On Wednesday, a judge unsealed a significant criminal case initiated by the Department of Justice (DOJ) against eighteen individuals and companies accused of manipulating cryptocurrency markets and artificially inflating token values. The complaint details an operation that targeted a crypto firm with a multi-billion-dollar market capitalization, employing a scheme involving a new cryptocurrency created by the FBI.
This indictment marks the DOJ’s first criminal prosecution of financial services firms for crypto market manipulation, following the earlier conviction of individual Avraham Eisenberg in April for rigging the Mango Markets platform. Market manipulation has been a persistent issue in the crypto industry, where token prices are often distorted through tactics like wash trading, which involves participants faking buy and sell orders to simulate demand. Some independent analysts estimate that over 50% of trading on offshore exchanges may be artificially inflated.
The DOJ’s case specifically targets three market makers and their employees, who are alleged to have provided wash trading services for compensation. Prosecutors describe the investigation as “the first of its kind,” though they acknowledge that pump-and-dump schemes have a long history spanning over a century.
To expose the operation, the FBI developed a token called NexFundAI on the Ethereum blockchain, engaging with market makers to discuss utilizing their services. One defendant identified himself as the “mastermind,” revealing that his company employed bots to execute simultaneous buy and sell orders on centralized exchanges to inflate trading volumes. During a September in-person meeting, he requested an upfront payment of $2,000. Remarkably, as recently as last week, the market maker’s bots were still executing millions of dollars in wash trades before being disabled at law enforcement’s request.
According to crypto price tracker DEX Screener, NexFundAI continues to trade actively, boasting a market cap of approximately $237,000.
Among the defendants are individuals associated with Saitama, a Massachusetts-based crypto firm accused of manipulating its token price to create a market value of $7.5 billion. Saitama allegedly collaborated with one of the accused market makers, Gotbit, to artificially inflate its token’s value. The DOJ claims that executives at Saitama were secretly profiting by selling their tokens for tens of millions of dollars. Notably, in 2019, a co-founder of Gotbit acknowledged to CoinDesk that his business practices were “not entirely ethical.”
Several defendants operated internationally, with connections to Portugal and Russia, and five have already pleaded guilty or agreed to do so. In addition to the DOJ indictment, the Securities and Exchange Commission (SEC) has filed civil complaints against the market-making operations, alleging violations of securities laws.
A particularly noteworthy aspect of the investigation is the FBI’s innovative tactics to apprehend the defendants. Jodi Cohen, special agent in charge of the FBI’s Boston office, revealed that the Bureau took the “unprecedented step” of creating its own cryptocurrency token and a fictitious company to aid in capturing the alleged perpetrators.
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