Crypto Craze Drew Them In; Fraud, in Many Cases, Emptied Their Pockets (#GotBitcoin?)

SEC and state regulators have brought more than 90 crypto cases over the past two years, but tracing funds is hard because of the elusive nature of the currency. Crypto Craze Drew Them In; Fraud, in Many Cases, Emptied Their Pockets

About a year ago, Charles and Claudia Wildes maxed out their credit cards and invested more than $40,000 in a hot new digital currency, just as the crypto mania peaked.

Now, all that money is gone—a small part of the billions investors lost as cryptocurrencies plunged in recent months.

But the Wildeses’ losses aren’t just because of bad timing: The digital coin they bought, called BitConnect, was one of many alleged frauds pervading the market. The Securities and Exchange Commission is investigating BitConnect, people close to the probe said, but the regulator may never get the Wildeses’ money back.

BitConnect couldn’t be reached for comment.

The SEC and state regulators have brought more than 90 crypto cases over the past two years, as bitcoin and other cryptocurrencies swung from highs to recent lows. So far, the regulators have managed to claw back only about $36 million for duped investors, according to an analysis by The Wall Street Journal.

“My wife and I put a lot of our life savings into BitConnect,” said Mr. Wildes, a computer-support worker from Boynton Beach, Fla. “Sadly, this was a life-changing experience for us.”

One of the attractions of digital currency is its anonymity. That feature, compounded in some cases by front companies and fake owners, can also make it hard for investigators to trace funds.

SEC Chairman Jay Clayton warned a year ago that his agency “may not be able to effectively pursue bad actors or recover funds” invested in digital tokens, in part because the proceeds often end up overseas.

Most of the federal and state cases were designed to close the more clearly illegal digital-coin offerings, as officials fought to tame a market they said was rife with fraud, including Ponzi schemes and pump and dumps, a review by the Journal found.

But regulators filed few cases at the height of crypto frenzy, when scores of new companies were offering digital coin investments and bitcoin was soaring in late 2017.

The SEC produced more results in recent months as the market fell. The commission filed five cases in November, compared with four in all of 2017.

Adam Pritchard, a law professor at the University of Michigan, said “the SEC can keep busy from dawn to dusk chasing fraud in this area, but a lot of the money that’s been taken is just going to disappear because of the elusive nature of cryptocurrency.”

The SEC’s chairman, Mr. Clayton, believes his agency’s repeated warnings about the risks of cryptocurrencies, as well as its enforcement caseload, has tamped down the market’s earlier excesses. “The SEC helped to get rid of the veneer of legitimacy,” he said in an interview.

Robert Cohen, the SEC’s head of crypto investigations, said the regulator has brought cases that send a strong message to every corner of the market—from token issuers to trading platforms and hedge funds.

“We’ve been able to make investors whole again in the cases we filed, but it’s not just about how much money is recovered,” Mr. Cohen said.

State regulators brought more than 70 crypto-enforcement actions since filing their first case about a year ago. None, however, returned money to investors, the Journal found.

Joseph Borg, Alabama’s securities commissioner, said state enforcers’ focus is on stopping frauds, not recovering money. “We’re trying to do the vaccine, not cure the problem.”

Investors are getting hit by more than just bad actors. Bitcoin has fallen about 70% this year. And of 573 digital coins launched since 2017, 89% are trading at a loss compared with their offering price and worth a total of about $2.1 billion—$8.4 billion less than the $10.5 billion initially invested, a Journal review of data from website ICORating found.

How much investors actually lost to fraud is impossible to calculate.

The biggest cryptocurrency flameout happened almost a year ago. BitConnect soared to a market value of $2.8 billion in barely a year as thousands of investors flocked to its promise of rich returns for little risk, pushed by a global network of promoters.

BitConnect blew up when the company closed its main operations, soon after Texas regulators filed an emergency cease-and-desist order. Losses from the alleged fraud are estimated at more than $1 billion, said David Silver, a lawyer representing investors, including the Wildes, in one of several lawsuits filed in federal court against some of the promoters.

Joe Rotunda, enforcement director of the Texas State Securities Board, said his priority was to act fast, rather than carry out the kind of prolonged investigation needed to figure out where the BitConnect money had gone. “This was a massive fraud,” he said. “We had to keep them from hurting more people.”

The SEC is still trying to figure out what happened at BitConnect, people familiar with the probe said.

SEC officials say they are using new tactics and tools to cut off illegal fundraising and pursue virtual assets, which can be sent around the world at the touch of a button, bypassing the banks, avoiding sanctions and brokers the government usually relies on to trace funds.

“These cases are challenging in new ways,” the SEC’s Mr. Cohen said. “You can’t just go to a bank and see the balance.”

That can make recovering any money a slow and expensive process. The SEC has asked federal courts to appoint receivers, typically an outside law firm paired with a cybersecurity consultant, to trace assets in two cases, including one against Dallas-based AriseBank.

Arise, started by a programmer named Jared Rice, claimed to have raised $600 million in a coin offering that was billed as funding the world’s first cryptocurrency bank and payments network.

Mr. Rice on Dec. 12 settled the case, agreeing to give back about $2.3 million—far below the total he claimed to have raised. Cybersecurity consultants from Kroll, working for the court in the SEC case, found only about $1.1 million in cryptocurrencies stored on various computers Mr. Rice maintained.

Mr. Rice and his public defender didn’t respond to a request for comment. In an interview in September, Mr. Rice said his fundraising claims were based on soft commitments from investors that didn’t materialize. His claims of having developed a “decentralized banking system” were based on legitimate milestones his company achieved, he said.

Still, the millions recovered for investors are expected to be reduced: The receiver and outside consultants have sought $593,000 in fees from the court, which so far has awarded them about $215,000.

As regulators step up their pursuit of frauds, investors will be left to nurse losses. The Wildes have taken out a second mortgage to repay their credit cards, according to their lawyer Mr. Silver.

Dusty Showers, a pest controller and wildlife rescuer in Florida who is also represented in the BitConnect lawsuit, said he doesn’t expect to recover the $6,000 he lost in BitConnect. “I think everything’s gone.”

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