July 23, 2013, 9:38 PM — A Texas man was charged on Tuesday in U.S. federal court with allegedly running a Bitcoin Ponzi scheme, allegedly siphoning the virtual currency from victims to pay for rent, food and gambling.
Trendon T. Shavers of McKinney, Texas, ran the Bitcoin Savings and Trust (BTCST), an investment scheme that promised 7 percent weekly returns from bitcoin trades intended to profit from market price differences in the virtual currency, according to a news release from the U.S. Securities and Exchange Commission.
Instead, the 30-year-old Shavers, who went by the "Pirate" and "pirateat40," on the popular Bitcoin Forum, is alleged to have used bitcoin investments from new investors to pay interest to early entrants to the scheme and cover withdrawals, the SEC said. He has been charged with violating parts of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Exchange Act Rule.
Shavers allegedly collected 700,000 bitcoins from investors, which the SEC calculated was worth more than US$4.5 million based on an average of bitcoin's market price in 2011 and last year. At Wednesday's market price, 700,000 bitcoins would be worth about $66 million.
More than 150,000 bitcoins were transferred to Shaver's personal bitcoin trading account, where he lost money in day trading, the SEC alleged. He also allegedly transferred $147,102 to his personal finance accounts, using the money to pay for rent, utilities, car expenses, food, retail purchases and gambling, the SEC alleged.
Shavers was dogged by accusations of whether his business was a Ponzi scheme. He denied it on the Bitcoin Forum in May 2012, and the scheme collapsed about three months later, according to the indictment.
The case, filed in U.S. District Court for the Eastern District of Texas, marks one of the first criminal prosecutions related to Bitcoin, a virtual currency launched in 2009. Bitcoin is still a very niche payment system, but it has gained steady interest, in part buoyed by wild swings in its price that garnered much media attention.
Various investment schemes promoted on the popular Bitcoin Forum over the years have been viewed with suspicion. Bitcoin transactions are irreversible, similar to using cash, and investors could be out-of-pocket if their funds disappear. Legal recourse against suspected bad actors may be difficult or impossible.
The SEC's announcement came as the agency issued an alert warning that fraudsters may use virtual currencies as part of bogus investment schemes.