Last week New York City hosted the Consensus 2018 conference. The conference was timed to coincide with Blockchain Week. Despite huge double-digit percentage drops in the value of Bitcoin and many other cryptocurrencies, the mood at the conference remained upbeat. (According coinmarketcap.com, cryptos lost $45 million in value between May 11th and May 18th.)
Even though Bitcoin is holding at around $8,000, one prognosticator claimed it would still close the year at $50,000. John McAfee, founder of the well-known antivirus software bearing his name, sees Bitcoin surpassing the $1 million mark in just two years.
The industry euphoria evident at the conference worries us. Rented Lamborghinis, a yacht big enough to hold a party for 1000 people… these are not the signs of a bear market.
Or a rational one, either.
If the Dow Jones Index or S&P 500, fell by 50%, there would be panic in the streets. Today’s youth weren’t around for the Great Depression, however. Nor were their parents. Yet millions of Americans are still mesmerized by the thought of easy money.
When the 1930’s ushered in the Great Depression, it was real companies that saw their value tumble. Railroad, mining companies. These businesses had employees, they made things and owned real assets.
But what is behind a crypto company. A couple millennials, a rented post office box and a website. In many cases, that is all. And that should be enough to worry any would-be investor.
Warren Buffet called the crypto market “rat poison squared.” We agree.
Google this month banned cryptocurrency ads. The SEC is cracking down on ICOs and so are other governments around the world. But will these actions have any effect on cryptocurrency prices and offerings?
It is impossible to tell if all the money is in, that is, are there still more people on the sidelines waiting to invest. Will there be a rally? A continued slow decline (Bitcoin has already lost half its value in the last several months)? Or might we see a dead cat bounce where the market makes a brief but small rally before crashing?
No one knows. But that uncertainty, the hype and extreme volatility is precisely why Bitcoin and most of the newer Initial Coin Offerings (ICO’s) are completely unsuitable for most investors.
To date, most investors continue to purchase their crypto investments through coin exchanges, directly from promoters or ICOs. Normally that would be fine but here it is more akin to purchasing from the devil himself.
If the deal goes south, who do you sue? Where is your money? Does the company making the offer really exist? Are they in the United States? We traced one ICO to a vacant lot in California.
So what can we do if you lose your money?
Surprisingly, very little! That is not the answer you expect from a law firm that prides itself on its asset recovery and fraud fighting skills. But there is a sliver of hope if you purchased from a broker or financial professional.
Buying from a promoter is probably a nonstarter. Ditto from an exchange. There isn’t much we can do for you. If you fall into that category and lose everything, your best hope is the SEC or FBI. Maybe if the ringleaders go to prison there might be some restitution. That is, if the money hasn’t been spent. (If the conference was any indication, there are still people partying like they are on the Titanic – before it hit the iceberg. Snoop Dog playing at your event of finding a yacht that can hold 1000 partyers isn’t cheap.
Brokerage Firms Can Be Sued for Cryptocurrency Fraud Losses
Because the commissions can be quite high, a few stockbrokers and financial advisors have been “dabbling” in the cryptocurrency market. And it’s usually without the blessing of their employer.
Brokerage firms and banks know that these investments are very risky. That is why so many of the forbid their advisors from peddling them.
So why would a broker tempt fate and sell them anyway? The answer is money.
With so many discount brokerage firms and online trading platforms available, commission revenue has been seriously squeezed. A stockbroker is lucky to get one half of one percent. But a crypto can pay 8% or more.
When brokers sell unapproved products to customers, the process is called “selling away.” Even if they sell unapproved products and do so without their employer’s knowledge, the brokerage firm is still responsible for those losses.
“Selling Away” Red Flag Warning Sign
Brokers that sell away will often ask investors to make their check payable directly to the broker or to a third party / promoter. Usually, when you make an investment through a stockbroker, you make payment to the brokerage firm. For example, if you buy $10,000 of GM stock through your broker at Merrill Lynch, your check is made payable to Merrill Lynch and not the broker’s personal account or General Motors.
