Written by: 0xjs@Golden Finance
As we all know, the crypto industry is a mixed bag.
Gary Gensler, chairman of the U.S. SEC, has always regarded many crypto tokens as securities and criticized the serious market manipulation in the crypto industry. He largely represents the regulatory attitude of the U.S. government.
On October 9, 2024, the U.S. SEC, the Federal Bureau of Investigation (FBI), and the U.S. Department of Justice (DOJ) jointly took action to file lawsuits against four crypto token companies, four market makers, and the founders and employees of several related entities, accusing them of market manipulation and fraud. Four defendants have pleaded guilty, another has agreed to plead guilty, and this week the U.S. Department of Justice arrested three other defendants in Texas, the United Kingdom, and Portugal. The U.S. Department of Justice has seized more than $25 million in cryptocurrency and deactivated multiple trading robots that conducted millions of dollars worth of wash trades on approximately 60 different cryptocurrencies.
These eight crypto companies are four crypto token companies: Saitama, Robo Inu, VZZN, and Lillian Finance; and four market makers: Gotbit, ZM Quant, CLS Global, and MyTrade.
According to the indictment, the defendants who created the crypto tokens made false statements about their crypto tokens and had market makers engage in false “wash trading” of those tokens to create the appearance of active trading and make the tokens look like good investments. These deceptive tactics allegedly attracted new investors and buyers, causing the tokens to trade at higher prices. The defendants then sold their tokens at artificially inflated prices, a fraud often referred to as a “pump and dump.” The largest of these crypto tokens, Saitama, once had a market cap of billions of dollars.
Although many people in the crypto industry often criticize Gary Gensler for being too conservative and strict in regulation, there are indeed many manipulations and frauds in the crypto industry. As the market maker who was sued this time said, the "goal of the secondary market" is to find "other buyers in the community, people you don't know or care about," because "you have to make [other buyers] lose money in order to make a profit."
It is worth noting that this is a joint action by multiple departments of the US government. In order to obtain solid evidence, the US FBI personally created encrypted tokens and conducted fishing enforcement on market makers.
The FBI’s unprecedented action: creating tokens on Ethereum and conducting “fishing enforcement”
The FBI has always had a "fishing enforcement" working style, and this time the FBI has successfully applied the "fishing enforcement" behavior to the encryption industry.
According to the FBI, this "fishing enforcement" is part of the U.S. government's investigation into potential market manipulation in the cryptocurrency industry, "Operation Token Mirrors."
In order to identify, disrupt and bring fraudsters to justice, the FBI has taken an unprecedented step by creating its own cryptocurrency company and token, NexFundAI, which is deployed on Ethereum.
The FBI found that three of the four market makers accused this time, ZM Quant, CLS, and MyTrade MM, were making markets for NexFundAI, and were thus successfully lured by the FBI.
Among them, ZM Quant is the market maker of both NexFundAI and Saitama, while Gotbit is the market maker of Saitama. Robo Inu and VZZN tokens were created by former Saitama employees after they left.
Through NexFundAI, the FBI successfully obtained criminal evidence against the vast majority of the defendants in this accusation.
MyTrade MM founder Liu Zhou described in detail how and why wash trading is done in a conversation with a NexFundAI representative. Liu Zhou bluntly told the NexFundAI representative that the “goal of the secondary market” is to find “other buyers in the community, people you don’t know or care about,” because “we have to make [other buyers] lose money in order to make a profit.”
Details of the market manipulation activities of the entities being prosecuted
Four market makers
1、Gotbit及Aleksei Andriunin，Fedor Kedrov, Qawi Jalili
According to court documents, Gotbit is a well-known "market maker" in the cryptocurrency industry.
Aleksei Andriunin, 26, of Russian and Portuguese origin, is the CEO and founder of Gotbit. Andriunin was arrested in Portugal on October 8, 2024, awaiting extradition.
Fedor Kedrov is from Russia and is the market making director of Gotbit.
Qawi Jalili is from Russia and is the Sales Director of Gotbit.
Gotbit, Kedrov and Jalili were each charged with wire fraud and conspiracy to commit market manipulation and wire fraud. Andriunin was also charged in a separate criminal indictment with wire fraud, conspiracy to commit market manipulation and wire fraud, and conspiracy to launder money.
Between 2018 and 2024, Gotbit provided market manipulation and wash trading services to several cryptocurrency companies, including companies located in the United States. Gotbit allegedly conducted millions of dollars worth of wash trading on behalf of its clients and received tens of millions of dollars in proceeds from these illegal services. In a 2019 interview posted online, Andriunin described how he developed a code to conduct wash trading and artificially inflate cryptocurrency trading volumes. Andriunin allegedly tracked Gotbit's market manipulation activities, including using a spreadsheet to compare "created volume" generated by wash trading to naturally occurring "market volume." Gotbit employees, including Jalili and Kedrov, allegedly described these wash trading strategies and how to avoid detection to potential clients. Jalili and Kedrov also provided these services to a variety of cryptocurrencies, including Saitama and Robo Inu cryptocurrencies.
