FBI phishing tokens: How token issuers and market makers manipulate the market

Written by: 0xjs@黄金财经

As we all know, the crypto industry is a mixed bag.

Gary Gensler, chairman of the U.S. SEC, has always regarded many crypto tokens as securities and criticized the serious market manipulation in the crypto industry. It largely represents the regulatory attitude of the U.S. government.

On October 9, 2024, the U.S. SEC, the Federal Bureau of Investigation (FBI) and the U.S. Department of Justice (DOJ) jointly took action to file lawsuits against four crypto token companies, four market makers and the founders and employees of several related entities, accusing them of market manipulation and fraud. Four defendants have pleaded guilty, another has agreed to plead guilty, and the U.S. Department of Justice arrested three other defendants in Texas, the United Kingdom and Portugal this week. The U.S. Department of Justice has seized more than $25 million in cryptocurrencies and deactivated multiple trading robots that conducted millions of dollars worth of wash trades on about 60 different cryptocurrencies.

The eight crypto companies are four crypto token companies: Saitama, Robo Inu, VZZN, and Lillian Finance;Four market makers: Gotbit, ZM Quant, CLS Global, and MyTrade.

According to the indictment, the defendants who created crypto tokens made false statements about their crypto tokens, and market makers conducted false "wash trades" on these tokens to create the illusion of active trading and make the tokens look like good investments. These deceptive strategies allegedly attracted new investors and buyers, causing the trading prices of tokens to rise. The defendants then sold their tokens at artificially inflated prices, a fraud often referred to as "pump and dump." Saitama, the largest of the crypto tokens, once had a market value of billions of dollars.

Although many people in the crypto industry often criticize Gary Gensler for being too conservative and strict in regulation, there are indeed many manipulations and frauds in the crypto industry. As the market maker who was sued this time said, the goal of the secondary market” is to find “other buyers in the community, people you don’t know or care about” because “you have to make [other buyers] lose money to make a profit.”

It is worth noting that this is a joint action by multiple departments of the US government. In order to capture solid evidence, the US FBI personally created crypto tokens and conducted fishing enforcement on market makers.

Unprecedented action by the FBI: personally creating tokens on Ethereum and “fishing enforcement”

The US FBI has always had a “fishing enforcement” work style, and this time the US FBI has successfully used the “fishing enforcement” behavior in the crypto industry.

According to the FBI, this "fishing enforcement" is part of the U.S. government's investigation into potential market manipulation in the cryptocurrency industry, "Operation Token Mirrors."

In order to identify, disrupt and bring fraudsters to justice, the FBI took unprecedented action to create its own cryptocurrency company and token NexFundAI. It is reported that the NexFundAI token is deployed on Ethereum.

The FBI found three of the four market makers accused, ZM Quant, CLS, and MyTrade MM, to make markets for NexFundAI, and was successfully fished by the FBI.

Among them, ZM Quant is the market maker for both NexFundAI and Saitama, while Gotbit is the market maker for Saitama. Robo Inu and VZZN tokens were created by former Saitama employees after they left.

The FBI successfully obtained criminal evidence against most of the defendants through NexFundAI.

MyTrade MM founder Liu Zhou described in detail how wash trading is done and the purpose of wash trading in a conversation with NexFundAI representatives. Liu Zhou bluntly told NexFundAI representatives that the “goal of the secondary market” is to find “other buyers in the community, people you don’t know or care about” because “we have to make [other buyers] lose money to make a profit.”

Details of the market manipulation behavior of the indicted entities

Four market makers

1. Gotbit and Aleksei Andriunin, Fedor Kedrov, Qawi Jalili

According to court documents, Gotbit is a well-known "market maker" in the cryptocurrency industry.

Aleksei Andriunin, 26, from Russia and Portugal, is the CEO and founder of Gotbit. Andriunin was arrested in Portugal on October 8, 2024, awaiting extradition.

Fedor Kedrov is from Russia and is the director of market making at Gotbit.

Qawi Jalili is from Russia and is the sales director of Gotbit.

Gotbit, Kedrov and Jalili were charged with wire fraud and conspiracy to commit market manipulation and wire fraud, respectively. Andriunin is also charged in a separate criminal indictment with wire fraud, conspiracy to commit market manipulation and wire fraud, and conspiracy to commit money laundering.

Between 2018 and 2024, Gotbit provided market manipulation and wash trading services to several cryptocurrency companies, including those located in the United States. Gotbit allegedly conducted millions of dollars worth of wash trades on behalf of its clients and received tens of millions of dollars in proceeds from these illegal services. In an interview posted online in 2019, Andriunin described how he developed a code to conduct wash trades and artificially inflate cryptocurrency trading volumes. Andriunin allegedly tracked Gotbit's market manipulation, including using a spreadsheet to compare "created volume" generated by wash trading to naturally occurring "market volume." Gotbit employees, including Jalili and Kedrov, allegedly described these wash trading strategies and how to avoid detection to potential clients. Jalili and Kedrov also provided these services to a variety of cryptocurrencies, including Saitama and Robo Inu cryptocurrencies.

