As regulatory scrutiny intensifies, crypto industry executives are increasingly finding themselves entangled in legal battles.
The recent case involving prominent crypto entrepreneur Sam Bankman-Fried (SBF) has further highlighted the challenges faced by individuals at the forefront of the digital asset revolution. Let’s take a deep dive into the top 10 high-profile crypto fraud cases so far.
Do Kwon and the collapse of Terra
In March 2023, Do Kwon, the co-founder of Terraform Labs, a Singapore-based blockchain platform, was arrested in Montenegro. Kwon, a South Korean national, was charged with fraud in the United States and indicted on eight charges, including securities fraud, wire fraud, commodities fraud, and conspiracy.
He had been a fugitive for several months, and South Korean authorities issued an arrest warrant for him in September 2022. Kwon was detained by Montenegro police at Podgorica airport while trying to board a flight to Dubai with another South Korean citizen.
During the encounter, police found forged passports of Costa Rica and Belgium. Kwon’s identity was confirmed through a fingerprint match. He spent Thursday night in police custody and was scheduled to appear in court on Friday evening.
The collapse of TerraUSD and Luna, two digital currencies issued by Terraform Labs, in May 2022, wiped out an estimated $40 billion from the crypto market. In June, he was sentenced to four months in prison by a Montenegrin court for using a forged passport during his travel attempt.
Avi Eisenberg
In December 2022, Avi Eisenberg, a crypto trader, was arrested in Puerto Rico under accusations of manipulating prices on the Mango Markets crypto exchange. He faced charges of commodities fraud, commodities market manipulation, and wire fraud related to his actions on the Mango Markets decentralized cryptocurrency exchange.
Eisenberg was accused of fraudulently obtaining approximately $110 million worth of cryptocurrency by manipulating the price of specific perpetual futures contracts on Mango Markets. Eisenberg’s trial was set to commence on December 8, 2023, but it was postponed until April 8, 2024.
This delay was granted after his legal team requested more time to prepare, given the complexity of the case involving intricate legal and factual issues. Eisenberg’s alleged scheme posed challenges for both the prosecution and defense, making the proceedings notably more complex than typical fraud cases.
Alex Mashinsky
Last July, Alex Mashinsky, the former CEO of cryptocurrency lender Celsius Network, was arrested and charged with wire fraud and other offenses by U.S. prosecutors.
He stands accused of orchestrating a lengthy scheme to deceive customers, ultimately leading to Celsius Network’s collapse with over $1 billion in debt.
Prosecutors allege that Mashinsky inflated his firm’s cryptocurrency price to attract customers, enabling him to pocket tens of millions of dollars. Mashinsky pleaded not guilty, and his trial is scheduled for September 2024.
Su Zhu and the fall of 3AC
On Sept. 29, Su Zhu, co-founder of the now-defunct Three Arrows Capital hedge fund, was arrested at Singapore’s Changi Airport while attempting to leave the country.
The arrest followed Zhu’s failure to comply with a court order, compelling him to cooperate with the liquidation process of Three Arrows Capital’s assets. The liquidation firm, Teneo, obtained a committal order against Zhu, directing Singaporean police to detain him in prison for four months.
A similar order was reportedly issued for Zhu’s co-founder, Kyle Davies, whose whereabouts remain unknown. While in prison, Teneo will engage with Zhu concerning matters related to Three Arrows Capital, with a focus on recovering assets belonging to the hedge fund or acquired using its funds.
The liquidators are determined to ensure Zhu’s full compliance with the court order. Three Arrows Capital filed for bankruptcy in July 2022, leading to significant disruptions in the crypto industry as major players had to adjust their operations and restrict customer withdrawals following a crypto market downturn triggered by the collapse of the Terra/LUNA project.
Thomas Smith, Kyle Nagy, and Braden Karony
Thomas Smith, Kyle Nagy and Braden Karony are the people behind the crypto token SafeMoon, a digital asset once valued at over $8 billion. They were accused of fraud and money laundering by both the U.S. Department of Justice and the Securities and Exchange Commission on Nov. 1, 2023.
