DROP token creators plead guilty to $1.8M ICO scam, settle with SEC

Two Californian men have agreed to plead guilty to securities fraud charges in connection with an unregistered ICO they conducted in 2017. The two raised $1.9 million by selling over 600 million native tokens, all while issuing false statements, presenting fake profitability statements and making unattainable promises to the investors, authorities said.

In a press release, the U.S. Department of Justice (DoJ) said the two men from Orange County in California were each charged with one count of securities fraud.

In addition to agreeing to plead guilty to the charges, 25-year-old Jeremy McAlpine and 28-year-old Zachary Matar, settled with the U.S. Securities and Exchange Commission (SEC). They agreed to permanent injunctions barring them from any further fraudulent conduct. They must also keep away from purchasing or selling digital securities and pay civil penalties, prejudgment interest and disgorge the ill-gotten wealth.

According to the DoJ, the two men founded Dropil Inc. in 2017. Dropil was a Belize-based firm operating out of Fountain Valley that claimed to manage and provide digital asset investments. The company claimed to offer an automated trading bot as well as a digital asset trading program.

As with the hundreds of the other ICOs that sprung up in 2017, Dropil also developed its own native token, DROP. Those that purchased DROP tokens had exclusive access to the bot. While providing all these services, the two men failed to register with the SEC as a broker or dealer.

To lure investors, the two purportedly made several false statements about the tokens and the trading bot. The bot, they claimed, could provide an “expertly managed portfolio balancing algorithm [that] manages risk.” The DROP tokens were touted as being able to ensure privacy and offer value and exclusivity.

McAlpine and Matar reportedly conducted an ICO in January 2018, selling the DROP tokens to investors. To lure investors, they made several false statements on their whitepaper, their website and via their social media pages, according to DoJ.

To give the impression of profitability, they made payments to the DROP token holders in the form of newly minted tokens. They also reportedly lied about the funds raised in the ICO, placing it at $54 million from 34,000 investors. However, the DoJ places this amount at $1.9 million from 2,500 investors. About $1.6 million of the amount they raised went to personal expenses and payments to their associates.

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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