2、ZM Quant及Riqui Liu, Baijun Ou
ZM Quant is a “market maker” in the cryptocurrency industry that advertised illegal market manipulation services to its clients.
Riqui Liu, 26, from the UK and Hong Kong, is an employee of ZM Quant.
Baijun Ou, 32, from Hong Kong, is also an employee of ZM Quant.
ZM Quant, Riqui Liu, and Baijun Ou were each charged in a superseding indictment with wire fraud and conspiracy to commit market manipulation and wire fraud.
According to court documents, ZM Quant allegedly advertised a “trading robot” that could “create volume.” ZM Quant employees allegedly discussed these illegal services with clients via Telegram messages and video conference calls. As alleged in the indictment, during a March 2024 video conference call, Riqui Liu, Baijun Ou described how ZM Quant “traded maybe ten or twenty times a minute” to “increase volume” and “drive up prices.” Riqui Liu, Baijun Ou also described how ZM Quant allegedly used multiple trading wallets to avoid trades appearing “fake.” It is further alleged that ZM Quant provided market manipulation services to multiple cryptocurrency companies, including Saitama and NexFundAI.
3、CLS及Andrey Zhorzhes
CLS was a “market maker” in the cryptocurrency industry that advertised illegal market manipulation services to its clients.
Andrey Zhorzhes, from the United Arab Emirates, is an employee of CLS.
CLS and Andrey Zhorzhes were both charged in an indictment with wire fraud and conspiracy to commit market manipulation and wire fraud.
Zhorzhes allegedly described to a potential client how CLS’s algorithm could generate trading volume on multiple cryptocurrency exchanges as follows:
“We have an algorithm that … basically does the buying and selling itself.”
“The idea is to create volume… so the token looks organic and active and people are interested in trading it.”
“It’s hard to track… We’ve done this for a lot of our clients.”
“I know it’s wash trading, and I know people might not be happy about it.”
Andrey Zhorzhes and other CLS traders provided these market manipulation services to NexFundAI.
4. MyTrade MM and Liu Zhou
MyTrade MM is another “market maker” in the cryptocurrency industry that advertises illegal market manipulation services to clients, including “pump and dump” advisory services and “wash trading” facilitated by “bots.”
Liu Zhou, 39, from China and Canada, is the founder of MyTrade MM.
Liu Zhou was charged and has agreed to plead guilty to conspiracy to commit market manipulation and wire fraud.
MyTrade MM clients can specify the desired daily wash trading volume on identified cryptocurrency exchanges through a dashboard on the MyTrade MM website. MyTrade MM’s dashboard describes the service as “volume support” and allows for millions of dollars of wash trading per client’s cryptocurrency per day, such as:
In a conversation with NexFundAI, Liu Zhou described MyTrade MM as superior to “CLS” and “Gotbit” because those market makers “keep their customers in the dark” and “control pump and dumps,” meaning “they can easily conduct insider trading.” Liu Zhou also described various purposes for wash trading, including showing “consistent trading activity every hour”; generating enough volume to allow cryptocurrency exchanges to waive listing fees; and executing “pump and dumps.” Liu Zhou further described, according to court documents, that the “goal of the secondary market” is to find “other buyers in the community, people you don’t know or care about,” because “we have to make [other buyers] lose money in order to make a profit.”
Four Crypto Token Companies
1、Saitama及Manpreet Kohli, Haroon Mohsini, Nam Tran, Max Hernandez, Russell Armand, Vy Pham
Saitama is a crypto token company originally incorporated in Massachusetts in August 2021.
Manpreet Kohli, 43, of the United Kingdom, is the CEO of Saitama. Kohli was arrested in the United Kingdom on October 7, 2024, awaiting extradition.
Haroon Mohsini, 37, of Texas, also works for Saitama. Mohsini was arrested on October 7, 2024, in the Southern District of Texas.
Nam Tran, 32, from Vietnam, works for Saitama and is currently in Vietnam.
Kohli, Mohsini and Tran were each charged in a superseding indictment with wire fraud, market manipulation and conspiracy to commit wire fraud, market manipulation and engaging in an unlicensed money transmission business.
Max Hernandez, 36, of Massachusetts,
Russell Armand, 42, of Texas, who also worked for Saitama, were indicted separately and both have pleaded guilty to market manipulation and conspiracy to commit wire fraud and operate an unlicensed money transmission business.
Vy Pham, 32, of California, was also indicted for her actions at another cryptocurrency company, but as part of her guilty plea, she admitted to certain conduct involving Saitama.
According to the indictment, Saitama created a range of products that could be used with its tokens and, at its peak, boasted a market capitalization of $7.5 billion. Saitama’s leadership allegedly made various false public statements, including that Saitama’s business plan had been reviewed by regulators, that its leadership had not sold any of the Saitama tokens they owned, and that Saitama tokens were coded in a way that prevented market manipulation. In reality, according to the indictment, Saitama’s leadership actively manipulated the market for Saitama tokens and secretly sold their Saitama tokens for tens of millions of dollars in profits.
