Key Points
- SEC sues NovaTech for allegedly raising $650 million fraudulently.
- NovaTech founders were accused of operating a multi-level marketing scheme.
- Investors, many from the Haitian-American community, were unable to withdraw funds.
- SEC continues crackdown on fraudulent crypto ventures.
The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against crypto startup NovaTech, accusing the company of fraudulently raising more than $650 million from over 200,000 investors.
Many of these investors come from the Haitian-American community, a demographic that the SEC suggests was specifically targeted by NovaTech. Founded in 2019 by Cynthia and Eddy Petion, NovaTech is alleged to have operated as a multi-level marketing (MLM) scheme.
This scheme promised lucrative returns through crypto and foreign exchange market investments but allegedly delivered something quite different.
The SEC’s investigation indicates that NovaTech allocated only a small portion of the investors’ funds to actual trading activities. The bulk of the money was reportedly used to pay existing investors and cover commissions for promoters, effectively creating a Ponzi scheme.
This setup often relies on constantly recruiting new investors to sustain the payouts to earlier ones, a hallmark of illegal MLM operations.
SEC Director Eric Werner of the Fort Worth regional office remarked, “NovaTech and the Petions caused untold losses to tens of thousands of victims around the world.
As we allege, MLM schemes of this size require promoters to fuel them, and today’s action demonstrates that we will hold accountable not just the principal architects of these massive schemes, but also promoters who spread their fraud by unlawfully soliciting victims.”
The Fallout from Novatech’s Collapse
When NovaTech collapsed, many investors found themselves unable to access their funds. Promoters who had reassured these investors by downplaying the potential risks now face scrutiny.
The SEC has named several NovaTech promoters as defendants in its suit, including Martin Zizi, Dapilinu Dunbar, James Corbett, Corrie Sampson, John Garofano, and Marsha Hadley.
The agency seeks permanent injunctive relief, disgorgement of ill-gotten gains, and civil penalties. Interestingly, Martin Zizi has already agreed to a partial settlement, indicating a potential willingness to cooperate with the ongoing investigation.
The fraudulent nature of NovaTech’s operations was highlighted by Seth Goertz, a partner at law firm Dorsey & Whitney and a former assistant U.S. attorney with the Department of Justice. He commented, “Overall, this, sadly, appears to be a textbook affinity group Ponzi scheme.
The size and scale of the scheme is noteworthy, though, and you always wonder whether it would have been possible if it was tied to traditional fiat currency, rather than cryptocurrency, which remains ethereal enough that fraudsters can more easily promise grand returns.”
The @SECGov charged Novatech, its founders Cynthia and Eddy Petion, and promoters with fraud today, alleging the company raised over $650 million in a global Ponzi scheme. pic.twitter.com/kaoKOACeVU
— Cointelegraph (@Cointelegraph) August 12, 2024
The SEC’s Broader Crypto Crackdown
The lawsuit against NovaTech is just one of several actions the SEC has recently taken against legally questionable crypto ventures.
In 2020, the SEC sued Ripple, a prominent blockchain developer and creator of the XRP cryptocurrency, alleging that the company had raised over $1.3 billion in 2013 through an unregistered security offering.
More recently, the SEC charged BitClout founder Nader Al-Naji with fraud, claiming that proceeds from the startup’s crypto activities funded Al-Naji’s lavish lifestyle, including a mansion in Los Angeles and extravagant gifts.
Additionally, the SEC has been investigating the role of venture capitalists in the crypto space. According to reports, the agency has sent letters to VCs concerning their involvement with Uniswap Labs, the operator of a major decentralized crypto exchange.
Gurbir Grewal, the SEC’s director of enforcement, emphasized the agency’s commitment to regulating the crypto industry in a recent address at the William & Mary Business Law Review.
He stated that the SEC has taken over 100 crypto-related enforcement actions in the past decade, highlighting the ongoing challenge of policing a rapidly evolving market.
These actions underscore the SEC’s determination to root out fraud and protect investors in the burgeoning cryptocurrency sector. As the agency continues its crackdown on fraudulent activities, it sends a clear message that the era of unregulated crypto schemes is coming to an end.
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