By: Eric Mulvey
On February 25th, Satishkumar Kurjibhai Kumbhani, the founder of BitConnect, was indicted by a federal grand jury in California for his alleged role in a $2 billion cryptocurrency Ponzi scheme. Kumbhani is alleged to have created a Ponzi scheme by soliciting bitcoins from investors who were wrongly told that their funds would be pooled and used to earn daily returns.
Founded in the United Kingdom in 2016, BitConnect created a digital currency called BitConnect Coin that could be exchanged for bitcoin. BitConnect also created a lending program that promised investors substantial profits and guaranteed returns by using investors’ money to trade on the volatility of cryptocurrency exchange markets. Kumbhani claimed that BitConnect had proprietary technology, known as the BitConnect Trading Bot and Volatility Software, that was able to guarantee high returns. However, early investors in BitConnect were simply paid money from later investors, while Kumbhani and co-conspirators used the funds for personal benefits. In total, it is alleged that Kumbhani and co-conspirators stole around $2.4 billion from investors.
This scheme was abruptly ended by Kumbhani after about a year and, subsequently, Kumbhani began trying to artificially inflate the price of BitConnect Coin. Allegedly, his goal was to create the false appearance that there was legitimate market demand for BitConnect Coin. In order to do so, Kumbhani never registered BitConnect with the Financial Crimes Enforcement Network (“FinCEN”), the United States regulatory agency in charge of analyzing financial transactions to combat domestic and international money laundering and other financial crimes. Under the Bank Secrecy Act, all money transmitting businesses are required to register with FinCEN and therefore, BitConnect was required to register due to operating a money transmission business through its digital currency.
Kumbhani has been charged with conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodity price manipulation, operation of an unlicensed money transmitting business, and conspiracy to commit international money laundering. If convicted of all charges, he faces up to 70 years in prison and up to $1.2 million in fines.
Wire fraud is defined as devising or intending to devise a scheme to defraud or obtain money or property by fraudulent pretenses using some form of telecommunications or the internet. In the case at hand, it appears there is ample evidence of Kumbhani and his co-conspirators using different forms of communication to defraud investors in their cryptocurrency lending program.
Commodity price manipulation makes it unlawful for any person, directly or indirectly, to use or employ, in a contract of sale of any commodity, any manipulative or deceptive device, in contravention of such rules and regulations and shall require any person to disclose to another person nonpublic information that may be material to the market price, rate, or level of the commodity transaction. By allegedly artificially inflating the price of BitConnect Coin, Kumbhani appears to have violated this statute through his manipulation of price.
International money laundering is defined as whoever transports, transmits, or transfers a monetary instrument or funds with the intent to promote the carrying on of specified unlawful activity. Since BitConnect was operating globally when allegedly running a Ponzi scheme, it appears that there is strong evidence that supports a finding of international money laundering.
This is not BitConnect’s first run-in with the law. In January 2018, the Texas State Securities Board issued an emergency stoppage of certain BitConnect operations after discovering that BitConnet’s offerings were promising investors unrealistic returns. In addition, BitConnect was sued by investors in the same month alleging that BitConnect cheated thousands of investors out of millions of dollars. This lawsuit resulted in the issuance of a temporary restraining order against BitConnect to prevent the company from trying to hide money that was generated from the scheme.
With the evidence stacked against Kumbhani and co-conspirators, it appears that they will most likely be found guilty of many, if not all of the charges. However, Kumbhani has fled from authorities and his current whereabouts are unknown. Kumbhani was last seen in India in October, but since then has been hiding in an unknown location. Kumbhani has yet to appear in court or hire counsel to represent him in the action, and authorities are unable to state when, or even if, they will be able to locate him.
Student Bio: Eric Mulvey is a second-year law student at Suffolk University Law School. He is a staffer on the Journal of High Technology Law. Eric received a Bachelor of Arts Degree in Economics from Union College.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