The charges revolve around allegations that the trio diverted millions of dollars for personal expenses, including luxury cars and real estate, and obtained investor funds dishonestly.
They are accused of deceiving investors about the token’s liquidity and making false promises about its features, claiming these would drive the price to record highs. The individuals charged in this case include founder Kyle Nagy, Chief Executive Braden John Karony, and former Chief Technology Officer Thomas Smith.
While Nagy is currently evading authorities, Karony and Smith have been apprehended. The charges against them encompass conspiracy to commit securities fraud, wire fraud, and money laundering.
William Ulbricht
San Francisco-born Ross William Ulbricht, aka Dread Pirate Roberts, is serving life in prison without possibility of parole. Ross William Ulbricht’s conviction stems from his creation and operation of Silk Road, a now-defunct online marketplace where individuals used Bitcoin to purchase drugs, hacking tools, and counterfeit passports.
Ulbricht was found guilty of seven offenses, including distributing narcotics and conspiring to distribute illegal goods. He intentionally designed Silk Road as a platform for illegal activities, allowing users to buy and sell drugs and other illicit items anonymously, beyond the reach of law enforcement. Ulbricht employed various methods to anonymize transactions on Silk Road.
The website operated as a hidden service on the Tor network, enabling the sale of narcotics and other illegal products and services. Ulbricht operated under the alias; Dread Pirate Roberts, a reference to a fictional character from The Princess Bride.
Charlie Shrem
Charlie Shrem is the former chief executive of crypto exchange BitInstant. In 2014, Shrem was sentenced to two years in prison for knowingly transmitting almost $1 million in Bitcoin meant for drug trafficking on Silk Road. Prosecutors also accused Shrem, who had served as vice chairman of the Bitcoin Foundation, of using Silk Road to purchase drugs for himself. Shrem has since been released and now works as a crypto venture capitalist.
Mark Karpeles
Mark Karpeles is the former CEO of the bankrupt crypto exchange, Mt. Gox. Karpeles, a French entrepreneur and programmer, served as the CEO of Mt. Gox, the world’s inaugural Bitcoin exchange.
He took over Mt. Gox from Jed McCaleb in 2011 and initiated a software overhaul. The exchange faced a significant setback in 2014 when it lost nearly $500 million worth of investors’ Bitcoin, leading to its collapse.
Following this incident, Karpeles was arrested in Tokyo in 2015 and spent over 11 months in custody. Karpeles was found guilty of unlawfully manipulating Mt. Gox’s electronic records, inflating the company’s holdings falsely by $33.5 million.
Nathaniel Chastain
Nathaniel Chastain is a former employee of the non-fungible token (NFT) marketplace OpenSea. On June 1, 2022, Nathaniel Chastain was apprehended in New York by the FBI.
He faced charges of wire fraud and money laundering. Chastain was accused of leveraging his insider knowledge about which tokens would be featured on OpenSea’s front page. He would buy these tokens just before they were showcased, immediately selling them to profit from the increased attention, all while conducting these transactions through anonymous digital currency wallets to conceal his actions.
In May 2023, Chastain was found guilty of fraud and money laundering. He was subsequently sentenced to three months in prison, three months of home confinement, 200 hours of community service, and a $50,000 fine.
Faruk Fatih Özer
Fatih Faith Ozer, the founder and CEO of Thodex, a Turkish crypto exchange, was captured in Albania in Aug. 2022. He had fled Turkey after his exchange abruptly shut down in April 2021, leaving more than 400,000 users without access to deposits totaling $2 billion in cryptocurrencies.
Ozer was extradited back to Turkey in June 2023, where he faced charges of money laundering, fraud, and organized crime. Following a court verdict, he was sentenced to 11,196 years in prison, primarily for fraud-related crimes.
This case extended to Ozer’s family and senior employees, with his brother, sister, and four other top staff members also being imprisoned. As part of the investigation, at least 83 individuals were detained.
The exact extent of losses suffered by investors during Thodex’s collapse remains uncertain, with varying reports in Turkish media, some estimating the losses to be as high as $2 billion. This incident carried significant implications for Turkey’s cryptocurrency landscape, particularly considering the widespread use of crypto as a hedge against inflation in the country.