Expose Crypto Fraud: A Guide for Whistleblowers

Cryptocurrency fraud has become a major area of interest for the Securities and Exchange Commission (SEC) since 2013. In 2023, the Commission brought 46 cryptocurrency-related actions, the highest since the SEC Whistleblower Program’s inception a 53% increase from the year prior. As of September 3, 2024, there have been 12 enforcement actions related to crypto assets.

The types of misconduct the Commission took enforcement action on in 2023 included crypto fraud schemes, unregistered crypto asset offerings, operating platforms as unregistered exchanges and clearing agents, unregistered and fraudulent intermediaries, and illegal celebrity touting, which we’ll explore more later. 

This guide is designed to help those with information about a fraudulent or non-compliant cryptocurrency or digital asset scheme report their concerns to the Commission and potentially receive an award for their information. This can range between 10 and 30 percent of the money collected in a successful enforcement action, when the sanctions exceed $1 million. 

Specifically, we’ll cover the following: 

• Understanding Crypto Fraud: Common types of cryptocurrency frauds and red flags 

• Importance of Whistleblowers: The whistleblower’s role in exposing the crypto fraud 

• Gathering Evidence: Evidence gathering tips and strategies for protecting yourself 

• The SEC Whistleblower Program: An overview of the awards program and eligibility  

• Reporting Process: The steps involved in filing a whistleblower complaint 

• Legal Considerations: Legal safeguards and protections available to whistleblowers 

After you’ve read this guide, you should be ready to take the necessary steps to confidentially and anonymously expose cryptocurrency fraud. Continue reading to learn more!

The SEC is clamping down on misconduct involving cryptocurrencies and digital asset securities and paying very close attention to a wide variety of related securities-law violations. This includes flat-out frauds, such as the case against Samuel Bankman-Fried and FTX, unregistered offerings, operating platforms as unregistered exchanges, and celebrities touting cryptocurrencies without disclosing if they were compensated for doing so, such as the case with Kim Kardashian, who had to pay massive fines for such unlawful touting.

Types of Crypto Frauds

Below is a list of the most common types of cryptocurrency misconduct that will surely be a focus of the SEC’s in the coming years:

• Unregistered Offerings: This includes noncompliance with the registration provisions of the federal securities laws, which deprives investors of the required disclosures necessary to make informed investment decisions, namely through ICOs, crypto asset lending and staking.
• False DeFi Claims: This may include implying that a project has no single developer or centralized control over how it operates, only to attract investors. Investors may rely on claims that the platform is decentralized, when in actuality it may expose them to potential manipulation, such as a rug pull or a pump-and-dump scheme.
• Ponzi Schemes: Investors of crypto assets should be aware of this classic scheme, which promises very high returns on their investment. Fraudsters who run Ponzi schemes using crypto create the illusion that investors are getting returns, when they are really paying old investors with the cash from new investors and skimming off the top.
• Pump-and-Dump Schemes: The pump-and-dump scheme is one of the most common schemes fraudsters use. It occurs when the creator(s) of a cryptocurrency artificially inflates the price, often through hype on social media. This is known as the “pump,” or pumping up its value and purpose. Once the price hits an all-time high, they will sell all their shares. This part is known as the “dump.” What remains are investors holding worthless crypto – this is known as “bag holding.”
• Rug Pulls: Like the pump-and-dump scheme, a creator of a cryptocurrency may raise funds, build a community, and get participants to invest. The creator may then abandon the project, leaving investors bag holding, and running off with the monies raised and invested.
• Fraudulent Initial Coin Offering (ICO): This type of fraud occurs when a company wants to create a new coin, application, or service and launches an ICO to raise the money needed to launch. This type of fraud can take the form of a traditional pyramid scheme and be difficult to recognize. Also, many ICOs are the type of offering of securities meant to be registered with the SEC, but many are not, even when they are not exempt.
• Fraudulent Initial Exchange Offering (IEO): Like the fraudulent ICO, a fraudulent IEO raises money for a new exchange, application, or service over the exchange platform itself. These IEOs can manifest as fake projects, fake websites, manipulated metrics, or collusion with other exchanges to steal investor money.
• Phishing Scams: These scams are becoming more common across social media. Scammers trick unsuspecting individuals into giving them personal information, such as their login credentials to wallets, or their private keys. Once they have this information, they can do whatever they want with the cryptocurrency in that wallet.
• NFT Scams: A non-fungible token (NFT) is a digital collectible made by individuals (and corporations), which is essentially digital artwork with limited supply. Scammers exploit the NFT space by offering forgeries or fakes to unsuspecting investors. The NFT is usually offered at a low price to make the investor feel like they are getting a great deal.
• Romance Scams: This type of fraud occurs when a scammer sets up a fake social media profile, generally using an attractive photo or bio to lure victims in. The scammer may “accidentally” direct message the victim on WhatsApp or Instagram; and then engage in a conversation. Once the scammer has built rapport with the victim, they will convince them to send them funds via cryptocurrency, which they subsequently steal, or invest in a cryptocurrency in which they are in control.
• Pig Butchering Scam: The pig butchering scam is like a romance scam. The scammer will continue asking for smaller deposits of a particular crypto, fattening up their crypto wallets. Eventually, once the scammer has taken enough from their victim, they will ask for a larger deposit, then disappear with all the cash that was “invested”
• Social Media Scams: This most often happens on YouTube, where creators set up fake livestreams and encourage viewers to invest in a new cryptocurrency or that the experts in the video can help you invest in cryptocurrencies. This can also take place on Twitter via posts, advertisements or via direct messages.
• Blackmail and Extortion Scams: In some instances, scammers may claim to have embarrassing or sensitive information about an individual. They may threaten to release such information to the public if the victim does not comply with their demands, which usually means sending money or cryptocurrency to the fraudster.
• Touting: Social media influencers may unlawfully tout crypto asset securities without disclosing that they were compensated to do so, depriving investors of required information indicating whether the celebrities’ promotion of the securities was biased.

