Ex-Broker Charged With Million-Dollar Crypto Fraud [Advance Cash ]

Ex-Broker Charged With Million-Dollar Crypto Fraud

A former FINRA-registered broker and investment banker accused of manipulating friends, former classmates and industry colleagues out of at least $1 million in a crypto scheme with Ponzi trappings has been charged by federal authorities.

Last week Rashawn Russell, 27, was accused of carrying out a cryptocurrency investment fraud scheme at the United States Attorney's Office for the Eastern District of New York.

The former Deutsche Bank investment banker faces a maximum of 20 years in prison if convicted. The Commodity Futures Trading Commission has also filed a civil suit against Russell.

“As alleged, Russell turned the demand for cryptocurrency investments into a scheme to defraud many investors to fund his lifestyle,” U.S. Attorney Breon Peace said in a statement. "This office will continue to aggressively pursue fraudsters who commit these schemes against investors in the digital asset markets."

According court documents filed with the charges on April 11, investigators allege that from at least November 2020 to July 2022, Russell facilitated a scheme to take advantage of several investors by promising them that the money he raised from them would be used for investments in cryptocurrencies that generate significant returns.

Russell asked investors to contribute to a proprietary digital asset exchange fund called R3 Crypto Fund. He accepted contributions in the form of bitcoin, ether and/or fiat currency.

He told potential investors that their contributions would be locked in the fund for three months. At the end of the term, Russell would give investors the option of receiving their initial investment plus profits generated from his trades or deferring their contribution and all profits into another three-month fund cycle.

On some occasions, the returns were presented as minimum guarantees of 25% by Russell, according to court documents. Russell told investors they could receive a guaranteed fixed 25% return on their contribution at the end of the term, with any profit over that amount going to Russell.

Investors could also choose to receive 80% of all profits, with 20% of total profits going to Russell as a management fee. Either way, Russell guaranteed that the initial investor contribution would be refunded.

Throughout the scheme, Russell promised current and potential investors that his trades for the fund were profitable, sometimes generating returns as high as 50% or more, according to court documents. Investigators say that in reality much of the investors' money was embezzled by Russell and used for his personal gain to gamble and pay off other investors in a Ponzi scheme.

Russell is also accused of fabricating several documents he sent to his clients to keep the deception afloat. Court documents indicate that Russell sent an investor an altered image of a bank balance displayed on a banking website that claimed to show Russell's substantial liquidity. A court filing indicates that a bank image sent by Russell to a client in February 2021 showed an account balance of approximately $355,000 at a time when the defendant had a balance of no more than $35,000.

When another investor sought to recover his investment, Russell never sent the money and instead sent the investor a fabricated wire transfer confirmation which was presented as proof that the investor's money had been returned.

Court documents said Russell often made excuses when investors moved to withdraw money from the fund, including lies that he was transferring money to them or that he would pay their contributions more profits in the form of USDC - USD Coin, a digital stablecoin pegged to the US dollar - to a digital wallet.

Russell delayed responding to repeated investor requests and eventually stopped responding at all, according to court documents. With few exceptions, Russell investors have not recovered any of their investments.

Financial planning attempts to reach Russell for comment were unsuccessful.

The charges come as Bitcoin tries its best to rebound and financial services regulators add crypto to their daily enforcement regimes.

In the days following the filing of the Russell case, and the Texas Securities Board placed final order against crypto firm Nexo Capital for the sale of non-registered securities; and the SEC loaded crypto asset trading platform Bittrex and its co-founder for operating an unregistered national securities exchange, broker-dealer and clearing agency.

The SEC also accused Bittrex's foreign subsidiary, Bittrex Global GmbH, of failing to register as a national securities exchange in connection with its operation of a single shared order book with Bittrex. The SEC said that since at least 2014, Bittrex has marketed itself as a platform facilitating the buying and selling of crypto assets that the SEC's complaint alleges were offered and sold as securities.

From 2017 to 2022, Bittrex generated at least $1.3 billion in revenue from investor transaction fees while serving them as a broker, exchange, and clearing agency without registering any of these activities with the commission.

In a statement released Monday by SEC Chairman Gary Gensler in connection with the Bittrex case, he said the enforcement actions clearly show that crypto markets are suffering from a lack of regulatory compliance, and not from a lack of regulatory clarity.

“As alleged in our complaint, Bittrex and the issuers it worked with knew the rules that applied to them, but went to great lengths to circumvent them by ordering prospective issuers to offer information indicating that certain assets cryptographic securities were securities," Gensler said. "Furthermore, Bittrex, as alleged, has failed to register and comply with U.S. securities laws as an exchange, compensation.

"The cosmetic changes did not change the underlying economic realities of the offerings and the conduct of Bittrex. Today, we hold Bittrex accountable for its non-compliance."

But veteran securities attorney Bill Singer, who is not involved in any of the cases, said regulatory clarity remains an issue even as applications of cryptography have become more common.

The US government still hasn't released a clear set of rules for cryptocurrency and blockchain forms to work. In September 2022, the White House released its first-ever global framework for the "responsible development" of digital assets.

Singer said scams once considered complex or exotic because they are prefixed with the word "crypto" have become routine and rely on the same tried and tested deceptions as conspiracies that existed in the industry long before blockchain technology.

For him, this means that excuses from regulators that more time is needed before definitive and concrete regulatory guidelines on digital assets can be distributed are approaching their expiry date.

"It's just an old fashioned cheat. All it did was we made it sexy by putting the word crypto in it…you have a guy asking you to give you some crypto. You've never heard of him. He doesn't "I don't really have a lot of experience. And he guarantees you 25%," said Singer, who worked as a regional attorney for FINRA's predecessor, the National Association of Securities Dealers. "I've been around for 40 years. I remember back in the late '90s we had this fraud, except people were told they were going to be put on a dot-com company."

He added that the Bitrex issue, which has spanned five years, angers him because he said it represents a “highway that was largely built by the SEC without any guardrails.”

"What a lot of people are complaining about is that the SEC is regulating through litigation when it should be regulating our regulation. What people have been pleading and begging the commission to do for at least five or six years is make up your mind and tell us which crypto falls under the jurisdiction of the CFTC and the SEC,” Singer said. “Every two weeks they come up with a new rule. Now they come up with a review of the rules they come up with. And then we have the Department of Justice stepping in because the scammers easily realized that if I continue to use the bitcoin word sounds really sexy And since the SEC isn't definitely regulating and the CFTC isn't definitely regulating…as lawyers like the word penumbra it's there that we are.