Oct 20, 2018 at 03:10
Oct 23, 2018 at 12:02 UTC
GBI to pay $2.5 Million Penalty for Bitcoin Ponzi scheme
According to an official announcement, United States district court of Southern District of New York has ordered Gelfman Blueprint Inc. (GBI) a cryptocurrency hedge fund and its Chief Executive Officer Nicholas Gelfman to pay over $2.5 million for operating a fraudulent Ponzi scheme.
GBI is a Bitcoin-denominated hedge fund built on a high-frequency trading algorithm. GBI was founded by Alex Kagan, David Kleyman, Benjamin Bokser, and Tj Mercery in 2014. The fund promises to deliver 7-9% monthly returns to its users on their Bitcoins. According to the company’s website, by 2015 it had 85 clients and 2,367 Bitcoins under management.
In September 2017, United States Commodity Futures Trading Commission (CFTC) filed an anti-fraud enforcement action against GBI. According to the complaint GBI and its Chief Executive Officer (CEO) and Head Trader, Nicholas Gelfman operated a Bitcoin Ponzi scheme. In the scheme, they fraudulently solicited participation in a pooled fund which purportedly employed a high-frequency algorithmic trading strategy, executed by defendants’ computer program called Jigsaw to trade the cryptocurrency Bitcoin. GBI received more than $600,000 from at least eighty customers. GBI presented a fake strategy and false performance report. In the Ponzi scheme, the payout of supposed profit to GBI clients consisted of other clients’ misappropriated funds. GBI made false and misleading claims about the performance of Jigsaw. Some of the misrepresentations by GBI were:
- GBI customers gaining 7-9% returns on their Bitcoin balances net of all fees through GBI’s risk protected strategy
- Misrepresentation of the individualized performance and balance report
- GBI even claimed that the assets and performance of GBI were audited by a certified public accountant, but they were not.
All strategies of GBI were misleading and fake, and the trading results were illusionary. The payouts of supposed profit to GBI investors were delivered from funds which were fraudulently obtained from other investors.
To conceal the scheme, GBI staged a fake computer hack that caused the loss of almost all GBI customer funds. Later they claimed that GBI had stolen only $25,00, but they stole around $600,000 from GBI customer fund. In the fake hack, GBI customers lost most of their funds.
According to the current court orders, GBI and Gelfman have to pay over $2.5 million in civil monetary penalties and restitution. They also have to pay $554,734.48 and $42,064.53 in restitution to customers, and $1,854,000 and $177,501 in civil monetary penalties.
The CFTC’s Director of Enforcement, James McDonald said that
“This case marks yet another victory for the Commission in the virtual currency enforcement arena. As this string of cases shows, the CFTC is determined to identify bad actors in these virtual currency markets and holds them accountable.”