Saitama’s market manipulation activity began around July 2021, when the leadership coordinated a series of small purchases spread across multiple cryptocurrency wallets. The transactions were coordinated on Telegram, with the goal, Armand explained, to “create the appearance of large purchases and new holders” in order to “incite people to buy more… We wanted the list of small purchases to look like there were more buyers. That was the idea.” Saitama’s leadership allegedly confirmed their purchases to each other, discussed how they had successfully gotten others to buy Saitama cryptocurrency, and exchanged “pump it up” memes and GIFs:
Thereafter, Saitama’s leadership allegedly paid several market makers to wash trade Saitama’s cryptocurrency on cryptocurrency exchanges, including BitMart, LBank, and XT.com. The market makers paid by Saitama allegedly included ZM Quant and Gotbit.
2、Robo Inu Finance（Robo Inu）
Robo Inu is a cryptocurrency company and token created by Vy Pham after he left Saitama in 2021. Pham has been indicted and agreed to plead guilty to conspiracy to commit market manipulation, wire fraud, and engaging in an unlicensed money transmission business.
Pham founded and promoted Robo Inu from the United States. Similar to Saitama, Robo Inu allegedly claimed to create a range of products that could be used with its cryptocurrency. Starting in about 2022, Robo Inu allegedly paid Gotbit to artificially inflate trading volume for the Robo Inu token through wash trading on cryptocurrency exchanges such as Bitmart.
3. VZZN and Michael Thompson
VZZN is a cryptocurrency company and token created by Armand after he left Saitama in 2023.
Michael Thompson, 50, of Virginia, also worked at VZZN. Like Armand, Thompson was indicted and pleaded guilty to conspiracy to commit market manipulation.
While promoting VZZN, a purported video streaming service that could be used with the VZZN token, Armand and Thompson also allegedly made misleading public statements about VZZN and artificially inflated the trading volume of the VZZN token through wash trading.
4、Lillian Finance及Bradley Beatty
Lillian Finance is a cryptocurrency company and token founded by Bradley Beatty, 48, of Florida, who was charged in an indictment with wire fraud.
Lillian Finance allegedly claimed to use blockchain technology in the healthcare industry and to use a portion of the proceeds generated by the token sales for charitable purposes. Beatty made a series of false statements about Lillian Finance to attract investors, such as that he was a defense contractor and that he had spoken to Congress on the subject of cryptocurrency. Thereafter, Beatty received hundreds of thousands of dollars in proceeds from the retail sales of Lillian Finance tokens and misappropriated a portion of Lillian Finance's profits that were intended for charitable purposes.
US regulators reiterate: Crypto market manipulation and “wash trading” are illegal
“This investigation is the first of its kind and has identified numerous fraudsters in the cryptocurrency industry. Wash trading has long been illegal in financial markets, and cryptocurrency is no exception. In these cases, an innovative technology — cryptocurrency — ran up against a centuries-old scam — the pump and dump. Today’s message is that if you make false statements to deceive investors, you are committing fraud, and we will aggressively combat fraud, including in the cryptocurrency industry,” said Acting U.S. Attorney Joshua Levy. “These charges are also a stark reminder that online investors must remain vigilant and that it is critical to do their homework before venturing into the digital frontier. People considering investing in the cryptocurrency industry should understand how these scams work so they can protect themselves.”
Sanjay Wadhwa, Deputy Director of the SEC’s Enforcement Division, said, “The SEC’s enforcement actions once again demonstrate that retail investors are becoming victims of fraudulent activities by institutional actors in the crypto asset market… So-called promoters and self-appointed market makers have teamed up to target the investing public with false promises of profits in the crypto market, and investors should be aware that they may be at a disadvantage.”
“What the FBI uncovered in this case was essentially a new twist on old-school financial crime,” said FBI Special Agent Jodi Cohen. “‘Operation Token Mirrors’ targeted nefarious token developers, promoters, and market makers in the crypto space. Our findings led to charges against the leaders of four cryptocurrency companies, as well as four crypto ‘market makers’ and their employees, who were accused of spearheading a sophisticated trading scheme that defrauded honest investors of millions of dollars.”
According to the U.S. Department of Justice, the sentences for different crimes are:
The market manipulation charge carries a maximum penalty of 20 years in prison, up to three years of supervised release, a fine of up to $5 million or twice the proceeds or loss from the crime, and forfeiture of property.
The wire fraud charge carries a maximum penalty of 20 years in prison, up to three years of supervised release, a fine of up to $250,000 or twice the proceeds or loss from the crime, restitution and forfeiture of property.
The charges of conspiracy to commit wire fraud, market manipulation and/or engage in an unlicensed money transmission business carry a maximum sentence of five years in prison, up to three years of supervised release, a fine of up to $250,000 to twice the proceeds or loss from the crime, restitution and forfeiture of property.
The charge of conspiracy to commit money laundering carries a maximum penalty of 20 years in prison, three years of supervised release, a fine of $500,000, or twice the value of the property obtained by the crime, whichever is greater, and forfeiture of property.