NOVEMEBER 2014, Trendon Shavers, aka “Pirate@40,” was arrested on securities fraud and wire fraud charges stemming from his involvement in a Bitcoin-related Ponzi scheme*.
Shavers was the founder and operator of Bitcoin Savings and Trust (BCS&T), which offered and sold Bitcoin-based investments through the Internet. In total, Shavers raised at least 764,000 Bitcoin in BCS&T investments, which amounted to more than $4.5 million based on the average price of Bitcoin during the period of the scheme.
U.S. Attorney Preet Bharara said:
“As alleged, Trendon Shavers managed to combine financial and cyber fraud into a Bitcoin Ponzi scheme that offered absurdly high interest payments, and ultimately cheated his investors out of their Bitcoin investments. This case, the first of its kind, should serve as a warning to those looking to make a quick buck with unsecured currency.”
FBI Assistant Director-in-Charge George Venizelos said:
“Shavers used a new currency, but the same old reprehensible tricks. He claimed to offer a Bitcoin market-arbitrage strategy. In reality, it was nothing more than an insidious scheme motivated by greed. Today, Shavers’ jig is up. He finds himself under arrest and charged in Manhattan federal court.”
An Elaborate Bitcoin Ponzi Scam
In 2012 Shavers solicited investments in BCS&T, a digital hedge fund that promised weekly returns of up to 7%, on the popular Bitcointalk forum. He told investors that he was involved in Bitcoin arbitrage activity and acted as a middleman for individuals who wished to purchase large quantities of Bitcoin “off the radar,” and indicated that he achieved gross returns of nearly 11% per week.
The scheme began to collapse when Shavers announced that the weekly interest rate would decrease to 3.9% beginning August 1, 2012, and he allegedly began making preferential payouts to friends and longtime investors with his remaining funds. Later that month, Shavers declared default, which caused unprecedented waves of outrage on the forum. According to authorities, BCS&T was nothing more than an elaborate Ponzi scam that Shavers used to take in millions of dollars in Bitcoin.
- *A Ponzi scheme is a fraudulent investment operation where the operator pays returns to its investors from new capital paid by new investors, rather than from profit earned. The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920.