Trenton Shavers’ Bitcoin Ponzi scheme lands him with $40 million fine from federal judge in Texas

In total contrast to last year’s series of Bitcoin-related woes which included the seizure of anonymous marketplace Silk Road and the demise of the world’s largest Bitcoin exchange MtGox, this year has been a period of advancement for virtual currency in which Bitcoin has propelled itself into the mainstream and garnered regulatory, commercial and societal support.

With this widespread acceptance in technologically advanced major financial regions such as North America, Britain and Switzerland comes the added effect of companies which operate within the Bitcoin scope now being subject to the same rules and regulations as other financial technology companies, brokerages and exchanges.

This week, a US federal court has finalized its latest action against one of the first high profile miscreants of the Bitcoin industry, Trenton Shavers, the infamous perpetrator of the fraudulent Ponzi scheme which operated under the name of Bitcoin Savings and Trust (BTCST), in that he is now liable for a $40 million fine as a result of a ruling on Thursday this week by a Texas federal judge who ordered Bitcoin Savings & Trust and its founder to pay the amount in disgorgement and penalties, ruling that the U.S. Securities and Exchange Commission showed they jointly defrauded investors by running a Ponzi scheme involving the Bitcoin virtual currency.

U.S. Magistrate Judge Amos L. Mazzant found that BTCST and founder Trendon T. Shavers violated federal securities laws by selling bitcoin-denominated investments through the Internet, while using Bitcoin from new investors to make purported interest payments on outstanding investments.

Although brought by the SEC which usually administers civil court proceedings against transgressors of financial services rulings in the United States, this particular case saw Mr. Shavers subjected to criminal prosecution after he perpetrated the scheme from mid 2011 until August 2012 when the scheme disintegrated.

Having been brought to book by the SEC for falsely promising investors up to 7% interest weekly based on BTCST’s purported BTC market arbitrage activity, including selling BTC to individuals who wished to buy BTC “off the radar,” quickly, or in large quantities, Mr. Shavers now faces a substantial and somewhat eye-watering $40 million fiscal penalty along with criminal prosecutions.

The SEC has deduced that in reality, the BTCST offering was a sham and a Ponzi scheme whereby Mr. Shavers used new BTCST investors’ BTC to pay the promised returns on outstanding BTCST investments and misappropriated BTCST investors’ BTC for his personal use.

In these circumstances, the SEC holds Mr. Shavers and BTCST jointly responsible, meaning that Mr. Shavers will bear the brunt of the prosecutions on a personal as well as a corporate level.

The chain of events which surround this matter began or about November 3, 2011, when Mr. Shavers, under the Internet name pirateat40, posted a general solicitation for BTCST, entitled “Looking for Lenders,” on the Bitcoin Forum, an online forum dedicated to BTC where, among other things, numerous BTC-denominated investment opportunities were posted. The solicitation stated that a minimum of 50 BTC was required to invest.

In the November 3, 2011 solicitation on the Bitcoin Forum, Mr. Shavers wrote that he was in the business of “selling BTC to a group of local people” and offered investors up to 1% interest daily “until either you withdraw the funds or my local dealings dry up and I can no longer be profitable.”

On or about November 11, 2011, when asked by another participant on the Bitcoin Forum how he was able to make such high profits, Shavers replied: “Groups of people that want to be off the radar, buy large quantities, and instant availability. I would say it’s the Hard Money sector of Bitcoin.”

Two days later, in a post on the Bitcoin Forum, Mr. Shavers wrote: “Hey all, I have some big orders coming in this week. I just wanted to thank all of my investors as I’m able to fulfill them without the risk of them going elsewhere. Still looking for about 1,000 total in lenders based on negotiations with my buyers in the coming weeks. It’s growing, it’s growing!”

The following week, on November 22, 2011, in a post on the Bitcoin Forum, Mr. Shavers wrote: “As with any movements in the market up or down I have enough order activity going on that my risk is very limited. In most cases the coins go uncovered less than a few hours, I have yet to come close to taking a loss on any deal. With that said, in the event there was a huge change in the market and I needed to personally cover the difference I am more than willing to do so’ following that up with a post on the Bitcoin Forum, in which Mr. Shavers wrote: “My clients deal in cash only and I don’t move a single coin until the cash is in hand.”

This attracted substantial investment and Mr. Shavers continued to post on forums promising high returns and soliciting for investment until the entire scheme collapsed in August 2012 with Mr. Shavers having misappropriated substantial sums of client money for his own use, amounting to $147,102.

At the time, Bitcoin was a relatively new and unknown phenomenon, it was not exposed to media coverage which only gained worldwide interest last year, and was far from the regulatory authorities’ agendas for two reasons, the first being apathy as they considered that it would be impossible to regulate a peer-to-peer, home mined virtual currency with no sovereign state or central issuer, and the other being the notion that it was something of a cottage industry and therefore very unlikely to gain any significance, a perspective that has proved not to be the case at all, resulting in free market economies welcoming it as an asset class around which all activity can be regulated, and nations without a free market economy doing their utmost to put a stop to its use, often to no avail.

Despite this ambiguity, a judge presiding over a federal court in Texas, Mr. Shavers’ home territory, stated two years ago that he considered Bitcoin activity to fall under US law, and therefore courts have full powers to prosecute perpetrators of illicit activity. Now, with regional regulators in New York forming Bitcoin specific laws, and Switzerland’s FINMA granting SBEX Bitcoin exchange a license, the rules are somewhat clearer.

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