A lawyer for the man who was convicted of what is believed to be the first criminal fraud case in the US related to Bitcoin has revealed new details about the case and his client.
In 2012, an anonymous Bitcoin entrepreneur known by the handle Pirateat40 launched a so-called "High Yield Investment Program" called Bitcoin Savings & Trust.
Pirateat40 advertised on the Bitcointalk.org forum, where he promised investors a 7 percent weekly return on deposits of more than 25,000 BTC, a sum worth more than $275,000 at the time. He never explained how he generated these fantastic returns. "If I told you then I couldn't do what I do," he said at the time (the thread has since been edited; the original is quoted here).
However, Pirateat40 shut down the fund in August of 2012, claiming it had gotten too big for him to manage. Then he disappeared. Investors who hadn't been paid back panicked.
Eleven months later, the Securities and Exchange Commission charged Pirateat40, who turned out to be Texas man Trendon T. Shavers, with running an illegal Ponzi scheme worth around $4.5 million at the time. He was ordered to pay more than $40 million in disgorgement, or illegal profits, as well as a $150,000 civil penalty.
That wasn't the end. The following year, Shavers was charged with criminal wire fraud and securities fraud in the Southern District of New York. He agreed to plead guilty to securities fraud on the condition that the wire fraud charge be dropped, and will be sentenced on February 3.
Jason Seibert, who defended Shavers for a short time during the SEC civil action, spoke about the case Tuesday at Inside Bitcoins, an industry conference in San Diego.
In Seibert's telling, Shavers was a scapegoat for an agency reeling from its failure to catch the infamous fraudster Bernie Madoff before he ripped off investors to the tune of $20 billion.
The situation was made worse by investigators and a judge who didn't understand how the digital currency Bitcoin works, Seibert said. He claimed his client was legitimately trying to pay back investors, and he simply lost control of the situation.
"The Bitcoin community that he loved abandoned him.”
“He paid as many people back as he could in the most fair way he could do it, but not everyone got paid back,” Seibert said. “So people assumed it must be a Ponzi scheme."
Seibert, who is based in Oregon, knew of Shavers through the Bitcointalk.org forum. He agreed to represent Shavers even though he knew he might not get paid. He did this because “the future of Bitcoin was too important to let the first case with the SEC be handled alone.”
When Bitcoin Savings & Trust started, Shavers had a formula for investing his client's bitcoins, Seibert said.
Shavers was "doing an arbitrage, lending money to others, sending it to MtGox, doing whatever he was doing in his ‘magic box’ before giving back to his Bitcoin clients,” the lawyer said.
“He paid 1 percent per day, per use and did that for almost two years and a lot of people made a lot of money,” Seibert said.
It's still not known exactly what Shavers did, however. “Even if I [knew], I can’t tell you because I represented the man,” Seibert said.
However, Shavers did want to pay his investors back, the lawyer said.
“All you have to do is look at the blockchain to see payment after payment going from Shavers out to lenders,” he said.
Ultimately one day, Bitcoin Savings and Trust ceased to work as it had and Shavers lost all the Bitcoin he had accumulated through the scheme, Seibert said. He claimed Shavers finally made a loan that would never be paid back. Pirateat40 was in trouble. Shavers rarely, if ever, knew with whom he was dealing.
With no money left, Shavers stopped paying investors, Seibert said, and soon, the SEC showed up with a subpoena—and a vengeance that came from its recent failure to suss out Madoff.
“The SEC got railed for missing the Bernie Madoff issue,” Seibert said. “Shavers [was] the Bernie Madoff of Bitcoin and the SEC wasn’t going to get caught napping.”
The SEC deposed Shavers without an attorney for "hours and hours and hours," Seibert said. “He didn’t know what he was answering or why it mattered. The SEC didn’t tell him that his answers could be used in the parallel criminal investigation.”
The investigators did not understand Bitcoin or its underlying architecture, the blockchain, Seibert said. Shavers "adamantly believed that they didn’t know what was going on, that they didn’t understand Bitcoin," Seibert said.
Seibert believes the agency was overly aggressive with Shavers's case.
“Maybe there is somebody in the SEC office that's trying to make a name for themselves in crypto-currency agencies,” he conjectured. “People want to be known for things, people want to have value in themselves. You get a motivated SEC attorney post-Madoff who has to show results.”
