More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
The Securities and Exchange Commission is warning investors to watch out for scams using virtual currencies, namely Bitcoin.
Just as the SEC on Tuesday charged a Texas man and his company with defrauding investors in a Ponzi scheme involving Bitcoin, the SEC’s Office of Investor Education and Advocacy released an alert warning investors about fraudulent investment schemes that may involve Bitcoin and other virtual currencies.
As the SEC’s alert states, virtual currencies, such as Bitcoin, have recently become popular. These schemes, the agency states, “often promise high returns for getting in on the ground floor of a growing Internet phenomenon.”
These currencies “may be traded on online exchanges for conventional currencies, including the U.S. dollar, or used to purchase goods or services, usually online,” the SEC says.
The “rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes in which these currencies are used to facilitate fraudulent, or simply fabricated, investments or transactions,” the agency says. “The fraud may also involve an unregistered offering or trading platform.”
Virtual currencies are attractive to fraudsters, the SEC says, because transactions in virtual currencies have more privacy and less regulatory oversight than transactions in conventional currencies.
In the case of the Texas man, the SEC alleges that Trendon Shavers, who is the founder and operator of Bitcoin Savings and Trust (BTCST), offered and sold Bitcoin-denominated investments through the Internet using the monikers “Pirate” and “pirateat40.”
Shavers raised at least 700,000 Bitcoin in BTCST investments, which amounted to more than $4.5 million based on the average price of Bitcoin in 2011 and 2012 when the investments were offered and sold, the SEC states. Today the value of 700,000 Bitcoin exceeds $60 million.
The SEC alleges that Shavers promised investors up to 7% weekly interest based on BTCST’s Bitcoin market arbitrage activity, which supposedly included selling to individuals who wished to buy Bitcoin “off the radar” in quick fashion or large quantities.
In reality, the SEC says that BTCST was a sham and a Ponzi scheme in which Shavers used Bitcoin from new investors to make purported interest payments and cover investor withdrawals on outstanding BTCST investments.
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