The following opinion editorial was written by Alex Forehand and Michael Handelsman for Kelman.Law.
In a sting operation emblematic of a John Grisham novel, the SEC charged ZM Quant Investment Ltd.—a British Virgin Islands entity—with manipulating markets and offering unregistered securities. Acting as a self-proclaimed market maker, ZM Quant used wash trading and other deceptive practices to artificially inflate the price and trading volume of its clients’ tokens. ZM Quant’s manipulative strategies included self-trading and high-frequency tactics, or “wash trading,” to create artificial market interest and significant market distortions.
Notably, ZM Quant was implicated in an undercover operation involving NexFundAI, a fictitious crypto project created by the FBI. During the sting, ZM Quant agreed to generate artificial trading volume to boost the token’s appeal, unaware it was part of an active federal investigation.
Similar schemes were uncovered involving other tokens such as Saitama Inu and SaitaRealty, where ZM Quant’s manipulative trading practices led to extreme, unsustainable spikes in trading volume. In the case of SaitaReality, the SEC noted that “[w]ithin 24 hours, the trading volume increased from de minimis levels to quadrillions of individual trades and billions of dollars in daily volume. As a result of ZM Quant’s manipulative trading, SaitaRealty saw a 412,000,000,000 percent increase in transaction quantity.”
The SEC’s complaint underscores the ongoing threat posed by such deceptive market practices and seeks permanent injunctions to prevent further investor harm. To read the full complaint, see here.
Gotbit Consulting LLC, a Belize-based entity also known as Gotbit Hedge Fund, recently came under SEC fire for orchestrating a market manipulation scheme involving the crypto asset “Robo Inu.” The SEC alleges that Gotbit, a self-proclaimed market maker, created a deceptive trading environment for Robo Inu, aiming to lure retail investors into buying the token by fabricating the illusion of a vibrant market.
According to the SEC’s complaint, crypto promoter Vy Pham enlisted Gotbit for what can be described as “market manipulation-as-a-service.” Gotbit allegedly used wash trading to inflate the trading volume of Robo Inu, making it appear far more popular than it was. The scheme, powered by trading algorithms and bots, at times generated over $1 million in fake trading volume per day, misleading investors into believing in the asset’s legitimacy and market demand. As evidence of Gotbit’s bad faith, the SEC noted that “[i]n pitching their market-manipulation services to potential clients, Gotbit employees touted their ability to pump a token’s price and volume and explained how much token offerors stood to profit from this market manipulation.” To read the full complaint, see here.
The SEC separately filed fraud charges against four individuals accused of manipulating the markets for two crypto assets, “Saitama Inu” and “SaitaRealty,” which were marketed as securities to retail investors. According to the SEC, the defendants engineered schemes to deceive investors into buying these tokens by making various misrepresentations and creating a fake impression of active trading.
The SEC’s complaint alleges the promoters used the Saitama website, whitepapers, and social media to make misleading claims about building a “Saitama ecosystem” with various products, including smart wallet apps and trading platforms, to drive up the value of Saitama Inu. The defendants are also accused of falsely encouraging investors to buy and hold the asset while secretly selling large amounts of it themselves. Finally, the defendants allegedly engaged in intentional market manipulation by hiring firms ZM Quant Investment Ltd. and Gotbit Consulting LLC to provide “market manipulation as a service,” whereby the market makers would inflate trading volume and manipulate the prices of Saitama Inu and SaitaRealty in unregistered transactions. To read the full complaint, see here.
As part of the FBI’s “NexFundAI” sting, the SEC charged CLS Global FZC LLC, a UAE-based firm claiming to be a crypto market maker, along with its employee Andrey Zhorzhes, for alleged market manipulation. The SEC alleges the scheme was designed to swindle investors into buying NexFundAI through the illusion of a bustling market.
According to the complaint, the promoters behind NexFundAI allegedly hired CLS Global to deliver “market manipulation as a service,” which involved inflating trading volume to deceive retail investors. The SEC claims that CLS Global and Zhorzhes conducted trades that had no real economic value, using algorithms and bots to create artificial activity and mislead the public about the asset’s true market interest. To read the full complaint, see here.
The SEC has charged California resident Vy Pham with fraud for allegedly manipulating the markets for “Saitama Inu” and “Robo Inu”—two crypto assets that were sold as securities to retail investors. The SEC claims Pham’s deceptive schemes aimed to mislead investors by creating a false impression of active trading to drive up interest and investment in these tokens.
The SEC’s complaint alleges that Pham personally orchestrated market manipulation for Saitama Inu by coordinating trades with other promoters in an effort to falsely signal growing demand for the asset. For Robo Inu, Pham allegedly hired Gotbit Consulting LLC, a self-proclaimed market maker, to carry out “market manipulation as a service.” This service included generating artificial trading volume and manipulating prices to give the appearance of a thriving market, thereby misleading retail investors who bought the asset in unregistered transactions. To read the full complaint, see here.
The SEC charged Chicago-based Cumberland DRW LLC for operating as an unregistered dealer, trading over $2 billion in crypto assets sold as securities in violation of federal securities laws. The SEC’s complaint alleges that since at least March 2018, Cumberland has regularly bought and sold crypto assets classified as securities for its own accounts, without the required registration. The firm, which brands itself as “one of the world’s leading liquidity providers” in crypto, conducts 24/7 trading through its phone network and online platform, Marea. The SEC also claims that Cumberland actively trades crypto assets deemed “investment contracts” on various third-party exchanges as part of its ongoing business activities. To read the full complaint, see here.
The federal court for the Central District of California recently imposed final judgments against Rari Capital, Inc. and its co-founders Jai Bhavnani, Jack Lipstone, and David Lucid for violating federal securities laws.
The SEC’s complaint alleged that Rari Capital’s Earn and Fuse pools operated as unregistered crypto investment funds by offering investors a chance to earn returns on deposited crypto assets while failing to disclose key risks and issues with their management—two crucial disclosures mandated by federal securities laws.
In addition, the SEC accused Rari Capital and its founders of deceiving investors by falsely promoting an “automated” rebalancing feature in the Earn pools, despite often requiring manual intervention and failing to deliver the promised returns on a consistent basis. Furthermore, the defendants allegedly exaggerated yield rates without accounting for hidden fees, leading to significant investor losses. The complaint further alleged that Rari Capital acted as an unregistered broker in operating the Fuse platform.
The court imposed a total of over $150,000 in monetary penalties, barred the co-founders from serving as officers or directors of public companies for five years, and ordered injunctive relief to prevent future violations. Without admitting or denying the SEC’s claims, Bhavnani, Lipstone, and Lucid agreed to the final judgments. Rari Capital also consented to a permanent injunction against future securities law violations. To read more about the judgments, see here.
This article originally appeared on the Kelman.Law website.
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