Analysis
Market Manipulation for Hire
Market Manipulation as a Service, Fraud for a Fee, Merchants of Manipulation, and Rigging for Rent are all terms to describe a series of actions executed by financial services firms that were uncovered by the United States Department of Justice (DOJ) and spans the U.S., the United Kingdom, Hong Kong, Canada, United Arab Emirates, Vietnam and Portugal. This case highlights both the ingenuity of modern fraud and the innovative tactics of law enforcement and regulators in their response with the Federal Bureau of Investigation (FBI), going as far as creating their own cryptocurrency token, called NexFundAI, to help catch the perpetrators.
The schemes revolved around wash-trading of cryptocurrencies, something I covered in detail in an earlier issue of Regulatory Roundup. The research shows that wash trading is effective at drawing investors into an instrument. The other manipulative tactic used was the pump-and-dump scheme, which has evolved steadily in recent years. The charging documents talk extensively about the “false statements” and “wash trades,” which are a hallmark of the “pump” phase.
Operation Token Mirrors
The law enforcement action was code-named “Operation Token Mirrors” and, so far, has seized $25 million in cryptocurrency and deactivated trading bots responsible for wash trading in 60 different cryptocurrencies. For this analysis, I’ll focus on two cases specifically targeting the Market Manipulation as a Service aspect. It is important to note that these are details from charging documents and, therefore, are allegations by the DOJ. The defendants are presumed to be innocent unless and until proven guilty beyond a reasonable doubt in the court of law.
In the first charge, the company alleged to have performed the market manipulation promotes its “volume support” tool, which, in an online video, claims it would allow clients to “designate a minimum trading volume and maximum trading volume, and then our bot will make natural, real-looking wash trades and deliver you a trading volume within that range every day.” The website goes into greater detail explaining that “the bot will trade randomly within this range with no loss besides exchange trading fees.” In video calls with NexFundAI, the firm even described providing a “dashboard,” which would allow users to manage those bots.
Merchants of Manipulation
In a series of calls with NexFundAI, the FBI’s Trojan horse, the founder of the charged company explained how the operation worked. According to the founder, the software includes a “volume bot,” a “liquidity bot,” and a “cash-out bot.” During the calls, he goes on to make the following incriminating statements as he discloses additional details.
According to the DOJ papers, clients had various intentions for the bots, among them was to execute “pump and dumps,” to generate significant trading volumes whereby cryptocurrency exchanges were willing to forgo listing fees, to “draw a continuous price chart,” and to “record a transaction on chain and show some liquidity” and “to have some activity.”
The founder explained wash trades can be employed “to solve the cold start problem.” For newly launched cryptocurrencies, companies can use wash trades to “generate a few trades here and there just to set the benchmark.”
The founder stated that the tool was superior to others because the other tools “keep clients in the dark” and “control the pump and dump,” which means “they can do inside trading easily.”
He further states that the company can help create trading volume that “looks like really nice roller coaster ride, and that’s where sometimes people jump in . . . but we have to make them lose money in order to make profit and get the listing fee back.”
Additionally, he says, the company “train[s] you in the tactics [of] how to do pump and dumps, and you can do it in house.” A user of the tool can “can finish executing a pump within five to ten minutes.”
As of Wednesday, Oct. 30, 2024, the founder pleaded guilty to conspiracy to commit market manipulation and wire fraud. Sentencing is to be determined.
Manipulative Methods Explained
The second example is similar and, in this charge, the company also explained its methods to the FBI’s NexFundAI stating: “The way we do market making on [Uniswap] is pretty easy [….] The way we do that is we will use multiple wallets, for example, one thousand wallets, two thousand wallets, and we do the transactions maybe ten times each hour, or ten times every minute to reach the trading volumes. And when we hit the top gainer on Uniswap the users will come to trade, they will see the potential opportunities and they will chase the price, they will come to do the trading.”
The company offered additional support to clients, providing resources such as marketing contractors or partnering with the client’s own marketing team, saying, “We can support you with resources. For example, if you need some marketing, we can provide our contractors or partners. And if you have your own marketing team, we can combine with them as well.”
Furthermore, to avoid detection and suspicion, the company frequently changed the wallets used for trading. This tactic prevented the appearance for continuous trading by a limited number of wallets, which could be perceived as “fake.” They explained, “If we keep, like, trading we will change the wallets. We will not, like, keep using the fifteen or twenty wallets. We will keep changing the wallets. Otherwise, like, people can check on the, can check […] that just these fifteen wallets or twenty wallets keep trading. That looks so fake.”
After these discussions, the company sent out a “Service Agreement” and even set up a blockchain test environment.
Innovation in Financial Crime
These charges offer insight into how broadly financial crime can evolve. Though the manipulative techniques like wash trading remain largely unchanged, there can be great innovation in the ways these schemes unfold. The charges show the combination of:
- User friendly technology, such as the dashboards.
- Integration of third-party contractors, such as marketing.
- Training on how to execute market manipulation.
- Professional delivery services, such as the testing environment.
