Two Men Have Been Charged for Defrauding Investors Through an ICO Called Centra. Prosecutors Say the Men Falsely Claimed Their Centra Tech Debit Card Could be Used Wherever VISA and MasterCard Are Accepted.
The Centra Tech Saga – Some Bad Guys Never Learn
[Post Updated thru June 2020] Cryptocurrencies are probably here to stay. Millennials love them and even banks and a couple countries are looking to blockchain technology to launch traditional currency alternatives. But a Crypto Visa card? It sounds like a great idea, but the SEC says it was just a giant scam. The agency and has charged two Florida men with illegally raising $32 million in a scheme claiming false ties to Visa Inc and MasterCard.
Both the Department of Justice and the Securities and Exchange Commission (SEC) say that Sohrab “Sam” Sharma, 26, and Robert Farkas, 31, ripped off investors when raising money for their new crypto venture, Centra Tech and the Centra token and Centra debit card.
Their efforts to raise money were probably enhanced by celebrity endorsements from Floyd Mayweather and DJ Khaled. Neither Mayweather nor Khaled are accused of any criminal wrongdoing. Mayweather had reportedly released a tweet saying, “Centra’s (CTR) ICO starts in a few hours. Get yours before they sell out, I got mine.”
A Facebook post of a smiling Mayweather holding a Centra Tech debit card has been removed from the Internet.
Subsequent to criminal and civil claims against Centra Tech and its founders, in November 2018 Khaled agreed to pay back the $50,000 he had received to promote the coin offering. In addition to disgorging the payments, he also agreed to pay a $100,000 fine to the SEC.
Mayweather was paid $100,000 to promote Centra Tech and apparently received another $200,000 for other crypto promotions. He agreed to disgorge all $300,000 and pay an additional $300,000 in fines.
Neither were required to admit to any wrongdoing as part of the settlement. Recently we have seen other celebrities endorse ICOs including Paris Hilton. While promoting an offering isn’t illegal, if you are paid for an endorsement it must be fully disclosed to potential investors.
The two celebrities endorsers may be out of the case but lawsuits and criminal charges continue to dog the promoters of the scheme.
Media sources say that Farkas was arrested last week as he attempted to fly to South Korea. Authorities say that just prior to his arrest he had asked a Centra lawyer to research U.S. extradition laws.
If the government’s allegations are correct, Centra Tech’s scheme was especially brazen and sophisticated. In addition to using paid celebrity endorsements, Centra’s website claimed it had hired a lawyer from a prominent law firm as the company’s CEO. A former Visa compliance officer was listed as Centra’s chief security officer. The company also touted having a former Credit One Bank consultant on board as COO.
The SEC says that some of the “executives” were fictitious made up names with phony biographies.
Centra Tech: Anatomy of a Phony ICO
According to the SEC, between July 30, 2017 through October 5, 2017, Sharma and Farkas raised at least $32 million from thousands of investors through the sale of unregistered securities issued by Centra Tech., Inc. The government says that the two men controlled the company.
The CentraTech tokens were issued in a so-called “initial coin offering” or ICO, a term that is meant to describe the offer and sale of digital assets issued and distributed on a blockchain. The men promoted the Centra ICO by claiming phony relationships between Centra and Visa and MasterCard.
Although Sharma and Farkas claim their offering is not a security, the SEC says otherwise. They say the men illegally sold unregistered securities and made material misstatements and omissions designed to deceive investors in connection with the offer and sale of securities in the Centra ICO.
The Commission claims that Centra Tech marketed its ICO by using postings on the internet.
According to prosecutors, Centra lured investors with the promise of creating a line of products that would enable holders of various “cryptocurrencies” to convert those assets easily into U.S. dollars, and spend “cryptocurrencies” in real time with the “Centra Card.” The Centra Card resembles an ordinary debit card. Investors were told that they could use their Centra Card wherever MasterCard or Visa cards are accepted.
In fact, Centra Tech’s website showed a picture of the Centra Card on its website. The card clearly depicted a Visa logo.
