Michelle Singletary: Six signs crypto investing is a classic Ponzi scheme

The recent cryptocurrency crash will not deter investors looking to get rich quick in a new technology they barely understand. Nor will it stop the many crypto scammers who understand the psychology behind the bitcoin bubble, the mindset that leads investors to deliberately ignore blood red flags that warn they are being scammed.

Criminal activity surrounding cryptocurrency is a growing concern for law enforcement. The FBI has formed a new specialized team – the Virtual Asset Exploitation Unit – dedicated to cryptocurrency crimes. The Securities and Exchange Commission has announced that it is nearly doubling the number of staff in its unit responsible for protecting investors in the crypto markets.

Thousands of investors are tricked into investing in cryptocurrency fraud schemes. Scams range from fake cryptocurrencies to people who lost money thinking they would take advantage of crypto mining companies.

“New financial frontiers may also create new opportunities for old-fashioned fraud,” said Damian Williams, U.S. Attorney for the Southern District of New York, after announcing charges against a New York man accused of falsely told investors that he bought a specialized cryptocurrency. mining computers.

I am a student of scams. I wrote about them in my column and discovered an illegal scheme that led to state authorities shutting it down.

I frequently read criminal complaints looking for the answer to what we born skeptics ask: how do scammers make their scams believe?

Even after exposing a fraud, victims blamed me for reporting the scam.

It is not enough to tell potential victims, “If it sounds too good to be true, it probably is.”

Victims clearly find the scams believable. So: What is the recipe for trickery?

To find that answer, it helps to dissect the deception.

Let’s look at the case involving another New Yorker, Eddy Alexandre, who was arrested and charged this month with running a Ponzi-style cryptocurrency and currency trading scheme that raised $59 million from of investors.

A Department of Justice complaint alleges that Alexander’s platform, EminiFX, invested relatively little of the victims’ money in crypto or currency trading. Instead, money raised from investors was used to fund his lavish lifestyle, including the purchase of a $155,000 BMW.

Alexander primarily traded individual stocks, investing about $9 million in public funds and losing more than $6.2 million, according to the Commodity Futures Trading Commission, or FTC, which filed a civil lawsuit against Alexander and EminiFX.

Alexander is also charged with commodity and wire fraud. He pleaded not guilty, according to the Justice Department.

The attorney representing Alexander did not respond to requests for comment.

The charges against Alexander, like so many other similar cases, can be instructive on what not to do. So here are six signs of a classic Ponzi scheme.

Sign #1: Promise returns which seems plausible. Many people will no doubt remember that Bernie Madoff, the mastermind of one of Wall Street’s biggest Ponzi schemes, always paid an annual return of around 12%, which seemed reasonable at the time.

That should have warned people. Market returns are unpredictable.

In the EminiFX complaint, the CFTC said the company promised potential participants that they would receive guaranteed returns of at least 5% “every week.”

A photo, obtained by the FBI, showed a whiteboard in EminiFX’s office that read: “Never less than 5%, never more than 9.98%!!!”

“This statement appears to indicate that the ‘weekly profit’ was not based on actual investment returns but was fictitious,” according to the FBI. “You couldn’t predict the returns to be in a narrow range.”

If you are presented with a money-making opportunity promising easy income or extraordinarily consistent returns on investment, I can assure you that it is likely a scam.

Panel n° 2: Ostentatious display of the wealth of the promoters. Scammers want you to want what they have. They must look like they have money. They wear expensive clothes or drive luxury vehicles.

They throw parties and have regular conference calls to brag about their wealth.

Want to know what a millionaire looks like? Read “The Millionaire Next Door.”

Ordinary millionaires do not need to prove their net worth, unlike scam artists.

Sign #3: Proprietary secrets prevent full disclosure. Madoff was secretive about how he got returns for his investors.

On its website, EminiFX states that investors have obtained relatively high returns through automated cryptocurrency investments and currency trading.

But when asked to explain the technology behind the business model, the FBI alleges Alexander told investors it was a “trade secret.”

When it comes to investing, full – verifiable – disclosure is your safety net.

Sign #4: Recruitment is key. A successful Ponzi scheme needs fresh money. Who better to build trust in their program than people investors know personally?

Sign #5: Participants brag about their winnings. What keeps a Ponzi scheme going is people bragging about the money they’ve made.

I found several videos on YouTube of individuals sharing how they made money with EminiFX.

One thing stood out. They didn’t talk about how the money was made.

They just bragged about their returns.

Sign #6: Cashing in becomes difficult. At some point, the Ponzi scheme collapses or law enforcement shuts it down.

To protect what may be left of investors’ money, EminiFX has gone into receivership.

So far, about 1,000 investors have contacted Raines Feldman, the law firm handling the receivership, according to David A. Castleman, who has been appointed temporary receiver for EminiFX.

Castleman said investors should not continue to use the EminiFX online platform, but instead email [email protected] and include the name on their account, an email address, a mobile phone number and the amount they have invested.

But some investors will find it difficult to convince. “As soon as we start accumulating wealth and raising our voices, that’s when adversaries attack us,” one YouTube user wrote in the comments section of a video about EminiFX’s shutdown. .

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