The U.S Securities and Exchange Commission (SEC) has charged NovaTech, a multi-level marketing (MLM) and cryptocurrency investment program provider, its principals, including Cynthia and Eddy Petion, as well as its promoters, with raising over $650 million from more than 200,000 investors through fraudulent means.
The crackdown comes amid ongoing probes into several firms, including Uniswap Labs and Consensys.
According to a recent press release published by the SEC, NovaTech, led by the Petions, operated as a Ponzi scheme. The company promised high returns on cryptocurrency and foreign exchange investments but primarily used investor funds to pay existing investors and promoters, with little actual trading.
More Action From The SEC
In addition to NovaTech’s founders, its top promoters were also charged for their roles in the fraudulent scheme. These individuals included Martin Zizi, Dapilinu Dunbar, James Corbett, Corrie Sampson, John Garofano, and Marsha Hadley.
The SEC said these promoters were paid “substantial commissions” for recruiting investors and promoters into the NovaTech pyramid scheme while downplaying red flags or knowing about the regulatory issues surrounding NovaTech.
The regulator is seeking permanent injunctive relief, disgorgement of ill-gotten gains, and civil penalties against all defendants. The securities regulator noted that Zizi agreed to pay a $100,000 civil penalty and permanent injunctions to partially settle the charges.
NovaTech faced multiple regulatory warnings from authorities in the U.S., Canada, and Russia throughout 2022 and into early 2023. Regulators accused the firm of operating without proper registration and failing to comply with financial regulations.
Busting Apart
NovaTech also dealt with growing dissatisfaction and credibility loss due to its inability to process withdrawals. Despite the founder’s reassurance about the company’s financial stability, the withdrawal freeze sparked accusations of mismanagement and deceit.
As more investors sought to withdraw their funds, NovaTech’s financial model, which relied on new investments to pay returns to earlier investors, became increasingly strained, leading to its abrupt collapse in early 2023.
Following the collapse, Cynthia and Eddy Petion reportedly went into hiding as legal actions, including those initiated by the SEC, began to mount against them.
Eric Werner, director of the SEC’s Fort Worth Regional Office, warned that the case showed that the authorities are not only targeting the masterminds behind the fraud scheme but also those who directly contribute to its growth like promoters.
“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,” said Werner.
Earlier in June, New York Attorney General Letitia James filed a lawsuit against NovaTech, its founders, and AWS Mining. The lawsuit claims that these entities engaged in illegal pyramid schemes, defrauding over 11,000 New Yorkers and hundreds of thousands of investors worldwide out of more than $1 billion in cryptocurrency.
NovaTech and AWS Mining allegedly targeted vulnerable communities, particularly Haitian New Yorkers, to promote fraudulent investment opportunities.
Like the SEC’s claims, Attorney General James alleged that the companies made false promises and misrepresented their operations and capabilities. In reality, only a small fraction of the funds deposited were actually traded, with most being used to pay early investors and commissions to promoters.
After the collapse of FTX, a cryptocurrency exchange led by disgraced mogul Sam Bankman-Fried, the SEC and other authorities have intensified their crackdown on the industry.
However, most of the SEC’s enforcement actions against cryptocurrency firms face community controversy. Those are ongoing lawsuits against Binance, Coinbase, Kraken, Uniswap Labs, and Consensys.
A recent report from DL News reveals that the SEC has issued subpoenas to at least three major venture capital firms involved in crypto transactions over the past year. The action is said to be part of a broader crackdown following the industry’s instability post-FTX collapse.
SEC Chair Gary Gensler’s arguments mostly focus on treating cryptocurrencies, excluding Bitcoin and Ethereum, as securities.
While the SEC wants firms to comply with registration requirements, the crypto industry considers their actions to be overreaching. Crypto members have prompted US lawmakers to establish a federal framework for cryptocurrency operations, in a bid to bring clear regulations to crypto.
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