Red Flags

While it’s essential to be aware of these common scams, it’s equally important to know how to spot red flags that may indicate fraudulent cryptocurrency activity.

• Unrealistic promises of high returns or “guaranteed returns”: Be wary of any investment opportunity that guarantees excessive profits with minimal risk.
• Lack of transparency: If a project or individual is secretive or unwilling to provide information about their team, technology, or financial statements, it could be a red flag.
• Pressure to invest quickly: Beware of schemes that urge you to invest immediately without giving you time to do your research.
• No clear use case: If a cryptocurrency project doesn’t have a clear purpose or practical application, it may be a scam.
• Unregistered or unregulated entities: Projects or individuals involved with a cryptocurrency who are not registered with the appropriate authorities may be a red flag.
• Slick Marketing: Don’t be tricked by a nice website! Many scams will take creative liberties and advertising tricks to get you to commit.

The red flags above apply to traditional securities and investments as well. Always keep in mind, if it sounds too good to be true, then in it probably is! Fraudsters (also known as con artists) are experts at getting you to commit, so be extremely weary of unsolicited opportunities.

The Role of Whistleblowers

Exposing cryptocurrency fraud is extremely difficult due to nature of cryptocurrency and blockchain technology. Therefore, whistleblowers (typically insiders or harmed investors) play a critical role in exposing such frauds to not only protect individuals from massive losses, but also improve the integrity of the cryptocurrency market.

Whistleblowers who know of crypto misconduct can provide critical information to the SEC, the Commodity Futures Trading Commission (CFTC) and other regulatory authorities. This can lead to investigations and prosecutions, deterring future frauds, while improving the industry.

Some argue that regulatory scrutiny stifles innovation and growth. However, findings suggest that balanced regulation and vigorous enforcement can lead to increased stability, adoption, and investor protection, allowing new projects to grow and thrive while giving investors more confidence.

To qualify for an award under the SEC Whistleblower Program, you’ll want to have specific and credible evidence. This will increase the likelihood that your tip gets the full attention of the Enforcement Division.

For instance, if you have the name of a developer running a pump-and-dump scheme and an example of a fraudulent transaction unknown the public, your tip is most likely going to be assigned to an enforcement attorney for follow-up. This evidence must be submitted voluntarily, which means you must provide the information before they ask you to do so.

The type of evidence the SEC is looking for is “original information,” which means information that is not known already by the SEC. It may be information that you possess as a result of your own contact with the activity in question, or it may be your own detailed, original analysis of publicly or privately available information. The type of evidence can include the following:

• Emails and messages: Save all relevant emails, text messages, and chat logs, including those that may seem insignificant. These can provide valuable context and evidence of fraudulent activity.
• Transactions: Keep records of all cryptocurrency transactions, including dates, addresses, and amounts. This can help trace the flow of funds and identify suspicious patterns.
• Contracts and agreements: If you have any contracts or agreements related to the fraudulent activity, make copies or take screenshots. These documents can provide evidence of promises made and broken.
• Social media posts: Save any social media posts, screenshots, or comments that may be relevant to the fraud. This can help establish a timeline of events and document public statements made by the fraudsters.
• Financial records: Gather any financial records, such as bank or cryptocurrency platform (e.g., Coinbase) statements or tax returns, that may be relevant to the fraud. This can help demonstrate financial losses or gains associated with the fraudulent activity.

When collecting evidence and blowing the whistle, you should take all the necessary precautions to protect yourself from being exposed. And by no means should you engage in hacking, as that will automatically disqualify you from receiving an award.

Always protect yourself by creating a new email address (preferably encrypted), using a secure device, and avoiding discussing any of your concerns on social media or to friends.

The SEC Whistleblower Program is one of the most effective laws available to whistleblowers around the world. The SEC Whistleblower Program was created in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, in response to the 2008 financial crisis. In this section, we explore more of this program as it relates to crypto asset frauds.

Overview of the Program

The SEC Whistleblower Program was established by Congress to incentivize whistleblowers to report specific, timely, and credible information regarding securities fraud. The program provides awards to individuals who provide original information leading to a successful enforcement action resulting in sanctions of $1 million or more. It also offers protection against retaliation, prohibiting an employer from discharging, demoting, suspending, harassing, or discriminating against an employee who has reported crypto fraud or any other violation of securities laws.

