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Texan charged in first bitcoin securities fraud Ponzi case
November 6, 2014 / 5:35 PM / 3 years ago

Texan charged in first bitcoin securities fraud Ponzi case

A Bitcoin (virtual currency) paper wallet with QR codes and coins in an illustration picture taken at La Maison du Bitcoin in Paris, July 11, 2014. REUTERS/Benoit Tessier

NEW YORK (Reuters) - A Texas man who operated Bitcoin Savings and Trust was charged on Thursday with bilking his investors, in what prosecutors called the first federal criminal securities fraud case arising from a bitcoin-related Ponzi scheme.

Trendon Shavers, 32, of McKinney, Texas, was charged with misappropriating about 146,000 of the 764,000 bitcoin, then worth more than $4.5 million, that he raised from September 2011 to September 2012 by promising investors “absurdly high” interest rates, U.S. Attorney Preet Bharara in Manhattan said.

Bitcoin is a virtual currency that trades on the Internet, without the backing of any government or central bank.

The criminal case follows a Sept. 18 order by a federal judge in Texas that Shavers give up $40.7 million comprising illegal profit, interest and fines in a related U.S. Securities and Exchange Commission civil lawsuit.

Known online as “pirateat40,” Shavers allegedly gained control of as much as 7 percent of the bitcoin market by promising investors up to 7 percent weekly interest, or 3,641 percent annualized, based on his ability to trade the currency, and a promise that money could be withdrawn at any time.

Instead, Shavers allegedly used new bitcoin to repay old investors, add to his account at the now-bankrupt Mt. Gox exchange, and fund expenses that included a used BMW M5 sedan, spa treatments, casino visits and a $1,000 dinner at Gallagher’s Steakhouse in Las Vegas.

About half the investors in Bitcoin Savings and Trust, which was not incorporated and which Shavers ran by himself, lost some or all of their investments, prosecutors said.

“Trendon Shavers managed to combine financial and cyber fraud into a bitcoin Ponzi scheme that offered absurdly high interest payments, and ultimately cheated his investors out of their bitcoin investments,” Bharara said in a statement. “This case, the first of its kind, should serve as a warning to those looking to make a quick buck with unsecured currency.”

Shavers was charged with securities fraud and wire fraud, and faces up to 20 years in prison on each count if convicted.

The defendant was arrested at his home on Thursday morning, and later made an appearance before U.S. Magistrate Judge Amos Mazzant in the northeastern Texas city of Sherman near the Oklahoma border. Shavers is expected to appear on Nov. 14 in federal court in Manhattan after his case is transferred.

A lawyer for Shavers could not immediately be reached. Shavers did not immediately respond to an email request for comment. His ability to pay the SEC judgment was unclear.

The cases are U.S. v. Shavers, U.S. District Court, Southern District of New York, No. 14-mag-02465, and U.S. District Court, Eastern District of Texas, No. 14-mj-00355; and SEC v. Shavers et al, U.S. District Court, Eastern District of Texas, No. 13-00416.

Reporting by Jonathan Stempel in New York; Editing by Leslie Adler and Jonathan Oatis

Our Standards:The Thomson Reuters Trust Principles.
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