5bn” while its leadership “was actively manipulating the market for the Saitama token and secretly selling their Saitama tokens for tens of millions in profits”, according to the DOJ.
Federal law enforcement officials traced Saitama’s alleged campaign of market manipulation back to July 2021, when one Saitama leader sent a private message to another about a plan to “create an illusion of massive buys and new holders” that will “incite ppl to buy more”.
“Yep,” replied another Saitama backer, who later sent a GIF emblazoned with the words “Pump it up”.
The defendants face a range of charges, including market manipulation, conspiracy to commit money laundering and wire fraud, which can lead to sentences of up to 20 years in prison.
“Wash trading has long been outlawed in the financial markets, and cryptocurrency is no exception,” said acting US attorney Joshua Levy in a statement. “These are cases where an innovative technology — cryptocurrency — met a century-old scheme — the pump and dump.”
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