A Tip From the SEC Led Federal Prosecutors to Set Up a Fake Company to Bust Crypto Market Manipulators

The firms are charged with "wash trading," artificially increasing trade volume to boost token prices. The case marks the first such charges against crypto firms, prosecutors say.

Federal prosecutors used a sting operation involving a fake crypto company to uncover and bust four firms engaging in market manipulation tactics.

The firms, along with over 15 individuals, were charged in separate schemes to boost token values through artificial trades, a practice known as "wash trading."

Prosecutors touted the first-of-its-kind charges in the crypto industry, highlighting the prevalence of illicit activities in the largely unregulated market.

Federal prosecutors in Boston pulled out all the stops to catch crypto firms engaging in market manipulation, setting up a fake crypto company to investigate a Boston-based firm.

The sting operation, which began with a tip from the SEC, ultimately led to the seizure of over $25 million in crypto and the deactivation of around 60 cryptocurrencies, according to a press release from the Boston federal prosecutors on Thursday.

Four firms and over 15 individuals were charged in separate schemes to boost token values, according to the прокуратура. The charges include conspiracy to commit wire fraud, wire fraud, conspiracy to manipulate cryptocurrency markets, and cryptocurrency market manipulation.

These are the first-ever wash trading charges in the crypto industry, prosecutors said.

Wash trading is a market manipulation tactic that involves moving assets quickly between accounts controlled by the same firm to create the appearance of higher trading volume and boost the asset's value.

The practice is typically used to inflate the price of an asset, making it more appealing to investors and driving up the demand.

The sting operation was launched after the SEC tipped off the FBI to potential market manipulation by a Boston-based crypto firm called Saitama, which boasted a multi-billion dollar market value at one point, according to the press release.

The tip prompted prosecutors to launch a fake crypto firm called NexFundAI and create a fake token. Over the monthslong operation, the FBI witnessed three market makers wash trade tokens for crypto clients, offering to manipulate the price of NexFundAI's token via video calls and Telegram chats.

The sting charged ZM Quant, CLS Global, and MyTrade with wash trading related to their communications with NexFundAI. A fourth firm, Gotbit, was not involved with NexFundAI but was charged in a similar scheme. The sting also charged 15 individuals, including six people associated with Saitama.

"The defendants' alleged cryptocurrency trading scheme bilked honest investors out of millions of dollars," Special Agent in Charge of the FBI's Boston Division Jodi Cohen said in a statement.

Prosecutors said those charges mark the first of their kind in the crypto industry, even as the practice of wash trading has been outlawed and strictly enforced in other financial markets.

"Cryptocurrency is no exception. 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," Acting United States Attorney Joshua Levy said in a statement released Wednesday.

The charges come as crypto-related scams are on the rise. The FBI's 2023 internet crime report showed that crypto fraud cost investors nearly $4 billion last year. One type of scam, called "pig butchering," has stolen at least $75.3 billion in crypto in recent years, according to one study.

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