Former broker accused of $1 million crypto fraud

Former broker accused of $1 million crypto fraud

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

Last week, 27-year-old Rashawn Russell was charged with perpetrating a cryptocurrency investment fraud scheme in 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 also filed a civil enforcement action against Russell.

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

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

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

He told prospective investors that their contributions would be locked up in the fund for a three-month term. When the term ended, Russell would give investors the option to either receive their original investment plus any profits generated by his trading or roll their contribution and all profits into another three-month fund cycle. 

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

Investors could also elect to receive 80% of all profits with 20% of the total profits going to Russell as a management fee. Either way, Russell guaranteed the investor’s original contribution would be returned. 

Throughout the scheme, Russell promised current and prospective investors that his trading for the fund was profitable, at times generating returns as high as 50% or more, according to court documents. Investigators say in reality, much of the investors’ money was misappropriated by Russell and used for his personal benefit to gamble and repay other investors in a Ponzi-like scheme. 

Russell is also accused of fabricating multiple documents that he sent to his clients to keep the deception afloat. Court documents state Russell sent one investor an altered image of a bank balance displayed on a bank website that purported to show Russell’s substantial liquidity. A court filing says a bank image sent from Russell to a client in February 2021 presented an account balance of about $355,000 at a time when the accused had a balance of no more than $35,000.

When another investor sought to recoup their investment, Russell never sent the money and instead sent the investor a fabricated bank wire transfer confirmation that was propped up as proof that the investor’s money had been returned.   

Court documents said Russell often made excuses when investors moved to pull money out of the fund, including lies that he was in the process of wiring money to them or that he would pay their contributions plus profits in the form of USDC — USD Coin, a digital stablecoin pegged to the U.S. dollar — to a digital wallet. 

Russell delayed his responses to repeated requests from investors and eventually stopped responding at all, court documents said. With limited exceptions, Russell’s investors failed to recover any of their investments.

Financial Planning’s attempts to reach Russell for comment were not successful.

The charges are filed as Bitcoin does its best to bounce back and regulators across financial services add crypto to their daily enforcement diets. 

In the days that followed Russell’s case being filed, and the Texas Securities Board entered a final order against crypto firm Nexo Capital for selling securities that are not registered; and the SEC charged crypto asset trading platform Bittrex and its co-founder for operating an unregistered national securities exchange, broker and clearing agency.

The SEC also charged Bittrex’s foreign affiliate, Bittrex Global GmbH, for failing to register as a national securities exchange in connection with its operation of a single shared order book along with Bittrex. The SEC said since at least 2014, Bittrex has held itself out as a platform that facilitated buying and selling of crypto assets that the SEC’s complaint alleges were offered and sold as securities. 

From 2017 through 2022, Bittrex earned at least $1.3 billion in revenues from transaction fees from investors while servicing them as a broker, exchange and clearing agency without registering any of these activities with the commission.

In a statement released Monday by SEC Chair Gary Gensler in connection to the Bittrex case, he said the enforcement actions make it clear that crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity.

“As alleged in our complaint, Bittrex and issuers that it worked with knew the rules that applied to them but went to great lengths to evade them by directing issuer-applicants to ‘scrub’ offering materials of information indicating that certain crypto assets were securities,” Gensler said. “Further, Bittrex, as alleged, failed to register and comply with U.S. securities laws as an exchange, broker-dealer, and clearing agency. 

“Cosmetic alterations did nothing to change the underlying economic realities of the offerings and Bittrex’s conduct. Today we’re holding Bittrex accountable for its non-compliance.”

But veteran securities attorney Bill Singer, who is not involved in any of the cases, said regulatory clarity is still a problem even as crypto enforcement cases have become more commonplace. 

The U.S. Government has still not issued a clear set of rules for cryptocurrency and blockchain forms to operate within. In September 2022, the White House released its first-ever comprehensive framework for the “responsible development” of digital assets.  

Singer said scams once considered complex or exotic because they’re preceded by the word “crypto” have become rote and rely on the same tried-and-true deceptions as the plots that have existed in the industry long before blockchain technology. 

For him, that means excuses from regulators that more time is needed before definitive and concrete regulatory guidance on digital assets can be distributed are approaching their expiration dates. 

“It’s just an old-fashioned fraud. All he’s done is we’ve made it sexy by putting the word crypto in there … you’ve got a guy asking you to give you crypto. You’ve never heard of him. He doesn’t really have much of any background. And he’s guaranteeing you 25%,” said Singer, who worked as a regional attorney for FINRA predecessor the National Association of Securities Dealers. “I’ve been around for 40 years. I can remember in the late ’90s where we had this fraud except people were told they’re going to be put into a dot-com company.” 

He added that the Bitrex issue, which continued for five years, angers him because he said it represents a “highway that’s been built largely by the SEC without any guardrails. 

“What many folks are complaining about is that the SEC has been regulating by litigation when it should be regulating our rulemaking. What people have been pleading and begging the commission to do for at least five or six years is to please make up your mind and tell us what crypto is under CFTC purview, and what it is under the SEC,” Singer said. “Every other week they’re proposing a new rule. Now they are proposing to review the rules that they propose. And we then have the Department of Justice stepping in because the con artists have easily realized that if I keep using the word Bitcoin, it sounds really sexy. And since the SEC isn’t definitively rulemaking and the CFTC isn’t definitively rulemaking … as lawyers love the word penumbra, that’s where we are.”