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More prosecutions for crypto-asset investment fraud.

Author: 
Nigel Morris-Cotterill

Jeremy David McAlpine, 25, of Fountain Valley, and Zachary Michael Matar, 28, of Huntington Beach, are each charged in a one-count information with securities fraud in a prosecution brought by the US Department of Justice. They have agreed to plead guilty to the charge, according to plea agreements lodged with the Court but have not yet actually done so. The defendants are expected to plead guilty in United States District Court in the coming weeks, says the DoJ.

The case is also investigated by the USA's Securities and Exchange Commission. The two men have "agreed to permanent injunctions barring further fraudulent conduct and prohibiting them from directly or indirectly participating in the offer, purchase, or sale of digital securities, with [surrender of gains], pre-judgment interest, and civil penalties to be determined by the court."

It is this that explains why there has not been a formal plea: the defendants, it seems, want to assure both the SEC and prosecutors that they are being co-operative but at the same time want to preserve some negotiating position relating to the amounts they will have to pay and to which agency.

It will not be small. The papers released by the Department of Justice indicate a level of awareness that what they were doing was not entirely above board, or worse.

According to court documents, in 2017, McAlpine and Matar founded Dropil Inc., a Belize-based company operating out of Fountain Valley. Dropil provided and managed investments in digital assets such as cryptocurrency. The defendants primarily were responsible for the development of Dropil’s digital asset, called DROP tokens, as well as its digital asset trading program, an automated trading bot called “Dex.” Purchasers of DROPs had access to Dex, which could only be used with DROP tokens. [None of] McAlpine, Matar nor Dropil was registered with the Securities and Exchange Commission (SEC) as a broker or dealer.

McAlpine and Matar induced investors to purchase DROPs by making false claims about the functionality and profitability of Dex, which was said to provide an “expertly managed portfolio balancing algorithm [that] manages risk,” according to information published on Dropil’s website. The DROP tokens were said to “ensure privacy while also offering added value and exclusivity.” Dropil further promised that Dex’s trading would generate profits that would be distributed as additional DROP tokens every 15 days.

Beginning in late 2017, McAlpine and Matar began an unregistered offer and sale of DROPS on Dropil’s website. In January 2018, the defendants launched an initial coin offering (ICO) for the sale of DROPs, again through Dropil’s website, which continued through March 2017. To induce investors to purchase DROPs, McAlpine and Matar made a series of false statements to investors in a “White Paper” published on Dropil’s website and on its Twitter account, promoting the cryptocurrency’s supposed success.

The defendants also manufactured fake Dex profitability reports and made payments in the form of DROPs to Dex users, giving the false appearance that Dex was operational and profitable. McAlpine and Matar also made false statements about the volume and dollar amount of DROPs sold both during and after the ICO, stating Dropil had successfully raised USD54 million from 34,000 investors both foreign and domestic. In fact, the ICO raised less than USD1.9 million from fewer than 2,500 investors.

In total, the defendants obtained approximately USD1,896,657 from 2,472 investors through the sale of approximately 629 million DROPs. But McAlpine and Matar did not use at least USD1.6 million of the invested money as promised, using it instead to fund disbursements to themselves and their associates.

As 2017 saw a rush of Initial Coin Offerings and the issue of a large number of tokens, it is highly likely that more cases will come up soon.

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