On July 23, 2013 the Securities and Exchange Commission ("SEC") announced it was bringing charges in a Texas federal court against Trendon Shavers for allegedly using a Bitcoin Ponzi scheme to defraud investors between September 2011 and September 2012. For those who may not know, Bitcoins are anonymous, decentralized, non-government-backed electronic currency. Bitcoins were originally created by an unknown hacker in 2009 as a worldwide payment method with low processing costs and have become a much ballyhooed currency among the Technorati.
The SEC is accusing Mr. Shavers, using the online handle "pirateat40," of advertising the Bitcoin Savings and Trust and accepting 700,467 Bitcoins, worth approximately $4,592,806, as investments while promising a 7% weekly return. Mr. Shavers allegedly promised to pay such returns to investors by trading the Bitcoins online. In the SEC's Complaint Mr. Shaver is alleged to have instead used funds from new Bitcoin investments to pay out the promised returns to older investors. Additionally, the SEC alleged that he converted roughly $147,000 worth of the Bitcoins in order to pay personal expenses including "rent, car-related expenses, utilities, retail purchases, casinos, and meals.
Concurrent with the filing of the SEC's Complaint, Andrew Calamari, director of its New York office, was quoted as saying. "[f]raudsters are not beyond the reach of the SEC just because they use Bitcoin or another virtual currency to mislead investors and violate the federal securities laws." The SEC also recently issued an investor alert warning of scams involving virtual currencies, stating "[w]e are concerned that the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes in which these currencies are used to facilitate fraudulent, or simply fabricated, investments or transactions."
Shavers quickly moved to dismiss the SEC's Complaint and argued that the SEC has no authority to bring this action, as the Bitcoins linked to his website were not securities because "Bitcoin is not money, and is not part of anything regulated by the United States". In response the SEC said the investments were both contracts and notes, and so were securities that can be regulated, according to regulatory documents. Judge Amos Mazzant of U.S. District Court in the Eastern Division of Texas, disagreed with Mr. Shavers' arguments and found for the SEC in a ruling on August 6, writing, "[i]t is clear that bitcoin can be used as money" and "[t]he court finds that the [Bitcoin Savings & Trust] investments meet the definition of investment contract, and as such are securities.". Therefore, this historic SEC case will continue.
Ironically, individuals who had simply bought and held Bitcoins from September 2011, without relying on Mr. Shavers services, would have made significant returns. The average Bitcoin value from September 2011 to September 2012 was approximately $6.56 but thereafter skyrocketed to a high of $266 before settling down to the current value of approximately $95.30. In fact, the700,000 Bitcoins at issue in this case are arguably worth around $65 million at their current value.