Cries of Scam Arise as Once High-Flying Firms Don’t Deliver on Cryptocurrency

When the price of bitcoin and other digital currencies shot up late last year, insurance agent Ryan James wanted in on the action. He hit a trifecta.

Unfortunately for James, the trifecta was in three get-rich-quick companies that crashed in value, drew the attention of U.S. and Canadian regulators and highlighted the dangers of the world of digital currency.

The sharp skid in the fortunes of the three companies –– USI-Tech Limited, BitConnect and DavorCoin –– triggered hundreds of millions of dollars in losses for clients around the world, and perhaps more.

Those who suffered losses span the world, from the Philippines in Asia and Guam in the South Pacific, across the American heartland, down to Brazil, and on to Europe.

James, an insurance salesman from Paris, Mo., heard about the companies in December. He figured they had plenty of potential.

“I was fairly new to the cryptocurrency world at that time,” James said. He quickly invested about $40,000, a hefty sum for him. “You want to invest in some of this stuff because that’s where some of the biggest profits are,” he said.

James is far more skeptical today: “There are so many scams out there.”

Thousands of others also rue their involvement.

“I almost immediately knew when I got in, I got [cheated],” said Evan Kopelson, a content marketing consultant in Los Angeles. “I’d like to see some comeuppance for these smarmy people.”

But it’s not easy to track down the principals. USI-Tech Limited lists its address as a post office box in Dubai, United Arab Emirates; BitConnect is registered in London but its owners are not named; and no one seems to know where DavorCoin’s headquarters are.

“DavorCoin is concealing its principal place of business, claiming that ‘due to tax and regulation risks’ it ‘cannot officialize its domiciliation,’” Texas Securities Commissioner Travis J. Iles said in a Feb. 2 cease-and-desist order against the company.

Texas has taken the lead in warning consumers about the companies. In an earlier cease-and-desist order, Iles charged USI-Tech with soliciting investors through [social media], and promising returns of 1 percent a day, almost too good to believe, regardless of the price of bitcoin. It said the company was “engaging in fraud” and “misleading” the public.

Within three weeks of the Dec. 20 order, USI-Tech stopped selling in the United States and Canada.

In pockets of the U.S., including North Carolina and Guam, victims of USI-Tech’s suspension have been hit hard.

“I absolutely know of people who have given $100,000 to USI-Tech. I know of people who have taken out loans, maxed out credit cards and taken from their retirement accounts to put in USI-Tech,” said Cyrus Luhr, who heads an animal shelter in Guam.

Luhr became so concerned that he wrote to the territory’s attorney general on Jan. 7, demanding action against what he said appeared to be a Ponzi scheme in which new investors provide the capital to pay fake returns to earlier investors.

But action has been slow, partly because politicians on the island attended events to promote USI-Tech, including territory Sen. Tommy Morrison. Morrison told the Guam Daily Post that he was an administrator of the Guam USI-Tech social media group.

Morrison did not respond to an email query.

Luhr said many investors in Guam still hold out hope of getting their money back.

“When it finally collapses and people realize their money is gone, it’s going to be devastating,” Luhr said.

USI-Tech does not sell bitcoin, the digital currency that was first released to the public in 2009 but exploded in value only last year. USI-Tech sells bitcoin investment “packages” that function as shares of a security. The company has no discernible source of revenue other than the purchase of packages.

No one responded to messages left on the company’s website. A German national identified as one of its owners, Mike Kiefer, also did not respond to email queries.

“They are very difficult to track down,” said Gerardo Flores, a real estate broker in St. George, Utah. “I’d be happy just to get my money back.”

After Texas ordered USI-Tech to cease operations, six Canadian provincial securities regulators did the same. The latest was Ontario, where the Securities Commission last week ordered USI-Tech and two promoters to stop its operations.

The Commodities Futures Trading Commission, an independent U.S. government agency, joined the cautionary voices on what it called thinly trade alternative virtual currencies.

“Pump-and-dump schemes long predate the invention of virtual currencies, and typically conjure the image of penny-stock boiler rooms, but customers should know that these frauds have evolved and are prevalent online,” commission spokeswoman Erica Elliott Richardson said in a statement. She called on consumers to “avoid purchasing virtual currency or tokens based on tips shared over social media.”

BitConnect’s collapse in many ways has been more dramatic than the slower implosion of USI-Tech. Like its Dubai-based counterpart, BitConnect operated with a multilevel marketing structure, much like a vitamin or cosmetics company. Investors would receive the company’s own cryptocurrency on loan and obtain bonuses for signing up new people.

At its peak in early January, the company said its BitConnect Coin had a capitalization of $4.1 billion. But in early January, after the company received a cease-and-desist order from North Carolina’s regulator, it notified clients that “we are closing the BitConnect lending and exchange platform.” The capitalization plunged to $36 million.

The North Carolina order said BitConnect did not identify its owners, name the location of its operations or detail how it could promise annual profits amounting to 3,000 percent a year.

“Guaranteed annual compounded investment returns of over 3,000 percent are a known ‘red-flag’ for fraud, specifically for the risk that the investment may be a Ponzi scheme,” Secretary of State Elaine F. Marshall wrote in the order.

James, the Missouri insurance salesman, said he hasn’t had the heart to tell his wife that he may have lost tens of thousands of dollars.

“She really knows nothing about it. …. I don’t think I’ll even break it to her,” James said.