- Risk mitigation services, such as the frequent changing of wallets.
Let’s not forget how the FBI created its own cryptocurrency in their investigation. This case serves as a valuable example of the innovation cycle we see in financial crime.
Capital Markets Regulatory Updates
21 October: The U.S. Securities and Exchange Commission (SEC) Division of Examinations released its 2025 examination priorities, informing investors and registrants of potential risks in the U.S. capital markets. The 2025 priorities focus on perennial and emerging risk areas, such as fiduciary duty, standards of conduct, cybersecurity, and artificial intelligence.
16 October: The Australian Prudential Regulation Authority (APRA) published its annual report for the 2023-2024 financial year, detailing how the regulatory body delivered on its purpose to maintain the strength and resilience of the Australian financial system.
9 October: The International Organizations of Securities Commissions (IOSCO) released its final report on investor education on crypto-assets, summarizing the results of a survey distributed to members of IOSCO’s Committee for Retail Investors. The final report highlights examples of regulatory changes and enforcement activity, as well as current priority issues around investor education in the crypto-asset space.
7 October: The European Securities and Markets Authority (ESMA) published its inaugural report on EU carbon markets. Key findings show price declines in the EU ETS due to factors like decreased demand, lower natural gas prices, and increased supply from additional auctions for the REPowerEU plan, as well as significant concentration in emission allowance auctions and trading through derivatives in secondary markets.
3 October: The Dutch Authority for the Financial Markets (AFM), in tandem with the U.K. Financial Conduct Authority (FCA), is working with academics at Oxford University to develop new data-driven models that will root out market abuse committed by automated trading algorithms.
Fines & Enforcement Actions
In an investigation conducted by the SEC, FBI, and DOJ, 18 individuals and entities, including leaders of cryptocurrency companies and financial services firms, face charges for market manipulation and fraud in the cryptocurrency industry. Several defendants have pleaded guilty or agreed to plead guilty, with authorities seizing over $25 million in cryptocurrency and deactivating multiple trading bots associated with fraudulent practices like wash trades and pump-and-dump schemes
The Comisión Nacional de los Mercados y la Competencia (CNMC) fined Neuro Energía y Gestión €1,081,502 for manipulating the Spanish electricity market under the REMIT Regulation to protect the EU’s wholesale energy markets. The company’s violations included issuing non-genuine orders to gain advantages in cross-border sales with France and providing false signals on supply, demand and price of energy products.
The FBI arrested an Alabama man for his alleged involvement in hacking the SEC’s social media account on X to falsely announce the approval of bitcoin exchange-traded funds. The individual, along with co-conspirators, gained unauthorized access through a SIM swap, leading to a temporary increase and subsequent decrease in the price of bitcoin, resulting in charges related to aggravated identity theft and access device fraud.
The SEC charged Cumberland DRW LLC with operating as an unregistered dealer in over $2 billion of crypto assets sold as securities, violating federal laws meant to safeguard investors.
The SEC charged Rimar Capital Entities and its owner for deceptive claims regarding the use of artificial intelligence in trading, leading to a settlement agreement with $310,000 in total civil penalties.
The SEC charged Minerco Inc. and two individuals for an alleged pump-and-dump scheme that defrauded investors of around $8 million through false promotions of Minerco stock linked to psilocybin mushrooms.
The CFTC issued an order filing and settling charges against Taishin Securities Co., Ltd., a Taiwanese financial services company, for engaging in wash sales and non-competitive transactions on the Chicago Mercantile Exchange. The order requires Taishin to pay a civil monetary penalty of $200,000.
The CFTC settled charges against Tradition SEF LLC for inadequate system safeguards and delays in providing records to the Division of Market Oversight during an examination. Tradition SEF LLC is required to pay an $875,000 civil monetary penalty and address its system safeguard deficiencies as part of the settlement, marking the first action of its kind by the CFTC against a swap execution facility.
The FCA charged two individuals with conspiracy to deal in four stocks while having inside information. The alleged offending took place between 2016 and 2020, and the two individuals made a profit of around £110,000.
The Hong Kong Securities and Futures Commission (SFC) arrested a core member of a ramp-and-dump scheme, charging the individual with the offense of conspiracy to employ a scheme with intent to defraud or deceive in transactions involving securities.
The Virtual Assets Regulatory Authority (VARA) of Dubai issued cease-and-desist orders and fines to seven entities for operating without licenses and violating marketing regulations.
The SEC charged individuals and companies for fraudulent activities involving investments in pre-IPO private companies, where defendants raised $120 million from over 900 investors through false representations.
A Singapore Court convicted a man for fraudulently inducing others to trade under the Securities and Futures Act. The individual made false statements in Telegram groups between April and November 2020, collaborating with other conspirators to exaggerate target sell prices and falsely claiming to own shares.
Fracture Labs filed a lawsuit against Jump Crypto for allegedly orchestrating a pump-and-dump scheme with their in-game currency, DIO, after accusing Jump Trading of artificially inflating the token’s value and later offloading it for significant profits.
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