Law Tales #11: Case of the Crypto Con Man

The recent SBF crypto scandal is only interesting because the size of the scam and SBF’s payoffs to politicians, which protected him so long from regulators. His actions are nothing new in the crypto space.

I read the original bitcoin white paper when it was published. I immediately recognized that this was not legal as a commodity or currency under existing laws. Being aware that early on, I could have bought 10,000 bitcoins for a few bucks. I just couldn't get over the idea that it was not compliant with federal laws and so didn't think it was worth even a twenty-dollar bill. Big mistake. It would have been nice to be a billionaire today, even if I got there based upon something as artificial as bitcoin.

At first only technology enthusiasts cared about bitcoin, but it then took off with anarchists and libertarians, then illegal commodities sellers on places like Silk Road, then offshore gamblers trying to avoid the IRS. And then investors around the world got into the game. Some countries treat crypto like a currency, others, a commodity. It is still a developing area of law.

One of the problems with bitcoin early on was trading it. Without a proper legal structure, how could sales take place. One way that developed was using escrow services and attorneys. No one trusted anyone. As time went on, we had the exchanges, where it seemed like crypto was actually real. But the question became of how trustworthy the exchanges were. Given what happened with SBF and other exchanges, the exchanges were not entirely trustworthy.

Crypto also attracted a ton of typical con artists. These individuals were experts at exploiting people and getting them to part with their money. Crypto offered a mysterious way to get rich without a great deal of effort or knowledge. It was a magic money machine box that just worked. People had already heard about bitcoin, so they could be sold more easily than on some obscure item that would first require creating a fiction.

A few years ago, my boss had me work with a new client. He was allegedly a bitcoin entrepreneur, who had tried to convince Facebook to partner with him, and many other things. Facebook would take his idea and try and explore creating its own coin, but it allegedly based this on his idea. Allegedly. He also claimed to have a huge mining operation and improved tools for mining.

This client claimed to own hundreds of thousands of bitcoins. He even showed his Coinbase wallet documenting this. This was back when bitcoin was much lower than today. It was a lot of money, but not billions, but millions. He hooked up with some marketers, AKA con artists, who convinced him to market investment opportunities in his mining operation. For quite some time, he paid everyone out. Bitcoin was making people money. It looked real, not like a Ponzi scheme. Investors dipped into savings and mortgaged homes and reinvested profits to increase their investments. It was a literal golden goose.

Suddenly things went bad, and all the investors were out.

The client had all the angles. I thought he was slimy from the moment I met him, but my boss believed in him. Then again, my boss was always chasing fool’s gold. He was always hoping to get in on a huge project and was willing to take risks to do so. Unfortunately, that meant he often lost his shirt and was attempting to overcome that with the next one.

My first task involved getting all the records together that they had. I went to their office and sat there for several days going through files, which I ended up taking with me back to our office in another state. I gave them a list of everything else I needed from their databases.

For all my concerns, I believed there actually might be enough money to pay everyone out. The former CFO had embezzled over a hundred thousand dollars. The former chief sales officer had done about the same. Maybe the client was innocent and the victim of some scammers. There were enough “maybes” for me to stay on the project and not worry too much about it.

My boss told the client to send all inquiries to our office. I was tasked with placating investors, some of whom were only small-time investors. I was told over and over again that the client would be paying out the investors for their investments and everyone would be made whole, eventually. They often made threats about contacting state and federal authorities. I responded as well as I could.

He allegedly came up with another way to make millions quickly. My boss tried to figure out a way to make it happen. Supposedly, it almost did. It was never clear why it did not happen, but a lot of pieces had been in place and then nothing concluded.

Eventually, the client stopped paying our bill. My boss had let it slide for quite some time, so it added up to be a lot of money. We finally stopped placating the investors. I found out the company had filed for bankruptcy. And later the client was charged with federal charges. I stopped following the matter after that, but I would not be surprised if he is in Club Fed right now. Nor would I be surprised if he is hiding in a foreign country.

I also represented some rich clients attempting to recover their million-dollar investment with a different crypto company. Some of the principals of the company had been caught after the federal indictments, but a few were sitting in non-extradition countries and sitting on their money. These smart ones actually paid for lawyers to tie up the civil suits, including mine.

SBF was not unique in the crypto space. Almost everywhere I have been involved in the crypto space as an attorney had been full of corruption and exploitation.

The con artists are just repackaging old tricks in new labels. If anyone offers you a “great investment”, run. If you do not run, at least get someone really smart to do the due diligence on it.

Every one of these investment scams exploits simple greed. The con artists know how to speak with a forked tongue and play off your fears. There are simple and safe investments that will not get your rich in short term but will pay off in the long run.

I remember someone trying to convince me that they didn’t get ripped off on one of these scams. They defended the con artist. Some of them claimed, “This one just did not work out, but I trust him, and the next one will work. He is working really hard to find us a good investment, though I have lost out on the first five I have done with him.”

Confidence men know how to gain your confidence. They know how to speak to separate you from your money.

Too many people try to recoup losses by risky investments. They get fearful of never recovering. Some of the crypto investors I talked with lost a lot in the Great Recession and were only trying to get back to where they were.

For most people, you would be better off learning to play blackjack and count cards. Your odds are better than these investment schemes. At least until the casinos ban you for engaging in a legal activity.¹

1. Yes, card counting is legal. It will help defeat the house edge. However, they have a lot of other rules in place now to make blackjack more profitable for them and less profitable for you.