(Bloomberg) — A Bitcoin Ponzi scheme amounted to securities fraud that can be challenged by federal regulators, a judge ruled as he fined a Texas man $40.6 million and blocked him from further illegal trading of the virtual currency.
The case was the first to determine whether the U.S. Securities and Exchange Commission, which filed the lawsuit, has the authority to regulate transactions in virtual currency, according to a lawyer for the defendant, Trendon Shavers. U.S. Magistrate Judge Amos L. Mazzant in Sherman, Texas, agreed with theSECthat Bitcoin Savings and Trust, operated by Shavers from his home in McKinney, Texas, was a Ponzi scheme.
Is the Buyside Ready for Bitcoin?
Prosecutors have pursued other high-profile Bitcoin cases, including one against ex-Bitcoin Foundation vice chairman Charlie Shrem, who this month plead guilty to charges tied to the Silk Road illicit online bazaar. Shrem admitted to working with another man who operated an underground Bitcoin exchange service and who also pleaded guilty.
In another case alleging that a Florida man used Bitcoins for money laundering, a state judge in March rejected a defense argument that he did nothing illegal because the digital currency isnt money.
Shavers solicited investors Bitcoins and falsely claimed that he traded the currency against the U.S. dollar to generate average weekly returns of 10.65 percent. In reality, Mazzant wrote, Shavers used new Bitcoins to pay for withdrawals or his personal use.
Blatant Misuse
The investments Shavers sold meet the definition of investment contract and, as such, are securities, giving the court jurisdiction over this case, Mazzant said in the Sept. 18 order. Shavers blatant misuse and misrepresentations of the Bitcoin Savings and Trust investors bitcoins, even as he publicly denied the Ponzi scheme on online forums evidences his intent to deceive, manipulate and defraud.
Shavers argued the investments werent securities because Bitcoin isnt money, and cant be regulated by the U.S. He claimed no money ever exchanged hands in the transaction at issue, according to a court filing.
Shavers didnt immediately respond to a call seeking comment on the ruling.
The case is U.S. Securities and Exchange Commission v. Shavers, 13-cv-00416, U.S. District Court, Eastern District of Texas (Sherman).
