The Federal Grand Jury Indicts BitConnect Founder Satish Kumbhani Over $2.4 Billion Ponzi Scheme

[Update 28.12.2022]

On February 25, 2022, the U.S. Department of Justice (DOJ) announced that a federal grand jury has indicted BitConnect’s founder, Satish Kumbhani, for orchestrating a $2.4 billion Ponzi scheme. “Today’s indictment reiterates the FBI’s commitment to identifying and addressing bad actors defrauding investors and sullying the ability of legitimate entrepreneurs to innovate within the emergent cryptocurrency space,” said Special Agent in Charge Eric B. Smith of the FBI’s Cleveland Field Office. “Dressing up a tried and true fraud scheme with a new twist and basing it overseas will not deter the resolve and dedication of the FBI to meticulously investigate and bring such fraudsters to justice.”

According to the court documents, Kumbani misled investors about BitConnect’s Lending Program. To induce investors to deposit funds in their Lending Program, BitConnect falsely represented, amongst other things, the fact that BitConnect used a volatility software trading bot that generated substantial profit and guaranteed high returns by using investors’ money to trade on the volatility of cryptocurrency exchange markets. In reality, however, BitConnect operated like a Ponzi scheme, using payments from new investors to repay the old investors. 

Approximately after one year, Kumbani abruptly shut down BitConnect’s Lending Program and directed his network of promoters to fraudulently manipulate and prop up the price of BitConnect’s digital currency, a commodity known as BitConnect Coin (BCC). In doing so, the promoters created a false appearance of increased demand for BCC, thereby, showcasing that there was a legitimate market demand for it.  Further, the DOJ also alleged that Kumbani and his co-conspirators “concealed the location and control of the fraud proceeds obtained from investors by commingling, cycling, and exchanging the funds through BitConnect’s cluster of cryptocurrency wallets and various internationally-based cryptocurrency exchanges.” In addition to using non-compliant exchanges and peer-to-peer (P2P) exchanges situated in jurisdictions with weak AML/CFT controls, Kumbhani may have also used anonymization services such as s mixers or tumblers and privacy coins to hide the source of funds. 

Additionally, Kumbhani is also charged for operating an unlicensed money transmitting business, conspiracy to commit international money laundering, wire fraud, and commodity price manipulation. Wire fraud is a  type of federal crime that involves a scheme to defraud another person or party by means of electronic communications. It can take many forms including telemarketing fraud, internet scams, phishing, or fraudulent schemes that use television or radio. If convicted on all of the above counts, he could face up to 70 years in prison. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

Currently, the whereabouts of Kumbhani is unknown and, thus far, the efforts to locate him have been unsuccessful. The FBI Cleveland Field Office and Internal Revenue Service’s Criminal Investigation Department are investigating the case.

On 1 September 2021, The Securities and Exchange Commission (SEC) announced that it has filed an action against BitConnect, an online crypto lending platform, its founder Satish Kumbhani, as well as its top U.S. promoter Glenn Arcaro and his affiliated company Future Money Ltd. (Collectively known as Defendants). All the values mentioned in this piece are in US Dollars (USD).

The SEC charged Defendants with lying about BitConnects’s ability to make a profit, violating the anti-fraud and registration laws put in place to protect retail investors. As per the SEC’s complaint, the Defendants conducted a fraudulent and unregistered offering and sale of securities in the form of a lending program and ultimately succeeded in obtaining more than 325,000 Bitcoin, or approximately $2 billion from investors worldwide, including from investors located in the United States. 

This new court action joins another parallel case filed by the SEC in May 2021 against five other promoters that are tied to BitConnect. According to SEC, the five promoters are known as Arcaro Promoters, who were led by Glenn Arcaro, falsely advertised the merits of investing in BitConnect’s lending program to prospective retail investors without being registered as broker-dealers. On 1 September 2021, Mr. Arcaro pleaded guilty to criminal charges brought against him by the SEC. Arcaro admitted to the fact that he made at least $24 million from the BitConnect fraud. Arcaro is required to repay investors and is scheduled to appear before U.S. District Judge Todd W. Robinson on 15 November 2021.

During his speech at the Aspen Security Forum, Gensler noted that “the American public is buying, selling, and lending crypto on these trading, lending, and DeFi platforms, and there are significant gaps in investor protection.” Gensler called for greater regulatory scrutiny around these platforms and urged Congress to dedicate more resources to prevent transactions, products, and resources from falling through regulatory gaps. Further, observing that platforms dealing in digital assets can fall prey to frauds, scams, hacks and abuse, Gensler pushed for increasing regulatory oversight in order to curb security breaches in crypto.

What Happened?

According to the formal complaint filed by the SEC, “from early 2017 through January 2018, Defendants conducted a fraudulent and unregistered offering and sale of securities in the form of investments in a "Lending Program" offered by BitConnect.”  The complaint alleges that, in order to induce investors to deposit funds in their Lending Program, BitConnect falsely represented, amongst other things, the fact that BitConnect would use a volatility software trading bot that would use users' funds to generate high returns.

BitConnect operated between 2016 and 2018, shutting down after receiving cease-and-desist orders from state regulators, including Texas and North Carolina. In 2016, BitConnect sold its own native token BitConnect coin in exchange for bitcoin (BTC). BitConnect claimed that its automated program — a volatility software trading bot — would make money by trading the contributed bitcoins and profit would be shared with investors through interest payments. The investors were duped into believing that the volatility software trading bot could generate returns of 40 per cent per month, and were given fictitious returns showing gains of about 3,700 per cent per year. In reality, the SEC said BitConnect investors lost much of their money after the price of BitConnect Coin sank 92 per cent on 16 January 2018.

The SEC claims that instead of deploying investor funds for trading with the purported trading bot, BitConnect and Mr. Kumbhani siphoned investors' funds off for their own benefit by transferring those funds to digital wallet addresses controlled by them, Mr. Arcaro, and others. The complaint further states that the defendants deceived their investors by establishing a network of promoters around the globe, paying them commissions for their promotional efforts, and then concealing a substantial portion of these rewards from the investors.

Currently, the whereabouts of Mr. Kumbhani is unknown and, thus far, the efforts to locate him have been unsuccessful. The complaint seeks injunctive relief, disgorgement plus interest, and civil penalties against him and the other defendants.

Why Merkle Science

Fuelled by the increased focus on consumer and investor protection, the U.S. regulatory bodies are looking to strengthen their crypto regulatory regime. Merkle Science’s highly customizable and easy-to-use platform provides near real-time detection of blockchain transactional risks  Our predictive cryptocurrency risk and intelligence platform set the standard for the next generation of financial safeguards and criminal detection. 

Merkle Science’s proprietary Behavioral Rule Engine allows crypto businesses to tailor the tool according to their risk policies based on the recent changes so that businesses may stay ahead of emerging illicit activities and fulfill their local compliance obligations.