October 19, 2020

Volume X, Number 293

October 16, 2020

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Wolf in Sheep’s Clothing: Bitclub Network Promoter Admits to Securities Fraud and Tax Offenses

Joseph Frank Abel recently pled guilty to conspiring to offer and sell unregistered securities and to filing a false tax return in connection with his role in the BitClub Network, a cryptocurrency mining scheme worth at least $722 million. 

Abel and his codefendants were charged by indictment in December 2019.  According to the indictment, from early 2014 through December 2019, the defendants used BitClub Network to solicit money from investors in exchange for shares of purported cryptocurrency mining pools and rewarded investors for recruiting new investors into the scheme. Internal communications obtained by the government as part of its investigation showed the defendants discussed that the target audience for the BitClub Network would be “dumb” investors, referred to them as “sheep,” and boasted that they would be “building this whole model on the backs of idiots.”

Abel, a promoter of the BitClub Network, sold shares of BitClub Network despite knowing the network and its operators did not register the shares with the U.S. Securities and Exchange Commission (SEC).  As part of his efforts to promote shares in the BitClub Network mining pools, Abel created and posted videos to the internet and gave presentations and speeches about the BitClub Network throughout the United States and numerous other countries in Asia, Africa, and Europe.

In an effort to avoid detection and regulation from U.S. law enforcement, U.S. investors were directed to use a virtual private network to hide their U.S. based IP address. Abel also failed to report approximately $1 million in cryptocurrency as income he earned from his promotion of the BitClub Network on his Form 1040 U.S. Individual Income Tax Return.

For the conspiracy charge, Abel faces up to five years in prison and a monetary fine amounting to twice Abel’s pecuniary gain or loss to the victims.  As for the tax charge, Abel faces up to three years in prison and a $100,000 fine.

Earlier this year, co-defendant Balaci pled guilty to one count of a dual-object conspiracy to commit wire fraud and to offer and sell unregistered securities.

The BitClub case is one of a number of criminal actions by the U.S. Department of Justice against issuers of digital assets that were illegally offered securities employing fraud. The criminal prosecutions are in addition to civil enforcement actions brought by the SEC against issuers of digital assets that are securities sold without a registration or an exemption from registration with the SEC.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 259

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About this Author

Richard Levin Polsinelli Fintech Attorney
Shareholder

Richard Levin is the Chair of Polsinelli’s Chambers rated FinTech and Regulation Practice.  He brings his experience as a senior legal and compliance officer on Wall Street and in London to bear in advising clients on corporate, securities and regulatory issues. A problem-solver by nature, his practice focuses on helping financial services and technology (FinTech) clients identify and address regulatory issues as they build their businesses.

The FinTech sector is...

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Jason A. Nagi, Polsinelli, Distressed note purchases lawyer, Real estate matters attorney
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Jason Nagi helps clients find the most efficient route to their desired result and clients have relied on him to get them what they need – in and out of the courtroom – for more than a decade.

He has significant experience representing parties involved in the following matters:

  • Foreclosing lenders realizing on their collateral

  • Distressed note purchases

  • Real estate

  • Related bankruptcy and out-of-court workouts

  • Guarantee enforcement and disposition of collateral

  • Lender liability, fraud, and breach of contract claims

  • Claims under articles 3 and 4 of the Uniform Commercial Code

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Paul Roshka, Polsinelli, financial securities lawyer
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Known for his thorough preparation and persistence, Paul Roshka has a national practice representing companies, their directors, officers, and employees during investigations and enforcement/disciplinary proceedings involving potential violations of the federal and state securities laws, and other financial regulatory statutes and rules. He has handled matters initiated by almost every SEC Regional Office and FINRA District Office, and their Home Offices in Washington, D.C.

He is also a recognized bet-the-company litigator. Paul has defended securities/financial...

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Andrew T. Fox Phoenix Polsinelli Government Investigations Labor and Employment Commercial Litigation Litigation and Dispute Resolution
Associate

As a member of Polsinelli’s Government Investigations practice, Andrew assists clients in all aspects of white collar criminal defense and internal corporate investigations. Working to understand each client’s unique situation, he helps guide clients through government inquiries and provides counsel that aligns to their business strategies. Andrew has experience drafting briefs, memoranda and responding to discovery requests.

Prior to joining Polsinelli, Andrew served as a law clerk to The Honorable Judge Douglas L. Rayes on the United States District Court for the District of...

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