What has happened?
The Securities and Exchange Commission (SEC) has charged a former bitcoin-denominated platform and its operator with operating an unregistered securities exchange and defrauding customers, while the Department of Justice arrested the operator for perjury and obstructing justice.
What does this mean?
On Tuesday, the SEC brought charges in the federal district court in Manhattan against Jon E. Montroll (also known as "Ukyo") and BitFunder, an unregistered bitcoin-denominated securities exchange, for violations of the anti-fraud and registration provisions of the federal securities laws.
Montroll operated BitFunder from December 2012 until it closed in November 2013.
According to the SEC's complaint, Montroll allegedly defrauded users "by misappropriating their bitcoins and failing to disclose a cyber attack on BitFunder's system that resulted in the theft of more than 6,000 bitcoins".
In today’s value, the stolen bitcoins would be worth more than $60 million.
The SEC also alleges that Montroll "sold unregistered securities that purported to be investments in the exchange and misappropriated funds from that investment as well".
"Platforms that engage in the activity of a national securities exchange, regardless of whether that activity involves digital assets, tokens, or coins, must register with the SEC or operate pursuant to an exemption,” said Marc Berger, Director of the SEC’s New York Regional Office.
A day after the SEC issued the charges, the US Attorney's Office of Southern District of New York announced that, following an investigation with the Federal Bureau of Investigation (FBI), Montroll had been taken into federal custody for allegedly giving "false sworn testimony and false documentation" during a SEC investigation into the exchange.
Prosecutors allege that, in November 2013, Montroll "provided sworn testimony to the SEC’s New York Regional Office in connection with their investigation into the [cyber attack] and BitFunder’s activities".
As part of that testimony, Montroll "denied that the [cyber attack] had been successful, also submitting a balance statement that showed "the total number of bitcoins available to BitFunder users in the WeExchange Wallet as of October 13, 2013 amounting to] 6,679.78 BTC".
However, according to the Justice Department the statement was a "misleading fabrication".
Montroll, of Saginaw, Texas, was charged with two counts of perjury and one count of obstruction of justice.
FBI Assistant Director-in-Charge William F. Sweeney Jr. said:
“As alleged, Montroll committed a serious crime when he lied to the SEC during sworn testimony. In an attempt to cover up the results of a hack that exploited weaknesses in the programming code of his company, he allegedly went to great lengths to prove the balance of bitcoins available to BitFunder users in the WeExchange Wallet was sufficient to cover the money owed to investors. It’s said that honesty is always the best policy – this is yet another case in which this virtue holds true.”
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