SEC and DOJ Charge Founder and Promoters of “HyperFund” with $1.7 Billion Crypto Pyramid and Ponzi Scheme - JD Supra

The Securities and Exchange Commission brought charges against Xue Samuel Lee, the co-founder of HyperFund, and Brenda Indah Chunga, also known as "Bitcoin Beautee," the fund's top promoter, for securities violations.[1]  Additionally, the United States Attorney's Office for the District of Maryland brought criminal charges against Lee for allegedly co-founding the fund,[2] and conspiracy charges against Chunga and Rodney Burton, a/k/a "Bitcoin Rodney,"[3] for their roles as alleged promoters of the fund.[4]  These three individuals face a maximum penalty of up to five years in prison.  The SEC alleges that for almost two years, from January 2020 until November 2022, Lee conducted a $1.7 billion Ponzi and pyramid scheme on a global scale. 

Lee initially launched HyperCapital in January 2022 as a decentralized finance ecosystem, only to relaunch it six months later as HyperFund.  This would become a pattern throughout the life of the fund, as it went through several iterations before its collapse in November 2022.  At the time of its collapse, the fund was called "HyperNation."

The initial success of HyperFund was based on several misrepresentations, including Lee's credibility and connection with prominent companies, and false promises of listing the fund on Hong Kong's stock exchange by 2022.

The government alleges that HyperFund was a Ponzi scheme because investors who purchased memberships were promised daily returns of 0.5% to 1.0% of the value of their investment until they earned triple the value of their investment.  Memberships ranged from $300 to $10,000, and could be purchased using the crypto asset Tether.  Members were promised "pure profit[s]" without working for them.  Lee and Chunga misrepresented to members that the fund was making money through bitcoin mining activity when, in fact,  there was no mining. According to the SEC and the DOJ, there was no real source of revenue other than the funds received from investors.

The SEC further alleges that HyperFund was a pyramid scheme because it rewarded promoters who recruited new investors with the promise of earning rewards.  The more investors a promotor recruited, the higher the monetary reward he received.  HyperFund provided three levels of rewards for promoters: Community Rewards, VIP Rewards, and Global Rewards, with Global Rewards being the highest level a promotor could achieve.  Chunga was a Global Rewards promoter, earning approximately $3.7 million during the life of the fund. 

The SEC brought charges against both Lee and Chunga for violation of the Securities Act of 1933 for an unregistered offering of securities.  The Commission also asserted claims of the antifraud provisions of both the Securities Act and the Securities and Exchange Act of 1934.  The SEC is also seeking a permanent injunction and disgorgement of ill-gotten gains. Chunga consented to a permanent injunction and to pay disgorgement and penalties in an amount to be determined by the Court.  Lee, however, is litigating.

In the parallel criminal proceeding, Chunga pleaded guilty to conspiracy to commit securities fraud and wire fraud.  At the sentencing hearing scheduled for May 1, she will be ordered to pay restitution to investors and sentenced to imprisonment of up to five years, though she may get a lesser sentence for having pleaded guilty.   Lee has entered a plea of not guilty.  At a detention hearing, Burton was ordered to be detained. 

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[1] Sec. and Exch. Comm'n v. Lee, et al., 1:24-cv-00296-RDB (D. Md. Jan. 29, 2024); SEC.gov | SEC Charges Founder of $1.7 Billion "HyperFund" Crypto Pyramid Scheme and Top Promoter with Fraud

[2] United States v. Lee, Docket No.: 24-CR-21 (D. Md. Jan. 25, 2024) (Lee is charged with one count of conspiracy to commit securities fraud and wire fraud.).

[3] United States v. Burton, Docket No.: 23-MJ-03185-CDA (D. Md. Jan. 8, 2024) (Burton is charged by criminal complaint with one count of conspiracy to operate an unlicensed money-transmitting business and one count of operating an unlicensed money-transmitting business. He also faces a maximum penalty of five years in prison on each count.).

[4] Justice.gov | Three Individuals Charged In $1.89 Billion Cryptocurrency Fraud Scheme.