SEC: Crypto fraudsters raised $300M with “textbook pyramid and Ponzi scheme” - Ars Technica

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The US Securities and Exchange Commission yesterday filed a lawsuit against 11 people accused of creating and promoting a crypto pyramid and Ponzi scheme known as "Forsage." The fraudulent scheme "raised more than $300 million from millions of retail investors worldwide, including in the United States," the SEC's announcement said.

The SEC alleged that "in January 2020, Vladimir Okhotnikov, Jane Doe a/k/a Lola Ferrari, Mikhail Sergeev, and Sergey Maslakov launched Forsage.io, a website that allowed millions of retail investors to enter into transactions via smart contracts that operated on the Ethereum, Tron, and Binance blockchains." Forsage allegedly "operated as a pyramid scheme for more than two years, in which investors earned profits by recruiting others into the scheme." Forsage also "used assets from new investors to pay earlier investors in a typical Ponzi structure," the SEC said.

The SEC filed a complaint in US District Court for the Northern District of Illinois against the four alleged co-founders and seven other people, accusing them of violating the registration and anti-fraud provisions of the federal securities laws. The complaint seeks permanent injunctions, disgorgement, and civil penalties.

The four alleged co-founders are Russian, while the seven other defendants are from the US. Two of the US-based defendants have already agreed to settle the charges. "Fraudsters cannot circumvent the federal securities laws by focusing their schemes on smart contracts and blockchains," said Carolyn Welshhans, acting chief of the SEC's Crypto Assets and Cyber Unit.

"Textbook pyramid and Ponzi scheme"

The SEC complaint described the pyramid scheme as follows:

Forsage is a textbook pyramid and Ponzi scheme. It did not sell or purport to sell any actual, consumable product to bona fide retail customers during the relevant time period and had no apparent source of revenue other than funds received from investors. The primary way for investors to make money from Forsage was to recruit others into the scheme.

To participate, an investor created a crypto-asset wallet and then purchased "slots" in Forsage's smart contracts, which gave the investor the right to earn compensation from others whom the investor recruited into the scheme (the "downlines") and compensation from the larger Forsage community of investors in the form of profit sharing of payments known as "spillovers." When an investor purchased a slot, a portion of that investment was directed to the persons who recruited the investor (the "uplines") and the investor in turn became an upline to whomever the investor recruited. Thus, all payouts to earlier investors were made using funds received from later investors.

Forsage's "website was publicly available to investors in the United States and was unrestricted—that is, it did not require a login or password to access content, including anonymized investor information contained in its 'back office,' the Forsage Academy, the Forsage Community, or the Forsage Customer Care Center," the SEC complaint said.

The website at forsage.io is still accessible. The SEC said it is hosted by Cloudflare and is "on the InterPlanetary File System (IPFS), a peer-to-peer network of cached Internet content designed to preserve information indefinitely."

US defendants called "promoters" and "crusaders"

The US-based defendants include "promoters engaged by the founders to endorse Forsage on its website and social media platforms, and several members of the so-called Crypto Crusaders—the largest promotional group for the scheme that operated in the United States from at least five different states," the SEC said. Cease-and-desist orders were issued to Forsage by authorities in the Philippines and by the Montana Commissioner of Securities and Insurance, but the defendants "continued to promote the scheme while denying the claims in several YouTube videos and by other means," the SEC said.

Okhotnikov is a Russian national believed to reside in Tbilisi, Georgia. "He is one of the co-founders of Forsage and 'the face' of the operation, hosting many of its YouTube videos and appearing in interviews with lead promoters," the SEC complaint said. Okhotnikov and the other three founders all have prior experience participating in multilevel marketing (MLM) projects, the SEC said.

Ferrari's real identity is unknown, but she "holds herself out to the public as 'Lola Ferrari,' [and] is believed to be a Russian national residing in Bali, Indonesia," the SEC alleged. Ferrari is a co-founder and "the self-proclaimed 'goddess' of Forsage, and has appeared in a number of its promotional videos and interviews with lead promoters," the SEC said.

Sergeev has monikers including "Mike Mooney," "Gleb," and "Gleb Million" and is believed to live in Moscow, the complaint said. He allegedly appeared in promotional interviews as Forsage's "development director." Maslakov is believed to reside in Gelendzhik or Moscow, Russia, and "has appeared primarily in Russian-language promotional videos for Forsage," the SEC said.

Two defendants settle, agree to pay penalties

The US-based defendants are Cheri Beth Bowen, of Pelahatchie, Mississippi; Ronald Deering, of Coeur d'Alene, Idaho; Samuel Ellis, of Louisville, Kentucky; Mark Hamlin, of Henrico, Virginia; Carlos Martinez, of Chicago, Illinois; Alisha Shepperd, of Dunedin, Florida; and Sarah Theissen, of Hartford, Wisconsin. The SEC complaint described Ellis, Hamlin, and Theissen as promoters of Forsage. Martinez, Deering, Bowen, and Shepperd were described by the SEC as Forsage's "Crypto Crusaders."

"Without admitting or denying the allegations, two of the defendants, Ellis and Theissen, agreed to settle the charges and to be permanently enjoined from future violations of the charged provisions and certain other activity," the SEC said. "Additionally, Ellis agreed to pay disgorgement and civil penalties, and Theissen will be required to pay disgorgement and civil penalties as determined by the court. Both settlements are subject to court approval."

In another crypto fraud case, the CEO of a purported cryptocurrency investment company in California last month pleaded guilty for his role in a scheme that raised $21 million from investors.