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Credit to Author: Gregory Barber| Date: Wed, 11 Dec 2019 00:48:18 +0000<\/strong><\/p>\n Gregory Barber<\/span><\/a><\/span> <\/span><\/p>\n Five men face federal charges of bilking investors of $722 million by inviting them to buy shares in bitcoin mining pools.\u00a0<\/p>\n The world of cryptocurrency has no shortage of imaginary investment products. Fake coins<\/a>. Fake blockchain services<\/a>. Fake cryptocurrency exchanges<\/a>. Now five men behind a company called BitClub Network are accused of a $722 million scam<\/a> that allegedly preyed on victims who thought they were investing in a pool of bitcoin mining equipment.<\/p>\n Federal prosecutors call the case a \u201chigh-tech\u201d plot in the \u201ccomplex world of cryptocurrency.\u201d But it has all the hallmarks of a classic pyramid scheme, albeit with a crypto-centric conceit. Investors were invited to send BitClub Network cash, which would allow the company to buy mining equipment\u2014machines that produce bitcoin through a process called hashing. When those machines were turned on, all would (in theory) enjoy the spoils. The company also allegedly gave rewards to existing investors in exchange for recruiting others to join. According to the complaint, the scheme began in April 2014 and continued until earlier this month.<\/p>\n Matthew Brent Goettsche, Jobadiah Sinclair Weeks, and Silviu Catalin Balaci are accused of conspiracy to commit wire fraud and conspiracy to offer and sell unregistered securities. A fourth defendant, Joseph Frank Abel, faces only the latter charge. Another unnamed defendant remains at large. Balaci\u2019s name was redacted from one public version of the indictment, but appeared on another<\/a>.<\/p>\n The scheme appears to have started as a relatively modest scam and spiraled dramatically in ambition. Internal messages between the conspirators give the impression of growing glee at the ease of taking advantage of investors, referring to \u201cbuilding this whole model on the backs of idiots.\u201d The men allegedly described their victims as \u201cdumb\u201d investors and \u201csheep.\u201d<\/p>\n \u201cThey were not wrong,\u201d Emin Gun Sirer, the CEO of blockchain startup Ava Labs, quipped on Twitter<\/a>.<\/p>\n In October 2014, a few months after BitClub Network was founded, Goettsche allegedly posted about the need to \u201cfak[e] it for the first 30 days while we get going,\u201d instructing a co-conspirator to do some \u201cmagic\u201d on the company\u2019s revenue numbers. They allegedly agreed on a method of cooking the numbers that would include inconsistencies to make sure they appeared real. The tricks swiftly became more daring. Later, Goettsche allegedly suggested the company \u201cbump up the daily mining earnings starting today by 60%.\u201d<\/p>\n \u201cThat is not sustainable, that is ponzi teritori [sic] and fast cash-out ponzi . . . but sure,\u201d Balaci responded, according to messages included in the indictment. A September 2017 email from Goettsche allegedly suggested the company \u201c[d]rop mining earnings significantly starting now\u201d so that he could \u201cretire RAF!!! (rich as fuck).\u201d<\/p>\n The defendants also allegedly sold shares of the company in violation of securities law, traveling around the world with marketing materials that touted the company as \u201ctransparent\u201d and \u201ctoo big to fail.\u201d (The BitClub website<\/a> now has a disclaimer saying investments are not available to investors in the US or the Philippines.) At one point, one of the defendants appeared to express remorse, referring to selling shares in BitClub without using the money to purchase mining equipment as \u201cnot right.\u201d<\/p>\n The identities of the alleged victims are unclear, but there are hints in still-online videos and advertisements that the company had wide reach. In one ad, appearing on the website of Ben Franklin Technology Partners, a nonprofit investment firm affiliated with the Pennsylvania Department of Community and Economic Development, a company calling itself BitClub Network promotes<\/a> \u201cFounder\u201d status for people who agree to purchase shares in four purported mining pools. The going rate was $1,000 per \u201cGPU share,\u201d a unit of measure that isn\u2019t illuminated in the marketing materials. (Ben Franklin did not respond to an after-hours request for comment).<\/p>\n In 2018, a large number of Facebook posts about BitClub Network caught the eye of Japhet Mesa in Zambia. In a Medium post<\/a>, he described what he saw as signs of a scam. Despite BitClub\u2019s claims of radical transparency, the location of the purported mining rigs appeared to be a mystery, and the individuals behind the company were hard to identify. \u201cGoing by the hype around BCN, I was amazed to see the number of people getting into it,\u201d he wrote at the time. \u201cThis could be seen by the number of people posting about it on social media, facebook especially.\u201d<\/p>\n Facebook pages based around BitClub Network communities in countries including Malaysia and South Africa remain active, with tens of thousands of members.<\/p>\n The crypto world is rife with scams. The grift reached a fever pitch in 2017, when bitcoin prices spiked and scammers lured victims to invest millions in cryptocoins or blockchain-based products that would never come to exist. Schemes around participation in mining pools are also popular to scammers who sell customers on the narrative of participating in business ventures that effectively amount to printing money. That\u2019s become all the more tantalizing now that mining is mostly out of reach for many stay-at-home miners. (The selling point is that large mining \u201cpools\u201d enjoy greater efficiencies\u2014and thus returns.) In January, a man in Hong Kong was accused<\/a> of a similar mining pool scam that allegedly included an advertising stunt that involved throwing money off of a skyscraper.<\/p>\n The wire fraud charges carry a maximum of 20 years in prison, while the securities violation allows five. The defendants\u2019 lawyers could not immediately be reached for comment.<\/p>\n