2. ZM Quant and Riqui Liu, Baijun Ou

ZM Quant is a “market maker” in the cryptocurrency industry that advertised illegal market manipulation services to customers.

Riqui Liu, 26, from the United Kingdom and Hong Kong, is an employee of ZM Quant.

Baijun Ou, 32, from Hong Kong, is also an employee of ZM Quant.

ZM Quant, Riqui Liu, and Baijun Ou were each charged in a superseding indictment with wire fraud and conspiracy to commit market manipulation and wire fraud.

According to court documents, ZM Quant allegedly advertised a “trading robot” that could “create trading volume.” ZM Quant employees allegedly discussed these illegal services with customers through Telegram messages and video conference calls. As alleged in the indictment, in a March 2024 video conference call, Riqui Liu, Baijun Ou described how ZM Quant “traded maybe ten or twenty times a minute” to “increase volume” and “drive up prices.” Riqui Liu, Baijun Ou also described how ZM Quant allegedly used multiple trading wallets to avoid trades appearing “fake.” It is further alleged that ZM Quant provided market manipulation services to multiple cryptocurrency companies, including Saitama and NexFundAI.

3. CLS and Andrey Zhorzhes

CLS is a “market maker” in the cryptocurrency industry that advertised illegal market manipulation services to its customers.

Andrey Zhorzhes, from the United Arab Emirates, is an employee of CLS.

CLS and Andrey Zhorzhes were both charged in an indictment with wire fraud and conspiracy to commit market manipulation and wire fraud.

Zhorzhes allegedly described to a potential client how CLS’s algorithm generated trading volume on multiple cryptocurrency exchanges as follows:

“We have an algorithm… that basically buys and sells itself.”

“The idea of ​​creating volume is… so the token looks organic and active, and people will be interested in trading it.”

“It’s hard to track… We’ve done this for a lot of clients.”

“I know it’s wash trading, and I know people might not be happy about it.”

Andrey Zhorzhes and other CLS traders provided these market manipulation services to NexFundAI.

4. MyTrade MM and Liu Zhou

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MyTrade MM is another “market maker” in the cryptocurrency industry that advertised illegal market manipulation services to clients, including “pump and dump” advisory services and “wash trades” facilitated by “bots.”

Liu Zhou, 39, of Chinese and Canadian descent, is the founder of MyTrade MM.

Liu Zhou has been charged and has agreed to plead guilty to conspiracy to commit market manipulation and wire fraud.

MyTrade MM’s clients can specify a desired daily volume of wash trades on identified cryptocurrency exchanges through a dashboard on the MyTrade MM website. The MyTrade MM dashboard describes the service as “volume support” and allows for millions of dollars of wash trades per customer’s cryptocurrency per day, such as:

In conversation with NexFundAI, Liu Zhou described MyTrade MM as superior to “CLS” and “Gotbit” because those market makers “keep clients in the dark” and “control pump and dump,” meaning “they can easily conduct insider trading.” Liu Zhou also described various purposes of wash trading, including showing “consistent trading activity every hour”; generating large enough volume for cryptocurrency exchanges to waive listing fees; and executing “pump and dumps.” According to court documents, Liu Zhou further described that the "goal of the secondary market" is to find "other buyers in the community, people you don't know or care about," because "we have to make [other buyers] lose money in order to make a profit."

Four crypto token companies

1. Saitama and Manpreet Kohli, Haroon Mohsini, Nam Tran, Max Hernandez, Russell Armand, Vy Pham

Saitama is a crypto token company that was originally registered in Massachusetts in August 2021.

Manpreet Kohli, 43, from the UK, is the CEO of Saitama. Kohli was arrested in the UK on October 7, 2024, awaiting extradition.

Haroon Mohsini, 37, from Texas, also works at Saitama. Mohsini was arrested on October 7, 2024, in the Southern District of Texas.

Nam Tran, 32, of Vietnam, worked for Saitama and is currently in Vietnam.

Kohli, Mohsini and Tran were each charged in a superseding indictment with wire fraud, market manipulation, and conspiracy to commit wire fraud, market manipulation, and operating an unlicensed money transmission business.

Max Hernandez, 36, of Massachusetts, and

Russell Armand, 42, of Texas, who also worked for Saitama, were each indicted and have both pleaded guilty to market manipulation and conspiracy to commit wire fraud and operating an unlicensed money transmission business.

Vy Pham, 32, of California, was also indicted for her conduct at another cryptocurrency company, but as part of her plea, she admitted to certain conduct involving Saitama.

According to the indictment, Saitama created a range of products that could be used with its tokens and, at its peak, boasted a market cap of $7.5 billion. Saitama’s leadership allegedly made various false public statements, including that Saitama’s business plan had been reviewed by regulators, that its leadership had not sold the Saitama tokens they owned, and that Saitama tokens were coded in a way that would prevent market manipulation. In reality, Saitama’s leadership actively manipulated the market for Saitama tokens and secretly sold their Saitama tokens for tens of millions of dollars in profits, according to the indictment.

