Exchange CEO Indicted
The CEO of a digital currency exchange who pleaded guilty after being indicted in New York for, inter alia, selling Bitcoin to US residents illegally and then stealing it from them by removing it from the exchange’s pooled wallet, is awaiting sentencing for the criminal proceeding against him, and is also negotiating a settlement with the SEC.
Opened Accounts for American Residents
Jon Montroll operated an Australian company that provided digital currency exchange services online to US residents which allowed them to deposit US dollars and to deposit and withdraw Bitcoin. Montroll also operated another platform and co-mingled customers Bitcoin from both platforms in one pooled Bitcoin wallet that he had complete control over.
Bitcoin removed from Exchange by its Officers
For close to a year, Montroll took Bitcoin from the exchange’s pooled wallet that belonged to customers and cashed out the customers’ Bitcoin and spent it. Digital currency exchanges are deposit-taking, and hold funds in trust for customers, and as a result are not permitted to spend Bitcoin held in trust.
Publicly Represented Company was Successful, When it was Not
Montroll’s platforms allegedly also suffered a hack which depleted the Bitcoin reserves of the exchange. When the Bitcoin was depleted from the pooled wallet, the CEO failed to disclose to customers that there was insufficient Bitcoin liquidity left and instead continued to promote the exchange services, “falsely representing to the public that the exchange was commercially successful” and viable when he knew it was not and there was insufficient liquidity to pay back any customers who may have wanted to cash out Bitcoin.
According to the indictment, the misrepresentations of the CEO led to the exchange acquiring an additional 978 Bitcoin from unsuspecting customers. In essence it was a Ponzi scheme where new customers with fresh Bitcoin were induced onto the platform to replenish the Bitcoin the CEO had taken and spent, while the CEO knew all the while that there would never be enough Bitcoin to pay back previous or new customers.
Montroll was indicted on a number of offences including wilfully, manipulatively and deceptively selling illegal securities; engaging in fraud; and making untrue and false statements to defraud the public. In addition, he was indicted for misappropriating customer funds, aka Bitcoin, and spending it without permission from the customers. He was also indicted for obstruction of justice for lying about the liquidity and number of Bitcoin in the pooled corporate digital currency wallet. In order to deflect law enforcement, he provided a screen shot purportedly showing the balance of the company pooled Bitcoin wallet but it was a fake document in that it was a screen shot of manual adjustments and balances, not of the actual balance in the pooled wallet.
Montroll faces a sentence of incarceration of up to 20 years in US federal prison and will be sentenced in January 2019.