In 2011, a Mr T Shavers of Texas (Lance Armstrong country) started asking for lenders (alont with ‘Bitcoin Savings and Trust'), under an alias known as ‘the Pirate', to fund his trading strategy. To encourage investors, the SEC claim the Pirate posted that he wanted to borrow money to finance a trading strategy that had risk free returns of 350% per annum.
Analysis
I have no professional experience of US contract and criminal law but have enough UK exposure to make some observations. Let's break this down so we can understand it. The parties are:
(1) Mr T Shavers;
(2) Bitcoin Savings and Trust (formerly ‘First Pirate Savings and Trust', I kid you not );
(3) A forum member called ‘the Pirate' (seriously);
(4) Lenders who appear to be predominantly forum members of the forum that the (3) was a member;
(5) A forum that the (3) and (4) communicated on.
The top hedges funds provide returns of 20% annually to their high net wealth customers using complex computer models and quants (but no pirates), (3) was advertising returns 10 times greater that even the most basic due diligence by members of (5) would have been able to confirm were implausible. There was no contract referred to in the SEC indictment, (3) who may or may not be person who had full control of the online profile of (1), advertised for members of (5) a series of posts on to lend him money to support a an implausible investment model. There is nothing in the indictment confirming (1) and the (3) are one and the same, but it appears (4) transferred money to (2) on the basis of information that was provided by (3) through forum posts on (5). About 15% of the money is transferred from (2) to (1) to cover his living expenses and failed trading activities and the rest is eventually returned to (4) following further posts by (3). No detail of how losses were distributed across (4) over the period of the alleged crime other than to state when the business collapsed he prioritised friends and earlier investors.
The only thing that is clear to me is that this is not a Ponzi Scheme and it is likely (1) and/or (2) may not have even committed a crime. There was no contract between (2) and (4), a forum post does not facilitate the confirmation of a legal agreement nor is it recognised anywhere as such in any country I have ever heard off (nor want to live in since most of the people who lived there would be involved in litigation) . Notwithstanding there was no contract, there is no evidence presented or referred to that (1) and (3) are the same, another reason why forum posts are not used to authenticate financial arrangements. As a result, money was transferred from (4) to (2) on the basis of no contract and from (2) to (1) as a shareholder/employee of the company.
How is this a Ponzi Scheme? The facts are that this Pirate had no contract with the forum members who sent him money and it will be a non-trivial exercise for the SEC to prove that the (1) and (3) are one and the same person for each forum post. The lack of contract essentially means there was no security granted to (4) by either (1), (2) or (3) which gives considerable weight to the argument that the lenders had put money into a get rich scheme without taking reasonable steps to protect themselves or their money. Reading between the lines it appears that an altruistic Bitcoin community engaged in high risk lending without undertaking or had means to do so undertake meaningful due diligence who transpires has serious problems with reality (in particular financial markets reality). If someone can confirm to me he had a parrot for an avatar on the forum then I might even go as far to say he was so unhinged he probably thought he was a pirate.
There was essentially no legal basis to bring the indictment since there was no contract for the terms of business and there is even less basis for the SEC to define the arrangement as a Ponzi scheme. In particular the failure to adequately define how the activities of (1) and (2) and the cashflows could be interpreted as being part of a Ponzi strategy. The only basis for the prosecution to refer to the activities of (1) and (2) as a Ponzi enterprise is that he ‘prioritised long terms investors and friends' when he paid people members of (4) back when the reality of his trading ability became very real. If this has been a true Ponzi it would have been organised as such from the very start and not just when he tried to unwind the mess the mess his inner Pirate created.
What's Really Going On
The US Government is waging a public relations war on Bitcoin which I have discussed at length in previous blogs for Daily Forex. This Pirate and his business dealings were escalated to Ponzidom because it suited the agenda of the highly politicised SEC to have Bitcoin associated with the negative public perception of a Ponzis scheme to reinforce the message ‘Bitcoin is Dangerous'. The SEC knew they could rely on an unquestioning mainstream media to not actually read the indictment and question the Ponzi association and therefore were guaranteed publicity to discredit Bitcoin worldwide on the filmiest of associations. The fact that the SEC have built a case relying on contracts derived from a series of forum posts against someone who had delusions of grandeur of being a financial trader and/or a pirate supports this. This is a far cry from the complex schemes of the FIAT world where the like's Madoff created complex financial contracts and accounting methods to legitimise his deception of investors under the very noses of the SEC for many years. There is are a few important lessons to be learnt from this pseudo nautical experience that is Bitcoin and FIAT agnostic:-
(1) Understanding the reputation of parties prior to a financial transaction is imperative to reduce the risk of fraud, deception or mistakes.
(2) Relying on a legal system that takes years to understand even at the most basic elements of an alleged fraud (and badly) is further evidence that the current system is deeply flawed
(3) Never invest in businesses where the owner of said business refers to himself and/or his business as a Pirate (in particular if he also has a parrot avatar).
This fiasco adds further weight to the argument that for Bitcoin to succeed it needs to supported by a system of reputation to protect parties in the anonymous peer to peer transactions from having to rely on the deeply flawed financial regulation and legal system of the FIAT world.