Despite all the promises in Centra’s ICO marketing materials, prosecutors say,
“Contrary to Defendants’ false representations, and as Defendants knew or recklessly disregarded: (i) Centra did not have any “partnership” or other relationship with Visa, MasterCard, or The Bancorp; (ii) “Michael Edwards” and other Centra executives pictured in its promotional materials were fictional, and the photographs used to identify the fictional “executives” were photos taken from the internet or pictures of Defendants’ relatives; and (iii) investors who purchased Centra Tokens would not receive future payments or “revenue share” from agreements with Visa or MasterCard.”
A copy of the SEC’s complaint can be found here.
On May 21st, 2018, Sohrab Sharma and Robert Farkas were arraigned in a Manhattan federal court. Both entered not guilty pleas to charges of securities fraud, wire fraud and criminal conspiracy. Sharma’s bond was set at $5 million of which $1 million had to be posted in cash. Farkas’ bond was set at $600,000 cash.
A third defendant, Centra Tech’s former COO Raymond Trapani, was also charged.
In May 2019, lawyers for Sharma and Farkas asked a federal judge to dismiss the charges because prosecutors illegally obtained and viewed communications between the two men and their lawyers.
The Justice Department said it created a “walled off” team of prosecutors called a taint team to make sure any privileged communications were not seen by the agents and prosecutors handling the case. They say that the Defendants agreed to the procedure in advance and further, that no privileged information was ever viewed by the government lawyers charged with prosecuting the case.
Media reports say that Sharma at some point realized that Centra’s marketing materials were misleading and ordered Farkas and Trapani to remove the misleading “fufu” from Centra’s website. Whether this will be Sharma’s defense remains to be seen.
Update: On June 16th, Robert Farkas pled guilty to conspiracy to commit federal wire fraud and securities fraud. He faces 10 years in prison when sentenced later this year, however under a plea agreement faces a likely 6 to 7 year sentence.
As part of the plea, Farkas admitted the following facts:
In or about July 2017, FARKAS, along with co-defendants Sohrab Sharma and Raymond Trapani, founded a company called Centra Tech that claimed to offer cryptocurrency-related financial products, including a purported debit card, the “Centra Card,” that supposedly allowed users to make purchases using cryptocurrency at establishments accepting Visa or Mastercard payment cards. From approximately July 30, 2017, through October 5, 2017, FARKAS and his co-defendants solicited investors to purchase unregistered securities, in the form of digital tokens issued by Centra Tech (“Centra tokens” or “CTR tokens”), through a so-called “initial coin offering” or “ICO.” As part of this effort, FARKAS and his co-defendants represented, in oral and written offering materials that were disseminated via the internet: (a) that Centra Tech had an experienced executive team with impressive credentials, including a purported CEO named “Michael Edwards” with more than 20 years of banking industry experience and a master’s degree in business administration from Harvard University; (b) that Centra Tech had formed partnerships with Bancorp, Visa, and Mastercard to issue Centra Cards licensed by Visa or Mastercard; and (c) that Centra Tech had money transmitter and other licenses in 38 states, among other claims. Based in part on these claims, victims provided millions of dollars’ worth of digital funds in investments for the purchase of Centra Tech tokens. In or about October 2017, at the end of Centra Tech’s ICO, those digital funds raised from victims were worth more than $25 million. At certain times in 2018, as the defendants’ fraud scheme was ongoing, those funds were worth more than $60 million.
The claims that FARKAS and his co-conspirators made to help secure these investments, however, were false. In fact, the purported CEO “Michael Edwards” and another supposed member of Centra Tech’s executive team were fictional people who were fabricated to dupe investors; Centra Tech had no such partnerships with Bancorp, Visa, or Mastercard; and Centra Tech did not have such licenses in a number of those states.
Former COO Robert Trapani already pled guilty last year. With yesterday’s guilty plea by Farkas, the sole remaining defendant is Sohrab Sharma. His trial was delayed by the coronavirus court closures until later this year.
In announcing Farkas’ conviction, the Justice Department released a statement saying, “Farkas and his co-conspirators duped ICO investors into investing digital currency worth millions of dollars based on fictitious claims about their company, including misrepresentations relating to its purported digital technologies and its relationships with legitimate businesses in the financial services sector. Whether in the context of traditional equity IPOs or newer cryptocurrency-related ICOs, raising capital through lies and deceit is a crime.”
