Five people have been charged with defrauding investors of $722 million, using promises of huge returns if they joined a cryptocurrency investing club while privately deriding their clients as “sheep” and “idiots,” the United States attorney’s office in New Jersey said on Tuesday.
Federal prosecutors said the defendants operated BitClub Network, a bogus investing scheme that they promoted in videos and in domestic and international trips as “the most transparent company in the history of the world” and “too big to fail.”
The network asked investors to join a pool to share in the earnings from Bitcoin mining, in which people race to unlock new Bitcoin by solving complex algorithms and verifying cryptocurrency transactions on a public ledger. The network said that it would invest in the hardware necessary to do the complex math and that its investors would reap the rewards, much like investors in a gold-mining operation.
“You’re not going to go start digging holes — the gold miners dig up the gold, they just give you your gold every single day,” one BitClub Network video says, according to federal court documents. “This is the same kind of thing.”
Thousands of investors were taken in by the business, which Craig Carpenito, the United States attorney for New Jersey, called “little more than a modern, high-tech Ponzi scheme.”
Mr. Carpenito said in a statement that the defendants had exploited “the complex world of cryptocurrency to take advantage of unsuspecting investors.”
An indictment unsealed in United States District Court in Newark charged Matthew Goettsche, 37, of Lafayette, Colo.; Jobadiah Weeks, 38, of Arvada, Colo.; and Silviu Balaci, who was arrested in Germany, with conspiracy to commit wire fraud and conspiracy to offer and sell unregistered securities. Joseph Abel, 49, of Camarillo, Calif., was charged with conspiracy to offer and sell unregistered securities.
Mr. Goettsche was arrested in Colorado, Mr. Weeks in Florida and Mr. Abel in California, federal prosecutors said. A fifth person, whose name has not been disclosed, remained at large, Matthew Reilly, a spokesman for the United States attorney’s office, said on Wednesday.
It was not immediately clear if those charged had lawyers or if they had entered pleas.
Mr. Reilly said Mr. Carpenito’s office was prosecuting the case because some of the victims were in New Jersey, where some of the transactions had taken place.
The indictment said the defendants operated BitClub Network from October 2014 until this month. Mr. Goettsche, Mr. Weeks and others solicited investments in the club’s Bitcoin mining pools by providing false and misleading figures that members were told were “Bitcoin mining earnings,” according to federal prosecutors.
In February 2015, for example, Mr. Goettsche directed one of his conspirators to “bump up the daily mining earnings starting today by 60 percent,” prompting that person to reply, “That is not sustainable, that is Ponzi” territory and a “fast cash-out Ponzi … but sure,” according to the indictment.
In September 2017, Mr. Goettsche sent an email to another conspirator calling for the BitClub Network to “drop mining earnings significantly now,” so that he could retire rich, according to the indictment.
The indictment said Mr. Goettsche told Mr. Balaci in January 2015 that “we are building this whole model on the backs of idiots.”
John M. Griffin, a professor of finance at the University of Texas at Austin, said that, by promising its investors access to Bitcoin mining, the BitClub Network had carried out a “classic Ponzi scheme under the guise of new, flashy technology in the cryptocurrency world, which perhaps makes it easier to engage in a Ponzi scheme.”
“Like any kind of new technology coming out, there’s often a buzz about it, so that makes it a compelling case for fraud,” said Dr. Griffin, who researches illicit activity in the financial markets. “It makes the story more believable that you’ve got this money-printing machine.”
The club’s marketing materials described the network as an almost surefire way to get rich, according to the indictment. In one video, a BitClub Network defendant promised club members that an investment of $3,599 could yield a return of $250,000 over three years, calling that a “very conservative” estimate, the indictment said.
Dr. Griffin said that such schemes were not uncommon in the cryptocurrency world but that the magnitude of this one was notable.
“Raising over $700 million in a Ponzi scheme is pretty spectacular,” he said.