Potential Awards

Whistleblowers who prevail in a successful enforcement may receive an award between 10 and 30 percent of the monetary sanctions collected. This is determined by assessing several positive and negative factors. For instance, if a whistleblower faced significant risks, they may be awarded more. Contrastingly, if they significantly delayed the filing of their claim, this is considered a negative factor, and they may receive less.

Given the vast number of rules, it’s important to speak with an attorney who specializes in representing whistleblowers securities frauds in the crypto space to increase your chances at receiving an award.

Eligibility Requirements

To be eligible for a whistleblower award, you must:

• Provide original information: The information or analysis you provide must be original and not previously known to the SEC.
• Lead to a successful enforcement action: The information must lead to a successful enforcement action that results in a monetary sanction of $1 million or more.
• Cooperate with the SEC: You must cooperate with the SEC’s investigation and provide any additional information or assistance requested.
• Not be a wrongdoer: You cannot be a participant in the fraud or have been convicted of a felony related to the securities fraud.

After you’ve met all the eligibility criteria, collected evidence, and submitted your claim, the SEC reviews your claim to determine whether they’d like to pursue an investigation. An investigation may take a significant amount of time. Following an investigation, the SEC may bring a litigated or settled claim against one or more defendants, pursuant to which the SEC may obtain monetary sanctions in the form of penalties and/or disgorgement (i.e., requiring a defendant to give up ill-gotten gains).

Once the SEC brings a case or cases in the matter, the SEC will post a Notice of Covered Action, after which the whistleblower has 90 days to apply for an award by submitting Form WB-APP to the Office of the Whistleblower by midnight on the claim due date listed for that action. The SEC will review all claims in the matter and determine the appropriate award for any eligible whistleblower(s). An experienced whistleblower attorney can assist you in ensuring that your contribution to the case is fully recognized by the SEC.

Anonymity

Whistleblowers may submit their tip anonymously, but to be eligible for an award, must have an attorney represent them in connection with their anonymous submission. It’s important to note that the whistleblower program is confidential, and the SEC takes steps to protect the identity of whistleblowers.

If you’re an insider with information about crypto asset fraud or a violation of securities laws, such as unregistered crypto asset offerings or celebrity touting, you can submit your information using the SEC’s Tips, Complaints and Referrals (“TCR”) portal or by hard copy. However, we given the complexity of whistleblowing, we strongly encourage you to contact an experienced SEC whistleblower attorney.

Understanding the SEC’s Role

The SEC is the federal agency that regulates securities markets, including the cryptocurrency markets. They have the authority to investigate any tips related to crypto fraud such as the ones listed above. They can also file civil charges against a fraudster and impose massive penalties against those who are found liable.

They pay awards to whistleblowers whose information leads to a successful enforcement action with monetary sanctions of $1 million or more. The SEC also works with other civil and criminal law enforcement agencies who may bring parallel actions, and a whistleblower to the SEC may be eligible for an award in connection with those parallel actions, if they were also based on the whistleblower’s original information.

Whistleblowers who report securities fraud, including crypto-related fraud, are often protected by federal laws, even if they were forced to sign a restrictive non-disclosure agreement.

While participating in an internal compliance program may be considered by the SEC in determining an award amount for an eligible whistleblower, internal reporting is not required to be considered for an award.

We suggest you seek legal advice if you’d like to file a claim, as the legal and ethical complexities involved in being a whistleblower are vast. Not only that, but an experienced whistleblower attorney who specializes in securities law and whistleblower protection can help you understand your rights and develop a strategy to help you maximize your chances of receiving compensation for your courageous act.

Here are some other things an experienced whistleblower attorney can help you with:

• Gathering evidence: How to collect and preserve evidence to support your claims.
• Protecting your identity: Strategies for safeguarding your personal information.
• Navigating legal procedures: The steps involved in filing a whistleblower complaint and the potential legal consequences.
• Obtaining and Maximizing awards: Advocating on your behalf to ensure you receive an award for your tip, and ensuring that you receive the largest award possible.
• Negotiating: A whistleblower attorney can help protect your interests by negotiating on your behalf.

By seeking legal advice, you can make informed decisions and increase your chances of a successful outcome. In many instances, top whistleblower attorneys work on a contingency basis, which means they only get paid if you get an award.

If you’re seeking legal assistance, consider consulting with Kohn, Kohn and Colapinto. Our Securities and Commodities Whistleblower Group has deep experience with crypto-related matters. Our SEC practice is led by former SEC Commissioner Allison Herren Lee and former SEC Enforcement Senior Counsel, Andrew Feller.

Our team also includes world-renowned whistleblower attorney Stephen M. Kohn, who has guided his clients to some of the largest whistleblower cases in history, such as the $104 million Bradley Birkenfeld case that put an end to Swiss banking secrecy for US tax evaders.

There is no better team to handle your crypto fraud case than KKC. Contact our firm today for a free and confidential case evaluation.