Class Action Against Centra Tech
In addition to the SEC and criminal actions, investors in the failed crypto currency scheme also filed a lawsuit. In June of 2019, the court heard arguments as to whether the claims can be asserted as a class action. Apparently Centra Tech has not even responded to the lawsuit and the three individual executives who were originally named in the suit have been dismissed.
The lack of an answer from Centra Tech may mean the company has no assets meaning collection of damages could be difficult. Court records suggest the FBI was able to seize 9,000 ETH coins but the value of those coins isn’t nearly enough to pay investors. At a price of $267 that would mean $2.4 million to satisfy losses of $32 million.
The company has filed a motion to vacate the default entered when it failed to timely respond to the lawsuit. In a motion filed June 17th the company said, “Mr. Sharma has been diligent in his efforts to obtain counsel to represent Centra Tech in this litigation. However, due to his limited access to a computer, his ongoing criminal matter in the Southern District of New York, his limited financial resources and the sheer complexity of this litigation, his search has been difficult.”
Centra Tech at the same time filed a motion to dismiss the case or in the alternative, compel investors to bring their cases individually as arbitrations. They say that the Token Sale Agreements contained both a lawsuit and class action waiver effectively closing the court doors to defrauded investors.
We reviewed the Agreement which says:
You may not take legal actions against the Service connected with using of Service… Legal actions against the services offered for reasons of misunderstanding will not be substantiated.
The purchaser acknowledges and agrees that, to the fullest extent permitted b y any applicable law, the Purchaser will not hold any developers, auditors, contractors or founders of the Service… liable for any and all damages or injuries whatsoever caused by or related to the use of, or inability to use, Tokens, Services or Blockchain system under any cause or action whatsoever…
…You… expressly waive trial by jury and right to participate in class action lawsuit…
If those terms aren’t onerous enough, Centra Tech reserves the rights to change the terms of the agreement at any time and without notice!
Class action and lawsuit waivers are terrible for consumers and investors. It effectively prevents any recover except for the largest of investors. Without the ability to collect legal fees, very few lawyers will consider an individual case unless paid hourly and most investors don’t want to spend tens of thousands of dollars in the hopes they get something back.
Even without a class action waiver, individual investors often find a tough time trying to find a lawyer to take their case if the defendant is a failed cryptocurrency business or ICO. (As noted below, we only take individual cases if your investment was purchased through a third party such as a stockbroker or investment adviser.)
Class actions allow one attorney or group of attorneys to bring a case on behalf of multiple victims. Lawyers are more likely to take a risk on a case if they are representing multiple investors.
Where Are They Now – The Centra Tech Saga Continues
One of of our favorite past times is following up on bad guys. Long after the main stream media loses interest in the case, we continue to follow the story. (Often we are part of the story when our clients have lost money.)
As noted above, Raymond Trapani, Centra Tech’s former Chief Operating Officer, pled guilty in 2019 to criminal conspiracy and securities fraud. As part of the plea, Trapani acknowledged the company fraudulently raised $25 million from unsuspecting investors.
One month later, the court ruled on Sharma and Farkas’ motion to dismiss the indictment. The court refused to dismiss the charges or disqualify the FBI agents investigating the case but did suppress Sharma’s statements. As to Sharma’s statements, the court suppressed a statement made by Sharma when he was arrested about firearms in the residence. At the time he was asked about guns, he had not yet been read Miranda warnings. The net effect on the Centra Tech case is zero.
Farkas pled out in June 2020. The case against Farkas continues. Neither Trapani nor Farkas have been sentenced and will likely not be sentenced until after the trial of Sharma. (Typically the government seeks to delay sentencing of cooperating defendants until after they have testified.)
As to the civil case, the court entered judgment against the company. Unfortunately, we believe it is unlikely that investors will receive back all their money. Typically investors only receive pennies on the dollar.
On February 3, 2020 a federal judge refused to reduce the amount owed by the company. Originally, investors who lost money would have been covered by the class action filed but the court refused to certify the class meaning that individual investors must bring their own individual lawsuits. We believe that many did not even bother as collection is likely to be difficult if not impossible.
