Nov. 6 (Bloomberg) -- Trendon Shavers, founder of Bitcoin Savings and Trust, was charged with fraud and accused of masterminding a $4.5 million Ponzi scheme, according to federal prosecutors in Manhattan who said it was the first U.S. securities-fraud prosecution tied to the electronic currency.
Shavers, 32, who operated the firm that made virtual currency-based investments through the Internet, raised at least 764,000 bitcoins through his business, Manhattan U.S. Attorney Preet Bharara said in a statement. At the peak of the scheme, Shavers raised and had in his possession about 7 percent of all the bitcoins in public circulation, Bharara said.
From September 2011 through September 2012, Shavers, using the name “pirateat40,” solicited investments in Bitcoin Savings on Bitcoin Forum, an Internet site where investment opportunities are posted, the U.S. alleged.
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“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 allegedly offered investors who lent bitcoins to Bitcoin Savings as much as 7 percent interest weekly -- an annualized interest rate of 3,641 percent per year-- and investors were told they could withdraw their investments at any time, according to the U.S.
Strategy Claim
He also claimed the investment by Bitcoin Trust would be used to support a market-arbitrage strategy that included lending bitcoins, trading bitcoins using online exchanges and selling bitcoins locally via private off-markets transactions, according to the U.S.
Shavers in truth “largely failed” to execute the claimed market arbitrage strategy and failed to deliver the agreed upon rates of interest, according to prosecutors. He used bitcoins from new investors to make purported interest payments to existing investors and cover investors’ requests to withdraw bitcoins from existing accounts at Bitcoin Savings, Bharara said.
He’s also accused of diverting investor funds for day trading in his own account on a bitcoin currency exchange and exchanging investors’ bitcoins for U.S. dollars to pay personal expenses including Law Vegas casino visits, restaurant meals, gasoline, groceries, spa treatments and a 2007 BMW M5 automobile.
$1,000 Meal
On July 30, 2012, Shavers transferred about $7,500 from his Mt. Gox bitcoin account to another account he controlled, later withdrawing about $6,000 from a Las Vegas hotel ATM and spending $1,000 on a steakhouse dinner that night, prosecutors said.
Shavers was arrested this morning at his home in Texas by agents with the Federal Bureau of Investigation. He’s charged with securities and wire fraud, which both carry maximum prison sentences of 20 years. He will make his first appearance in federal court in Texas, the U.S. said.
In September, in a separate action brought by the U.S. Securities and Exchange Commission in Texas, Shavers and Bitcoin Savings were fined $40.6 million and he was barred from further illegal trading of the virtual currency.
The suit was the first to determine whether the SEC has the authority to regulate transactions in virtual currency. The U.S. Attorney’s Office said Shavers will be represented by one court- appointed lawyer in Texas and another in New York when he appears in court next week.
The cases are U.S. v. Shavers, 14-mj-00355, U.S. District Court, Southern District of New York (Manhattan), and U.S. Securities and Exchange Commission v. Shavers, 13-cv-00416, U.S. District Court, Eastern District of Texas (Sherman).
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