Legitimate Cryptocurrency Securities
The SEC and CFTC are now approving cryptocurrency exchange traded funds. These work like a mutual fund. Although the fund itself may be legit, the ICO and crypto currencies purchased by the fund may not be. Already there are several crypto ETFs available to U.S. investors: Amplify Transformational Data Sharing ETF (BLOK), Reality Shares Nasdaq NexGen Economy ETF (BLCN), First Trust Indxx Innovative Transaction & Process ETF (NASDAQ: LEGR) and Innovation Shares NextGen Protocol ETF (KOIN).
And these ETFs can be as volatile as the cryptocurrencies themselves.
That extreme volatility makes them unsuitable for most investors. Especially those needing immediate access to their money (retirees or soon to retire), the elderly and those with a low or moderate risk tolerance.
Also quite volatile are Bitcoin futures which can be traded on both the CBOW and CME. And with the launch of Bitcoin futures along came a few brokerage firms willing to sell these futures contracts. As of this writing we believe that TD Ameritrade and TradeStation are both allowing trades in the new contracts.
Simply because a brokerage firm allows trading in a particular offering doesn’t make them liable for any losses. What you do with your money is your business. Brokers get in trouble, however, when they start making recommendations and those recommendations are deemed unsuitable for a particular customer.
We know of at least one investor lawsuit brought against Bitcoin Savings & Trust. That company allegedly made claims that their investors could make 7% weekly profits. They also claimed to “safeguard [an investor’s] Bitcoin in a manner akin to a brick-and-mortar bank safeguarding a customer’s valuable goods and money.”
Sounds legit like a bank, right? Well the previous name of this supposed bank was Pirate Savings & Trust. That was apparently even to wild for them. According to court records, Bitcoin Savings & Trust was a Ponzi scheme. It isn’t a legit bank. In fact, it is not even an incorporated entity.
The SEC also took action but not before millions of dollars of investor monies were lost.
That means if you buy from a bank or brokerage firm, make sure it is really legitimate.
As this was being published, we checked with investing.com to see what brokerage firms are holding themselves as cryptocurrency brokers. While there are many who will offer Bitcoin futures and cryptocurrency ETFs, a whopping two companies were brave enough to put their licenses on the line and serve as cryptocurrency brokers. (One of those companies is Cryptobitup. We know nothing about them other than they appear to be located in London yet investing.com claims they are regulated by the Russian Financial Market Relations Regulation Center. With a minimum investment of just $250 there are red flags galore!)
Call to Action – Cryptocurrency Fraud Victims and Whistleblowers
If you lost money in a cryptocurrency scheme and you invested in an ETF, futures contract or mutual fund, we can help. Ditto if you purchased any type of ICO or the like from a stockbroker or investment adviser. As long as the investment was solicited – an “unsolicited trade” is one in which the investment was your idea – both the broker and brokerage firm can be held liable.
SEC Cryptocurrency Whistleblowers. Working in the industry? The SEC is actively looking for whistleblowers that can expose these schemes. Under the SEC Whistleblower Program, financial services workers with inside information about fraud involving Initial Coin Offerings or other cryptocurrency schemes may be entitled to substantial cash awards.
We have not seen any IRS whistleblower awards yet but suspect they will also be interested. Just like Swiss accounts once were used to launder money and evade taxes, today that dubious honor falls on cryptocurrencies. Like the SEC, the IRS also has a whistleblower program.
Worried that you might get in trouble for your role in the scheme? It is probably better to get ahead of the problem than wait for the knock on your door. And not having U.S. citizenship is also not an impediment. The feds want to shut down the crypto Ponzi schemes that harm investors and give the entire blockchain movement a black eye.
For more information, visit our ICO cryptocurrency fraud page. Ready to talk or want to know if you have a case? Contact us online, by email () or by phone (202-800-9791.) All inquiries are kept strictly confidential. Both stockbroker fraud recovery and SEC whistleblower actions are handled on a success fee (contingent fee) basis.
MahanyLaw – America’s Corporate Policeman