BULLETIN: SEC: Now, A Bitcoin Ponzi Scheme Operated By Trendon T. Shavers — AKA ‘Pirate’ And ‘pirateat40’

BULLETIN: The SEC has gone to federal court in the Eastern District of Texas, charging Trendon T. Shavers of McKinney in an alleged Bitcoin Ponzi scheme that gathered more than $4.5 million before collapsing in August 2012.

Bitcoins are a digital currency that has “no single administrator, or central authority or repository,” the SEC said.

Investors with at least 50 bitcoins were told that they’d receive “up to 1% interest daily,” the SEC charged, alleging that Shavers used the moniker “pirateat40” at an online forum to pitch the scheme.

The “program” operated through an unincorporated entity known as BTCST, formerly known as First Pirate Savings & Trust, the SEC said.

“Ponzi scheme operators often claim to have a tie to a new and emerging technology as a lure to potential victims,” said Lori J. Schock, director of the SEC’s Office of Investor Education and Advocacy.  “Investors should understand that regardless of the type of investment, a promise of high returns with little or no risk is a classic warning sign of fraud.”

Shavers is 30, the SEC said. The agency did not reveal when its investigation began or how it determined the online identities of Shavers.

From a statement today by the SEC (italics added):

The SEC alleges that Shavers promised investors up to 7 percent weekly interest based on BTCST’s Bitcoin market arbitrage activity, which supposedly included selling to individuals who wished to buy Bitcoin “off the radar” in quick fashion or large quantities.  In reality, BTCST was a sham and a Ponzi scheme in which Shavers used Bitcoin from new investors to make purported interest payments and cover investor withdrawals on outstanding BTCST investments.  Shavers also diverted investors’ Bitcoin for day trading in his account on a Bitcoin currency exchange, and exchanged investors’ Bitcoin for U.S. dollars to pay his personal expenses.

And from an Investor Alert issued today by the SEC (italics added):

Virtual currencies, such as Bitcoin, have recently become popular and are intended to serve as a type of money. They may be traded on online exchanges for conventional currencies, including the U.S. dollar, or used to purchase goods or services, usually online.

We 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. The fraud may also involve an unregistered offering or trading platform.

These schemes often promise high returns for getting in on the ground floor of a growing Internet phenomenon. Fraudsters may also be attracted to using virtual currencies to perpetrate their frauds because transactions in virtual currencies supposedly have greater privacy benefits and less regulatory oversight than transactions in conventional currencies. Any investment in securities in the United States remains subject to the jurisdiction of the SEC regardless of whether the investment is made in U.S. dollars or a virtual currency. In particular, individuals selling investments are typically subject to federal or state licensing requirements.

Prior to the collapse of the scheme, Shavers denied to forum questioners he was operating a Ponzi. Along the way, however, he slashed the purported payout from 7 percent a week to 3.9 percent a week and changed the rules about who could invest, the SEC said.

As the scheme was collapsing, the SEC charged, “Shavers made preferential redemptions to friends and longtime BTCST investors.”

The scheme began “at least” by September 2011, the SEC said.