The fact that Bitcoin was involved made the case look even better for the agency, Seibert said.
“This was also when the Silk Road was going on,” Seibert said. “Bitcoin was big news and now they had a potential Ponzi scheme. A million dollar Bitcoin Ponzi scheme is ‘legal sexy.’”
After the case became public, Seibert flew to Dallas to meet with Shavers in person in Mckinney, Texas at a Starbucks. The two talked about how the investigation was handled. The SEC had frozen Shavers's assets, Seibert said.
“When you try to go against a SEC agency hell-bent on making a name for itself, what chance did Trendon have,” Seibert said. “A snow ball's chance in hell, maybe. They shut him down, paralyzed him right from the beginning.”
The agency had collected Shavers's bank records, Seibert said, as well as his account history from the Bitcoin exchange Mt. Gox. Then he said the agency demanded Shavers's provide a "verified accounting" of his assets.
"The community hated Shavers so much that they didn’t understand [that] even if Shavers did wrong, the SEC was making bad law, expanding the scope of their power."
“They [knew] every single dollar that went from his bank to MtGox and back to his bank," Seibert said. Plus, the nature of Bitcoin means all historical transactions can be looked up on the blockchain, which is essentially a public ledger. “What more verified of an accounting do you need than the blockchain?”
A verified accounting obviously costs money and costs assets. Shavers, for that reason, couldn’t provide a verified accounting, Seibert said.
“Is that fair?” Seibert asked rhetorically. “It’s not fair, probably not.”
Shavers came up with most of his own defense, Seibert said. “There is a definition of money in the US Code of what money is: legal tender issued by US definitions,” Seibert said. “The SEC doesn’t have jurisdiction over this case because Bitcoin isn’t money, it’s not use-currency."
The agency didn't buy it, however. “Judge Mazzant had no expertise and sought out no special master to the court,” Seibert said, referring to the fact that judges can seek out experts for topics in cases they don’t understand. “He relied on what the SEC wished the definition of money to be.” Thus, the SEC had acted outside the scope of its authority, Seibert said.
“Instead, the SEC ran to the courthouse and said, ‘Judge, you can define it as money,'" Seibert said.
“The judge relied on a second year law student’s article from the University of Illinois,” Seibert said. He filed a motion for reconsideration.
Seibert tried to explain Bitcoin to the judge: “Bitcoin is a value transfer protocol,” he said. “It’s a ledger of value transfer, a record of a transaction of a transfer.”
“But, can’t I buy airline tickets with it?” the judge asked.
“You can also do that with airline reward miles,” Seibert said. “Does that mean airline reward miles are money?”
The judge decided to treat Bitcoin as money anyway, denied the motion to dismiss the case, and ignored Seibert's motion to lift the asset freeze, Seibert said.
“At that point Shavers was done—broke, tired, confused, hurt," he said. "The Bitcoin community that he loved abandoned him.” Shavers felt he had to fire Seibert, because he had no money with which to pay.
“I have to fire you,” Seibert recalled him saying. He then recounted explaining to his Shavers what would happen to him.
“The second I am gone the SEC is going to move for summary judgement. They’re going to win a $40 million dollar judgement against you. They’ll put you in handcuffs right away after pressing criminal charges.”
“Yeah, but at least it will be over at some point in time? Right?” Seibert recalled Shavers asking.
“I don’t know when it’s going to be over,” Seibert recalled saying.
A campaign seeking Bitcoin to fund Shavers's defense was started, but it only raised the equivalent of $50. "The community hated Shavers so much that they didn’t understand [that] even if Shavers did wrong, the SEC was making bad law, expanding the scope of their power, and without money to fight and appeal, the community may have cut off its nose to spite its own face,” Seibert said.
Despite the rulings of Judges Mazzant and Rakoff, how Bitcoin is defined remains muddled. If you ask the IRS about Bitcoin, it will say it’s property, he said, while the Commodity Futures Trading Commission will say it’s a commodity and the SEC will consider it money.
“Whatever they have to say in order to make sure they can regulate it,” Seibert said.
Christopher Flood of the Federal Defenders of New York, who represented Shavers during the criminal case, had no comment for Motherboard. Shavers could not be reached.