Are ICOs a Securities Offering?
The major securities laws in the United States were written in the 1930’s as America grappled with the Great Depression. Today, technology is changing so fast that Congress can’t catch up. That is very evident in the area of cryptocurrencies.
Cryptocurrency offerors often claim they are outside the jurisdiction of both the SEC and CFTC. They say that ICOs tokens are not securities. Obviously, the government doesn’t agree. Thus far the courts have sided with the regulators, a good outcome for investors.
Anatomy of an ICO (Initial Coin Offering)
An Initial Coin Offering or “ICO” is a fundraising event in which an entity offers participants a unique digital asset, often referred to as a “coin” or “token,” in exchange for consideration (often in the form of other digital assets — most commonly Bitcoin and Ether — or fiat currency).
The tokens are issued on a “blockchain” or cryptographically-secured ledger. Generally, a token entitles its holders to certain rights related to a venture underlying the ICO, such as rights to profits, shares of assets, rights to use certain products or services provided by the issuer, and/or voting rights. These tokens may also be listed on online platforms, often called exchanges, and are tradable for other digital assets or fiat currencies. (Some exchanges have also been accused of being frauds or were successfully hacked causing huge losses to investors.)
The tokens are immediately tradable. According to the SEC complaint, the initial share price for the Centra tokens was 15¢. As Centra ramped up its marketing, the price of Centra tokens soared to $4 in January of 2018. After the SEC and Justice Department filed charges, the price of those shares has plummeted.
ICOs are typically announced and promoted through public online channels. Issuers usually release a “white paper” describing the project and the terms of the ICO. To participate, investors are generally required to transfer funds (often Bitcoin or Ether) to the issuer’s digital address, online wallet, or other account. After the completion of the ICO, the issuer will distribute its unique “tokens” to the participants’ unique address on the blockchain. They are also marketed through social media, press releases, websites and sometimes, by other financial professionals.
Although the concept of cryptocurrency is probably here to stay, recovering money for victims of cryptoscams is extremely difficult. MahanyLaw is one of the few law firms that help victims of cryptocurrency fraud recover their money. Our practice, however, is limited to prosecuting cases where the ICO investment involved a stockbroker or investment advisor. Those cases are few and far between.
When ICOs are marketed through white papers, Facebook and websites, getting back an investor’s money is difficult. In many cases, it is almost impossible to determine where the offeror is even located! Because the people running the ICO want to be paid in digital currencies such as Bitcoin, tracing the money is also quite difficult.
Regulators are trying to stop these scams before people lose money. The SEC and several states are trying to stem the rising tide of scam and phony ICOs. Unfortunately, the bad guys launch new ICOs faster than the government can shut them down. And shutting them down doesn’t put money back in the investors’ pockets.
Did You Lose Money in a Cryptocurrency or ICO Scam?
As cryptocurrencies continue to rise in popularity, we expect more stockbrokers and investment advisors will try to get in the act. The big brokerage firms are certainly worried and with good reason. Millennials are turning to cryptos instead of traditional investments. That means a loss of commission revenues.
They also know how volatile ICOs can be. Many brokerage firms refuse to permit their brokers to sell these investments.
Unfortunately, money talks and greed often wins out over ethics. We are finding some financial professionals are now peddling these investments on the side. In industry terms, that is called “selling away.” When a broker sells a financial product without his employer’s approval, he is said to be selling away.
At least two crypto investment funds have been launched. Because of the volatility of the underlying crypto assets, however, these funds are extremely volatile. That makes them unsuitable for most investors.
If there is any good news here, investors who purchase an ICO or a crypto fund offering through a licensed broker may have a good claim against that broker’s employer. Selling away subjects both the broker and the brokerage firm to liability.
If you lost at least $100,000 in an ICO, a cryptocurrency fund or a crypto investment and the investment involved a licensed financial professional, we may be able to help. For more information about cryptocurrency frauds, visit our cryptocurrency and ICO fraud page. Want to know if you have a case? Contact us online, by email at or by phone at (202) 800-9791. All inquiries are kept in strict confidence.
MahanyLaw – America’s Fraud Recovery Lawyers