Source: The New York Times
Federal authorities have arrested two founders of a virtual
currency that raised $32 million from investors last year and won an endorsement
from the boxer Floyd Mayweather.
The co-founders of the Centra virtual currency, Sam Sharma and Robert Farkas,
were arrested on Sunday, a day before the Securities and Exchange Commission
released a complaint against the men and announced that it was halting the project.
Centra raised $32 million last summer and fall in a so-called initial coin
offering, a method of fund-raising in which companies sell custom virtual currencies.
The Centra team said at the time that the Centra token would give investors access to
a new virtual currency exchange and a virtual currency debit card that would operate
on the Visa and Mastercard networks.
The S.E.C. said in its complaint that the Centra team had never received
approval from Visa and Mastercard and had misled investors on several other
counts. The S.E.C. said that several of the executives listed on the Centra website
Most of the claims in the S.E.C. complaint were detailed in an article in The New
York Times about Centra in October.
A co-director of the S.E.C.’s enforcement division, Stephanie Avakian, said in a
statement that the Centra co-founders had “sold investors on the promise of new
digital technologies by using a sophisticated marketing campaign to spin a web of
lies about their supposed partnerships with legitimate businesses.”
Lawyers for Mr. Sharma and Mr. Farkas did not respond to emails seeking
comment Monday evening. The authorities did not charge a third man who had been
listed as a Centra co-founder, Raymond Trapani.
Initial coin offerings, or I.C.O.s, emerged suddenly last year to become one of
the most popular ways for start-ups to raise money, with investors pouring more
than $6 billion into such offerings. But I.C.O.s operate in a regulatory gray area, and
that has drawn a swift blowback from authorities around the world.
The S.E.C. is said to have sent subpoenas to dozens of I.C.O. projects, and has
already sought to halt a handful of such projects.
The Centra founders appear to have been the first people arrested because of a
coin offering. In addition to the S.E.C. complaint, the United States attorney for the
Southern District of New York brought criminal charges against Mr. Sharma and Mr.
Farkas — including conspiracy to commit securities fraud, securities fraud,
conspiracy to commit wire fraud and wire fraud.
Mr. Farkas had a flight reservation to leave the country on Sunday but was
arrested before he could board the plane, according to the S.E.C. complaint.
The complaint alleges that the men “engaged in an illegal unregistered securities
offering and, in connection with the offering, engaged in fraudulent conduct and
made material misstatements and omissions designed to deceive investors in
connection with the offer and sale of securities in the Centra I.C.O.”
The chairman of the S.E.C., Jay Clayton, has said that most tokens offered
through coin offerings should be categorized as securities and registered with
regulators, which few have done.
Mr. Sharma announced that he was leaving Centra after the Times article was
published last fall, but the company has continued its operations and said this week
that it would release the “Centra Roadmap 3.0” at a conference in South Korea.
After the arrests were announced on Monday, the price of Centra’s token on
virtual currency exchanges crashed and the administrators of a Centra chat room on
the Telegram messaging app expressed confusion.
“The admins have no more info then you,” an administrator named Tomo wrote
to the other users.