Former Hydrogen Technology CEO sentenced for cryptocurrency manipulation

According to a press release from the U.S. Department of Justice, two men have been sentenced for manipulating the price of a security and defrauding investors in the process of purchasing the cryptocurrency HYDRO issued by Hydrogen Technology.

Shane Hampton, a 32-year-old resident of Philadelphia, was sentenced to two years and eleven months in prison, while Michael Kane, a 39-year-old resident of Miami Beach, was sentenced to three years and nine months.

Their manipulative actions, which caused an inflated price, allowed the conspirators to profit approximately $2 million from selling HYDRO over about ten months.

This case marks the first time a federal criminal trial jury has recognized a cryptocurrency as a security and deemed the manipulation of cryptocurrency prices as securities fraud.

The prosecution and today's sentencing should serve as a warning: the Criminal Division will not hesitate to use all tools at its disposal, including federal securities laws, to protect the integrity of the cryptocurrency markets.

Case Details

According to court documents and evidence presented at trial, Michael Kane was the co-founder and CEO of Hydrogen Technology, while Shane Hampton was the company's Chief of Financial Engineering.

Starting in January 2018, Kane and the New York-based fintech company Hydrogen created the Hydro token and distributed it through various methods: "airdrop," essentially giving Hydro away to the public; bounty programs, paying tokens to individuals in exchange for promoting it; employee compensation; and direct sales on crypto asset trading platforms.

From October 2018 to April 2019, Kane and Hampton hired an external company, Moonwalkers Trading Limited of South Africa, to manipulate the HYDRO price on a U.S.-based cryptocurrency exchange by injecting false and fraudulent orders into the market using automated trading applications or "bots."

Kane, Hampton, and their co-conspirators executed approximately $7 million in "wash trades" for HYDRO and placed over $300 million in "spoof orders." These manipulative trades were intended to deceptively entice retail investors to purchase HYDRO.

The inflated prices resulting from these manipulative actions allowed Kane, Hampton, and their co-conspirators to earn approximately $2 million in profits from selling HYDRO over about ten months.

SEC Charges Against Hydrogen Technology

The U.S. Securities and Exchange Commission (SEC) announced charges against Hydrogen Technology, its former CEO Michael Ross Kane, and the self-proclaimed "market maker" Moonwalkers Trading Limited CEO Tyler Ostern on September 28, 2022. They were charged for their roles in an unregistered offering and sale of the crypto asset security called "Hydro" and for manipulating the trading volume and price of these securities.

The SEC's lawsuit, filed in the federal district court in Manhattan, alleges that Hydrogen, Kane, and Ostern violated the registration, anti-fraud, and market manipulation provisions of the securities laws. The SEC sought permanent injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties.

In April last year, Michael Ross Kane lost to the SEC in the charges of manipulating token quantities and prices.

He was ordered to pay $2.8 million in compensation and civil fines to the SEC, which included $1.5 million in profits from illegal activities, over $1 million in fines, and prejudgment interest.

Additionally, Kane was required to pay about $260,000 in personal fines.

Implications of Recognizing Cryptocurrency as a Security in Federal Criminal Trial

This ruling establishes a legal precedent that can influence future cases. By classifying certain cryptocurrencies as securities, the court aligns with the U.S. Securities and Exchange Commission's (SEC) stance.

Cryptocurrencies deemed as securities fall under the SEC's regulatory framework, meaning that entities dealing with these digital assets must comply with securities laws, including registration requirements, disclosure obligations, and investor protection measures.

This decision could prompt more comprehensive legislation and clearer guidelines regarding cryptocurrencies. It highlights the necessity for clearer regulatory frameworks to foster innovation while protecting investors.