Arrest Warrant

Crypto Crime Cartel: John McAfee, Arthur Hayes arrested and more Mt Gox deflection

Two prominent names in the Crypto Crime Cartel were arrested this past week as the long overdue legal reckoning chews through prominent industry companies and individuals at the start of what is set to be a busy 2021. And, as if on cue, at the same time Mark Karpelès—another disgraced personality in the digital currency space—again deflected attention away from his own legal troubles and onto Dr. Craig Wright.

More charges piled on John McAfee

In news that will be of particular interest to those who have been using their social media platforms to promote junk digital asset products, the U.S. Department of Justice filed charges against John McAfee and bodyguard Jimmy Gale Watson Jr on Thursday.

The indictments relate to two schemes allegedly orchestrated by McAfee and Watson. The first involved McAfee using Twitter to promote multiple ICOs while publicly claiming that he was impartial: in reality, he was paid over US$23 million worth of digital assets for his endorsements. The second was the pump-and-dump scheme, where the two would buy digital assets right before promoting them to McAfee’s one million plus followers and then selling the assets once the endorsements led to a price increase. The indictments also accuse McAfee of laundering the proceeds of this scheme via an unnamed exchange operating in the Southern District of New York.

The allegations were already somewhat of an open issue after the Securities and Exchange Commission (SEC) brought civil charges against McAfee and Watson in 2020 in relation to the same two schemes.

McAfee is also already under arrest in Spain awaiting extradition to the U.S. on tax evasion charges, having allegedly not filed any tax returns for four years despite earning millions from speaking engagements, international consulting work, to name only a few. On this charge, one can assume that prosecutors are confident in the veracity of their evidence:

The civil charges would have seen the SEC try to have McAfee disgorged of his ill-gotten gains and have him banned from serving as an officer or director of any company which has to file reports to the SEC. The criminal charges are more significant: for the older tax evasion charges alone, McAfee could face up to 30 years in prison.

As for the latest indictments, the money laundering charges can result up to 20 years in prison and a fine of up to twice the value of the property involved in the transaction. The fraud charges carry a maximum term of 20 years’ imprisonment.

The timing of these arrests is in keeping with a wider push toward enforcement and regulation over digital assets, in part sparked by rhetoric from Biden-appointed watchdogs (as well as his Secretary of the Treasury, Janet Yellen) suggesting that the crime being facilitated using digital asset-related products will be a focus under the new administration. 

BitMEX founder Arthur Hayes finally turning himself in

Arthur Hayes, who you may remember as the former CEO of BitMEX, is now in the process of surrendering himself to U.S. authorities, according to court transcripts submitted by prosecutors in February.

Hayes, along with his BitMEX co-founders, were indicted under the Bank Secrecy Act on charges of actively evading their anti-money laundering obligations under that Act. Co-founder Samuel Reed had already been taken into custody, while the other co-founders—Hayes and Ben Delo—have been on the run since.

Now, according to the filings, Hayes and defendant Ben Delo are willing to surrender to authorities in April. In Hayes’ case, the plan is apparently to turn himself in in Hawaii. In addition to the criminal BSA charges, the Commodity Futures Trading Commission (CFTC) are also in the process of litigating a civil suit covering much of the same territory, accusing the BitMEX founders of evading KYC and AML requirements and operating as a futures commission merchant without registering with the CFTC. 

BitMEX apparently settled the $300 million investors suit in January, but prosecutors and regulators are not bought so easily, with the Department of Justice and the CFTC set to see this one through to the end. We’ll know more about what comes next when (or if) Hayes surrenders himself in April.

Karpelès Mt. Gox posturing continues

Something about Dr. Craig Wright’s ongoing quest to reclaim his legacy appears to have gotten under Mark Karpelès’ skin. Karpelès, the disgraced former CEO of Mt. Gox, is now posturing to sue Dr. Wright over messages allegedly leaked from an internal Slack channel in which he calls Karpelès an “embezzler” and “convicted felon.”

Ostensibly, the messages from Wright (of unknown provenance) are in response to claims—shared by Karpelès—that the coins which were stolen in a hack on Dr. Wright’s network last year originated from the Mt Gox hack in 2011 (the ‘1Feex address’). According to Dr. Wright, the 1Feex coins were purchased from an exchange some time prior to the Mt. Gox theft and that no one—either affiliated with Mt. Gox or otherwise—has ever approached him about ownership of the coins. This despite Dr. Wright putting himself on record as the owner of the coins (indirectly or directly) since 2011, which would have been the perfect time for Karpelès or anyone else to raise the issue.

In the messages, Dr. Wright says that Karpelès didn’t ever report the address “or do anything of the sort until he came to find that I was the owner” and that “what he is claiming is that he stole the coins from Mount Gox and embezzled them but still owns them.” Separately, Dr. Wright also says that Karpelès is a “convicted felon” and “an embezzler.”

Apparently happy to take what little wins he can, Karpelès pointed out that he was never convicted of embezzlement. This appears to be a semantic complaint only, though: Karpelès was not convicted on counts of embezzlement, but he was convicted of accessing Mt. Gox’s computer system to falsify financial records, with the Court blasting him for “[abusing] his status and authority to perform clever criminal acts.” This conviction was upheld on appeal in 2020.

That Karpelès was indicted for falsifying records rather than embezzlement is neither here nor there, but it is interesting that Karpelès would be so ready to bring attention to this fact given that the evidence which connected the 1Feex address to the Mt Gox hack has never been more than a plain text log of what is claimed to be a Skype chat between Mark Karpelès and programmer Jed McCaleb. In that log, a participant said to be McCaleb identifies the 1feex address as the address that Mt. Gox. The log was submitted as an exhibit in another private lawsuit against Mt. Gox and its personnel in relation to the hack.

So, in the end, it seems that Dr. Wright and Mr. Karpelès are not as far apart as Karpelès might have you believe. Despite that, Karpelès demanded (via Twitter) a formal apology and a retraction concerning the claim that Karpelès is a ‘convicted embezzler’.

Despite that the linked Slack messages called Karpelès a convicted felon and an embezzler separately, it is unclear whether Karpelès would have been satisfied if Dr. Wright had left his criticism of Karpelès at “convicted felon.” Judging by the broader reaction to Dr. Wright’s recent legal actions, it seems that Karpelès’ problem has nothing to with the coins Dr. Wright is claiming to own and more to do with the on-going efforts to discredit and malign Dr. Wright, who has been a vocal critic of opaque exchanges which can foreseeably lose hundreds of millions of client money without so much as an honest word about it even now, years after the supposed hack.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups-from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple and Ethereum—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

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