SEC charges crypto company Safemoon and its executives for fraud

The Securities and Exchange Commission (SEC) has taken legal action against SafeMoon LLC, its founder Kyle Nagy, SafeMoon US LLC, along with the firm’s Chief Executive Officer, John Karony, and Chief Technology Officer, Thomas Smith. The charge pertains to a fraudulent operation connected to the unregistered sale of the crypto asset security named SafeMoon. The SEC’s official complaint reveals that the defendants made bold claims about taking the token’s price “Safely to the moon.” However, these promises turned out to be empty. The alleged misconduct led to a considerable decrease in market capitalization, with more than $200 million in crypto assets being withdrawn from the project. Additionally, the SEC claimed that investor funds were misused for personal gains.

Misuse of investor funds

David Hirsch, who heads the SEC Enforcement Division’s Crypto Assets and Cyber Unit (CACU), stated that decentralized finance claims to offer transparency and predictable outcomes and that offerings that aren’t registered do not have the required disclosures and accountability. He added that such offerings can become a breeding ground for fraudulent activities, as individuals like Kyle Nagy can exploit these gaps to their advantage. 

The SEC’s detailed complaint highlights that Nagy had assured investors about the safety of the funds. Nagy assured that these funds were securely locked in SafeMoon’s liquidity pool, ensuring no one, including the defendants, could access them. Contrary to these claims, substantial portions of this liquidity pool remained unlocked. The defendants allegedly redirected millions of dollars toward personal luxuries, including high-end cars, lavish trips, and opulent residences.

Warnings for investors

Jorge G. Tenreiro, the Deputy Chief of the CACU, has urged investors to proceed with caution in the crypto realm. He emphasized the need to be wary of fraudsters who might exploit the rising popularity of crypto assets. Such individuals might lure investors with the promise of substantial profits, only to end up causing significant financial losses.

According to the SEC’s findings, the price of SafeMoon witnessed a staggering increase of over 55,000 percent between March 12 and April 20, 2021. This surge resulted in a market capitalization that exceeded $5.7 billion. However, the momentum was short-lived. The price experienced a sharp decline of nearly 50 percent after revelations on April 20, 2021, that the liquidity pool of SafeMoon was not as secure as previously claimed. Following this downturn, Karony and Smith allegedly used the misappropriated assets to artificially inflate SafeMoon’s price and manipulate the market. It is also alleged that Karony engaged in wash trading, which created a false impression of market activity, to manipulate SafeMoon’s price.

The SEC’s complaint, filed in the U.S. District Court for the Eastern District of New York, accuses the defendants of breaching the registration and anti-fraud provisions of both the Securities Act of 1933 and the Securities Exchange Act of 1934. The investigation was a collaborative effort, with contributions from several individuals. The SEC also expressed its gratitude to the U.S. Attorney’s Office for the Eastern District of New York and the FBI for their assistance in this matter. 

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