Saitama’s market manipulation activities began around July 2021, when leadership coordinated a series of small purchases spread across multiple cryptocurrency wallets. The trades were coordinated on Telegram, with the goal, Armand explained, of “creating the appearance of large purchases and new holders” in order to “incite people to buy more… We want the list of small purchases to look like there are more buyers. That’s the idea.” Saitama’s leadership allegedly confirmed their purchases to one another, discussed how they had successfully gotten others to buy Saitama cryptocurrency, and exchanged “pump it up” memes and gifs:

Thereafter, Saitama’s leadership allegedly paid several market makers to place orders on cryptocurrency exchanges including BitMart, LBank and XT.com). Market makers paid by Saitama allegedly include ZM Quant and Gotbit.

2. Robo Inu Finance (Robo Inu)

Robo Inu is a cryptocurrency company and token created by Vy Pham after he left Saitama in 2021. Pham has been indicted and agreed to plead guilty to conspiracy to commit market manipulation, wire fraud, and engaging in an unlicensed money transmission business.

Pham founded and promoted Robo Inu from the United States. Similar to Saitama, Robo Inu allegedly claimed to create a series of products that could be used with its cryptocurrency. Starting in about 2022, Robo Inu allegedly paid Gotbit to artificially inflate the trading volume of Robo Inu tokens through wash trading on cryptocurrency exchanges such as Bitmart.

3. VZZN and Michael Thompson

VZZN is a cryptocurrency company and token created by Armand after he left Saitama in 2023.

Michael Thompson, 50, of Virginia, also worked at VZZN. Like Armand, Thompson was indicted and pleaded guilty to conspiracy to commit market manipulation.

VZZN was purportedly a video streaming service that could be used with the VZZN token. While promoting the service, Armand and Thompson also allegedly made misleading public statements about VZZN and artificially inflated the trading volume of the VZZN token through wash trading.

4. Lillian Finance and Bradley Beatty

Lillian Finance is a cryptocurrency company and token created by Bradley Beatty, 48, of Florida. Beatty was charged in an indictment with wire fraud.

Lillian Finance allegedly claimed to use blockchain technology in the healthcare industry and to use a portion of the proceeds from token sales for charitable purposes. Beatty made a series of false statements about Lillian Finance to attract investors, such as that he was a defense contractor and that he had spoken to Congress on the subject of cryptocurrency. Thereafter, Beatty received hundreds of thousands of dollars in proceeds from the retail sales of Lillian Finance tokens and misappropriated a portion of Lillian Finance’s profits that were intended for charitable purposes.

U.S. regulators reiterated:Crypto market manipulation and "wash trading" are illegal

Acting U.S. Attorney Joshua Levy said, "This investigation is the first of its kind and has identified numerous fraudsters in the cryptocurrency industry. Wash trading has long been illegal in financial markets, and cryptocurrencies are no exception. In these cases, an innovative technology - cryptocurrency - encountered a century-old scam - pump and dump. The message conveyed today is that if you make false statements to deceive investors, it is fraud. We will actively combat fraud, including in the cryptocurrency industry." "These charges are also a stark reminder that online investors must be highly vigilant and it is critical to do their homework before getting involved in the digital frontier. People considering investing in the cryptocurrency industry should understand how these scams work in order to protect themselves."

Sanjay, Deputy Director of the U.S. SEC Enforcement Division Wadhwa said, “The SEC’s enforcement action once again demonstrates that retail investors are falling victim to fraudulent activities by institutional actors in the crypto asset markets… Investors should be aware that they may be at a disadvantage as so-called promoters and self-appointed market makers work together to lure the investing public with false promises of profits in the crypto markets.”

“What the FBI uncovered in this case was essentially a new twist on old-school financial crime,” said FBI Special Agent in Charge Jodi Cohen. “‘Operation Token Mirrors’ targeted nefarious token developers, promoters and market makers in the crypto space. Our findings led to charges against the leaders of four cryptocurrency companies, as well as four crypto ‘market makers’ and their employees, who are accused of spearheading a sophisticated trading scheme that defrauded honest investors of millions of dollars.” 

According to the U.S. Department of Justice, the sentences for the different charges are:

The market manipulation charge carries a maximum sentence of 20 years in prison, up to three years of supervised release, a fine of up to $5 million or twice the proceeds or loss from the crime, and forfeiture of property.

The wire fraud charge carries a maximum sentence of 20 years in prison, up to three years of supervised release, a fine of up to $250,000 or twice the value of the proceeds or loss, restitution, and forfeiture of property.

The conspiracy charge to commit wire fraud, market manipulation, and/or engage in an unlicensed money transmission business carries a maximum sentence of five years in prison, up to three years of supervised release, a fine of up to $250,000 to twice the value of the proceeds or loss, restitution, and forfeiture of property.

The money laundering conspiracy charge carries a maximum sentence of 20 years in prison, three years of supervised release, a fine of $500,000 or twice the value of the property obtained, whichever is greater, and forfeiture of property.