SEC and DOJ Charge SafeMoon Cryptocurrency and Its Executives with Millions of Dollars in Fraud | The Volkov Law Group

Matt Stankiewicz, Partner at The Volkov Law Group, weighs in on the latest cryptocurrency industry fraud allegations leveled against SafeMoon.

On November 1, 2023, the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”) filed charges against the cryptocurrency project SafeMoon LLC and its U.S. subsidiary SafeMoon US LLC, as well as its three executives Kyle Nagy , owner and founder; John Karony, CEO; and Thomas Smith, Chief Technology Officer (collectively, “Defendants”). The SEC accused the defendants of perpetrating a massive fraud scheme through the unregistered offer and sale of a security using their SafeMoon token. Meanwhile, the Justice Department filed criminal charges of conspiracy to commit securities fraud, conspiracy to commit wire fraud and conspiracy to commit money laundering.

SafeMoon was a cryptocurrency project that launched in March 2021 during one of the cryptocurrency industry’s major “bull runs.” The token had little use, but quickly became a viral sensation as a “meme coin.” The price of the token increased by over 55,000% in the first two months. SafeMoon’s total market capitalization rose to over $5.7 billion and in this short period of time, there were more than 2 million unique wallet addresses owned by SafeMoon. Thanks to an aggressive marketing campaign, even non-crypto personalities got noticed. For example, Dave Portnoy, owner and founder of Barstool Sports, purchased SafeMoon tokens during one of his investment podcasts, which caused the price to rise further as his followers also participated. Portnoy was then sued by SafeMoon investors after the coin lost more than 90% of its value.

The SafeMoons white paper, website and other marketing materials explained that the token is subject to a 10% tax on each transaction, which benefits all SafeMoon holders. This tax would return 5% to all current SafeMoon holders relative to their current holdings and the remaining 5% would be deposited into a SafeMoon liquidity pool, increasing liquidity in the market for users to trade on SafeMoon. These marketing materials also stated that the tokens sent to the liquidity pool would be subject to a four-year lock-up period. The purpose of this lock-up period, as presented, was to prevent misappropriation of funds or to avoid a “rug pull” – a colloquial term in the crypto industry where founders of a project instead steal all liquidity from its users. In all marketing materials, SafeMoon was always described as a safe investment.

Contrary to these representations, all defendants had access to the funds in the liquidity pool. In effect, the tax provided the defendants with LP tokens, which essentially represent a claim against the funds within the liquidity pools. This means that the defendants were able to exchange these LP tokens directly for funds within the pool, often to enrich themselves. At no time has the SafeMoon team ever disclosed this access. Meanwhile, public blockchain experts reviewed the SafeMoon smart contract and found that the defendants had access to the taxes in the liquidity pools. Following this revelation, Karony and Smith did not admit what was going on, but instead stated that they would never remove funds from SafeMoon pools without first disclosing to the public their intent and intended use of those funds. As you may have guessed, they didn’t keep that promise. Defendants were able to conceal their misappropriation by obscuring the movement of these funds through various private, unhosted wallets and pseudonymized centralized exchange accounts.

As the SEC complaint charges, the defendants “raided” these pools to fund lavish lifestyles. As part of their fraud, the defendants redeemed tens of millions of dollars in LP tokens. They used this money for a variety of purposes, including covering business expenses and making personal purchases. The defendants purchased luxury properties in several states, including Utah, New Hampshire and Florida. They purchased sports cars, including several McLarens and a customized Porsche 911. The group also made extravagant travel purchases, such as several flights on private jets. The defendants even used the funds to manipulate the SafeMoon token price to further enrich themselves. Between April 9, 2021 and December 31, 2021, Karony used approximately 50 trillion SafeMoon tokens to execute wash trades between two accounts he controlled. On 188 trading days during this period, Karony accounted for 95% of the total SafeMoon trading volume via these wash trades.

Karony and Smith have since been arrested. According to the DOJ, Nagy is currently at large. The price of the SafeMoon token is down over 90% from its all-time high and is currently $0.00005938 per token.

Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers