Author: Susan Mangiero, Ph.D., CFE, CFA

Ron Sages, a Portfolio Manager at Eagle Ridge, was interviewed and quoted in an article from Fraud Magazine. Below is the overview and a link to the full article:

In April, Michael Kane, the former CEO of a New York-based financial technology company, Hydrogen Technology Corporation, found himself possibly facing decades in prison after federal prosecutors charged him and co-conspirators with falsely inflating the price of their virtual token to lure investors into a scheme that yielded $2 million in profits for the firm but left its victims out of pocket. [See “Five Individuals Charged in $2M Virtual Asset and Securities Manipulation Scheme,” U.S. Department of Justice (DOJ), April 24, 2023.]

Investors have been losing their money to scammers since ancient times, but the scale and the cost of investment fraud has only grown in a digital age that has made it easier for fraudsters to steal hard-earned savings. Here we look at some of the different types of investment fraud and the red flags to watch out for.

According to the published charges, when the company created the Hydro token in 2018, it proceeded to give it away to investors with the condition that they promoted the virtual asset, which traded on the Ethereum blockchain. In October that same year, Hydrogen hired a South African firm called Moonwalkers Trading Limited, which allegedly used customized software, or bots, to create the appearance of robust trading volumes so that Hydrogen could then sell the token to unknowing investors for a tidy profit. Last year, the U.S. Securities and Exchange Commission (SEC) said that Hydro was an unregistered fundraising scheme. And in April, federal prosecutors charged Kane — along with Shane Hampton, Hydrogen’s chief of financial engineering, and George Wolvaardt, Moonwalker’s chief technology officer — with one count of conspiracy to commit securities price manipulation, one count of conspiracy to commit wire fraud and two counts of wire fraud. If they’re convicted, each will face a maximum of five years in prison for securities price manipulation and 20 years on each of the other counts, according to the DOJ. (See “SEC Charges The Hydrogen Technology Corp. and its Former CEO for Market Manipulation of Crypto Asset Securities,” SEC, Sept. 28, 2022; “U.S. Securities and Exchange Commission against The Hydrogen Technology Corporation, Michael Ross Kane, Tyler Ostern,” Southern District Court of New York, Case No. 22-cv-08284, Sept. 29, 2022; and “Crypto Executives Risk Decades in Prison for $2 Million Manipulation of Hydro,” by Rick Steves, Finance Feeds, April 25, 2023.)

In some ways, this scam echoes the bigger and better-known fraud scandal at crypto exchange FTX, where founder Sam Bankman-Fried — who now sits in a Brooklyn prison awaiting trail — is accused of using his firm’s FTT token in similar ways. Sadly, these are familiar stories for investors these days, not only in the crypto space but anywhere people are seeking to grow their money and keep it safe. (See “FTX made a cryptocurrency that brought in millions. Then it brought down the company,” by David Gura, NPR, Business, Nov. 15, 2022 and “SEC Charges Caroline Ellison and Gary Wang with Defrauding Investors in Crypto Asset Trading Platform FTX,” SEC, Press Release, Dec. 21, 2022.)

Inventor and statesman Benjamin Franklin had it right when he said, “An investment in knowledge always pays the best interest.” Educating yourself about the many ways you can lose money to swindlers is a good start, but more is needed to protect the value of your portfolio. As history shows, even self-described smart people fall prey to con artists who promise high returns and deliver nothing but heartache and empty wallets. Count yourself lucky if you’ve never received an email solicitation from a mysterious foreign prince or a telephone hustle to invest in a hot stock by the end of the call. For everyone else, be scared, be very scared. Investment fraud is huge, on the rise and ruinous if you put all your money eggs in a bad basket.