FBI creates bogus crypto to nab 4 companies, 14 people on fraud charges

U.S. prosecutors charged four crypto companies and 14 people on Wednesday.

Boston federal prosecutors charged Gotbit, ZM Quant, CLS Global and MyTrade as well as their leadership and employees, which also involved a few arrests internationally, Reuters reported.

The U.S. Justice Department has cracked down on crypto firms over the past year, including notably against crypto exchange Binance. Wednesday's action marks what prosecutors said is the "first criminal prosecution of financial services firms" related to market manipulation and sham trading in the crypto industry, according to Reuters.

Four defendants agreed to plead guilty and more than $25 million in crypto has been seized, according to a statement released by the U.S. Attorney's Office for the District of Massachusetts.

Prosecutors say defendants created crypto firms, lied about their cryptocurrencies and then carried out wash trades to create the illusion of trading activity so that investors would think the tokens were good investments, thereby increasing the price of the tokens. The defendants then sold their tokens at the artificially set high price, prosecutors added.

The crypto firms also hired market makers "to wash trade their tokens in exchange for payment," prosecutors said. Those market makers allegedly were ZM Quant, Gotbit, CLS Global and MyTrade, according to a statement.

"These are cases where an innovative technology – cryptocurrency – met a century old scheme – the pump and dump. The message today is, if you make false statements to trick investors, that’s fraud. Period. Our Office will aggressively pursue fraud, including in the cryptocurrency industry,” said acting United States Attorney Joshua Levy, in a statement.

The FBI, which was also involved in the investigation, created its own crypto called NexFundAI to find misconduct.

“The FBI took the unprecedented step of creating its very own cryptocurrency token and company to identify, disrupt, and bring these alleged fraudsters to justice," said Jodi Cohen, special agent in charge of the Federal Bureau of Investigation, Boston Division, in a statement.

The U.S. Securities and Exchange Commission brought civil charges against ZM Quant, Gotbit and CLS Global and nine people on Wednesday.

The SEC said Russell Armand, Maxwell Hernandez, Manpreet Singh Kohli, Nam Tran, and Vy Pham were promoters and hired "market makers" ZM Quant and Gotbit to initiate artificial trading volume or manipulate the price of crypto that they were offering to retail investors.

The agency also named ZM Quant's employees, Baijun Ou and Ruiqi Lau, Gotbit's Fedor Kedrov and CLS Global's Andrey Zhorzhes and said they manipulated markets for the promoters by wash trading on "popular crypto asset trading platforms."

“Today’s enforcement actions demonstrate, once more, that retail investors are being victimized by fraudulent activity by institutional actors in the markets for crypto assets,” said Sanjay Wadhwa, deputy director of the SEC’s Division of Enforcement in a statement. “With purported promoters and self-anointed market makers teaming up to target the investing public with false promises of profits in the crypto markets, investors should be mindful that the deck may be stacked against them.”

The SEC's complaints seek permanent injunctions, disgorgements and bars from acting as officers or directors.

Update: Oct. 9, 8:40 p.m. UTC to include details throughout