Brave New World: Cryptocurrencies and Whistleblowers

Cryptocurrencies—of which the best-known is Bitcoin—have appeared in financial news stories with increasing frequency during 2017 and early 2018. Perhaps you’ve read about daily swings of $1,000 or more in the prices of Bitcoin, Ethereum, and other “cryptos.” It may seem as if a lot of people are scoring quick profits. But fast profits can mean the potential for big frauds, especially with initial coin offerings, also known as ICOs.

What is a Cryptocurrency, an ICO, and Blockchain Technology?

Cryptocurrencies are completely digital in nature and operate outside of any country’s central bank (such as the Federal Reserve Bank in the U.S.). Encryption methods employing blockchain technology regulate the generation of cryptocurrency units and also authenticate transferring these units. Bitcoin was the first cryptocurrency, launching in 2009. Others that have followed are Ethereum, Litecoin, Dash, Ripple, and Zcash.

Blockchain technology is crucial to cryptocurrencies. A blockchain is no more than an electronic recording of transactions between parties. Each block contains timestamped transaction data and points to a previous block in the chain. It is this pointing and linkage that provides the superior security features of blockchain technology. Because no one can change one block without changing previous ones, and because blocks are stored across numerous computers, it is much more difficult for hackers to steal the data using a cyberattack.

An initial coin offering, or ICO, seeks to raise funds for a new project by selling “crypto” tokens that can be exchanged for Bitcoin and others (sometimes known as “ether”). In some ways, an ICO is similar to an IPO, or initial public offering, which enables investors to buy shares of a company that previously had none to sell. The purchase of such shares funds the company’s future ventures.

The SEC and ICOs

The Securities and Exchange Commission (SEC) is casting an eye over the rapid rise of ICOs and associated fraud, and is considering asking for legislation that will provide stronger oversight of cryptocurrencies. Unlike IPOs, any organization that puts forth an ICO is not required to divulge its finances or vouch for its product’s legitimacy. Therefore, the unscrupulous can and do employ ICOs to fleece investors.

Cryptocurrencies and ICOs are becoming more and more commonplace; ICOs raised around $5 billion in capital during 2017 alone, and the number is rising. The SEC has released a number of bulletins alerting both the public and financial professionals to the risks inherent in ICOs. ICOs can use the following schemes:

• “Pump and dump,” or making false public statements meant to increase prices in the marketplace, after which insiders sell, reaping a nice profit. “Pump and dump” has long been used by fraudsters in the stock market.
• Selling crypto tokens that don’t exist. In September 2017, the SEC employed an emergency order to freeze the assets of REcoin, which was supposedly backed by real estate.
• Making false statements that promise future gains. An emergency action was filed by the SEC in December 2017 to stop an ICO known as PlexCoin, where an increase in price of 1,354 percent in 29 days or less was “guaranteed.”
• Bitcoin “clubs” or other cryptocurrency organizations that aren’t properly registered.

The warning signs of fraudulent ICOs are similar to other investment frauds: “guaranteed” returns on your money, returns that sound too good to be true, high pressure to buy immediately, and cold call sales (unsolicited offers).

If you know something, say something.

Whistleblowers are Needed

The SEC does not have sufficient resources to police a new financial frontier where scams may be relatively easy to perpetrate. For this reason, whistleblowers are urgently needed to short-circuit ICO frauds.

While successful SEC enforcement actions often involve insiders, generally meaning those who work at the company perpetrating the swindle, insider knowledge is not a requirement to bringing a successful case or reaping an award. In the SEC’s 2017 report to Congress, the agency stated that almost 40 percent of successful whistleblower award recipients were, in fact, company outsiders. Sometimes the outsiders were industry professionals or others with pertinent information. Prospective or defrauded investors comprised nearly one-fifth (19 percent) of whistleblower award recipients.

Any whistleblower who voluntarily gives the SEC credible, timely, and original information that results in a successful enforcement action may receive an award. Awards range from 10 percent to 30 percent of the monetary sanctions collected, as long as the amount is more than $1 million.

Blowing the whistle? We can help you with your next step.

If you think you have the facts needed to bring a whistleblower case, the experienced whistleblower attorneys at the Louthian Law Firm can review your case and help you file the appropriate disclosure statement. Under some circumstances, the government will intervene, or join in your lawsuit.

Your chances of succeeding are greater if your whistleblower claim is substantive, clear, and to the point. Because of this, meeting with a qualified whistleblower attorney can increase your chances of winning. The Louthian Law Firm can help you form your claim so that the government will be more inclined to intervene in your case; government intervention can sometimes increase the chances of recovering reward money. Even if the government decides not to intervene, it could still be a good idea to pursue your case without government involvement. Our strong support system can assist you through every step of the process.

For a free, confidential evaluation of your case, call the Louthian Law Firm today at 1-803-454-1200 or, if you prefer, you can fill out our online contact form.