FBI Launches Undercover Token in Sting Operation Entrapping Market Makers
The FBI recently launched and sold a cryptocurrency token with the explicit intent to entrap market makers—a move that’s as troubling as it is hypocritical. This conduct has prompted lawyers to begin preparing lawsuits against both the FBI and SEC for their bad-faith actions and their role in misleading investors into a project that lacked any real value. Ironically, the government is now engaging in the practices they’ve spent the past four years dismantling the crypto industry for the unregistered sale of securities. It’s challenging to comprehend the rationale behind these actions, which contradict the principles they claim to uphold.
In this mind-blowing enforcement action, the SEC charged three firms—ZM Quant, Gotbit, and CLS Global—and nine individuals with market manipulation in the crypto space. The SEC alleges that these firms offered “market-manipulation-as-a-service” by creating fake trading volumes, deceiving investors into thinking there was high demand for certain crypto assets, which were then sold as unregistered securities.
The Players and the Scheme
The key figures in the case are promoters Russell Armand, Maxwell Hernandez, Manpreet Singh Kohli, Nam Tran, and Vy Pham, who allegedly hired ZM Quant and Gotbit to execute their manipulative schemes. Employees of these firms, such as Baijun Ou, Ruiqi Lau, and Fedor Kedrov, reportedly engaged in “wash trading” to inflate prices artificially. Wash trading is when the Company trades with itself to create the illusion of high volume and activity on a coin or exchange, it’s a very common practice in the crypto industry. The government accuses the defendants of misleading investors into believing that certain assets were popular, pushing prices up artificially, and profiting when unsuspecting investors bought in.
According to the SEC’s Crypto Asset and Cyber Unit (CACU), “The wrongdoers behind these schemes are profiting handsomely at the expense of investors.” . The SEC is seeking permanent injunctions, civil penalties, disgorgement of allegedly ill-gotten gains, and barring certain individuals from serving as officers or directors in the future.
The SEC’s continued Bad-Faith Regulation of the Crypto Industry
The SEC’s pursuit of this case follows a string of recent actions targeting the crypto space. In the past 3 months alone, the SEC has sued 12 other crypto companies in what can only be defined as regulation by enforcement. The SEC refuses to set clear guidance for the industry and has itself been found to have acted in bad faith in the Debt Box case where it presented false evidence. The judge said the SEC engaged in a “gross abuse” of power and fined the regulator $1.8 million.
Setting aside our disdain for the current administration’s lawfare against our industry, wash trading is a particularly concerning issue in crypto because it’s relatively easy to execute with automated trading algorithms or bots. As the SEC noted, these bots generated billions of dollars in artificial trading volume, which can mislead investors. For investors, this case, despite the strange FBI intervention, underscores the risks inherent in crypto markets and the need for due diligence before making investment decisions.
This crackdown not only seeks to hold the perpetrators accountable but also sends a message to the crypto industry: market manipulation will not be tolerated, and the SEC is willing to partner with other federal agencies and go to any length to address it.
