`
`RICHARD R. BEST
`REGIONAL DIRECTOR
`Lara Shalov Mehraban
`A. Kristina Littman
`John O. Enright
`Mark R. Sylvester
`Richard G. Primoff
`Michael Baker
`Gwen Licardo
`Pamela Sawhney
`Attorneys for Plaintiff
`SECURITIES AND EXCHANGE COMMISSION
`New York Regional Office
`Brookfield Place
`200 Vesey Street, Suite 400
`New York, New York 10281-1022
`(212) 336-0148 (Primoff)
`primoffr@sec.gov
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`SECURITIES AND EXCHANGE
`COMMISSION,
` Plaintiff,
`
` -against-
`
`BITCONNECT,
`SATISH KUMBHANI,
`GLENN ARCARO, and
`FUTURE MONEY LTD.,
` Defendants,
`
`
`
`
`
`
`
`
`
`
`COMPLAINT
`
`21 Civ. 7349 ( )
`
`
`
`
`JURY TRIAL DEMANDED
`
`
`
`
`Plaintiff Securities and Exchange Commission (“SEC”), for its Complaint against
`
`Defendants BitConnect (“BitConnect”), Satish Kumbhani (“Kumbhani”), Glenn Arcaro
`
`(“Arcaro”), and Future Money Ltd. (“Future Money”) (collectively, “Defendants”), alleges as
`
`follows:
`
`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 2 of 44
`
`SUMMARY
`
`1.
`
`From approximately January 2017 to January 2018 (the “relevant period”),
`
`Defendants conducted a fraudulent and unregistered offering and sale of securities in the form of
`
`investments in BitConnect’s purported “Lending Program,” that ultimately succeeded in
`
`obtaining more than 325,000 Bitcoin, or approximately $2 billion, from investors worldwide,
`
`including from investors located in the United States.
`
`2.
`
`BitConnect, an unincorporated organization, and Kumbhani, its founder,
`
`established a worldwide network of promoters, and rewarded them for their promotional efforts
`
`by paying them commissions, a substantial portion of which they concealed from investors.
`
`Among these promoters was Arcaro, whom Kumbhani and BitConnect engaged as the lead
`
`national promoter of BitConnect for the United States, and who used the website he created for
`
`his company, Future Money, to lure investors into the Lending Program.
`
`3.
`
`Arcaro formed his own network of United States-based promoters, which
`
`included Trevon Brown (“Brown”), Craig Grant (“Grant”), Ryan Maasen (“Maasen”) and
`
`Michael Noble (“Noble”) (the “Arcaro Promoters”). Each of the Arcaro Promoters is a named
`
`defendant in a related case in the United States District Court for the Southern District of New
`
`York, entitled SEC v. Brown, et al., 21 Civ. 4791 (JGK).
`
`4.
`
`Arcaro and the Arcaro Promoters – none of whom was registered with the
`
`Commission as a broker-dealer, or associated with a registered broker-dealer – touted the
`
`supposedly lucrative potential of investing into the Lending Program to potential retail investors,
`
`through “testimonial”-style videos they created and published on YouTube, sometimes multiple
`
`times a day, with referral links to the Lending Program.
`
`
`
`2
`
`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 3 of 44
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`5.
`
`To induce investors to deposit funds into the purported Lending Program,
`
`BitConnect and Kumbhani represented, among other things, that BitConnect would deploy a
`
`purported proprietary “volatility software trading bot” (the “Trading Bot”) that, they claimed,
`
`would use investor funds to generate returns as high as 40% per month, and they posted fictitious
`
`returns on the BitConnect Website that amounted to, on average, 1% per day, or approximately
`
`3,700% on an annualized basis.
`
`6.
`
`These claims were a sham. As Defendants knew or recklessly disregarded,
`
`BitConnect did not deploy investor funds for trading with its purported Trading Bot. Rather,
`
`BitConnect and Kumbhani siphoned investors’ funds off for their own benefit, and their
`
`associates’ benefit, by transferring those funds to digital wallet addresses controlled by
`
`Kumbhani, Arcaro, other promoters, including the Arcaro Promoters, and other unknown
`
`individuals.
`
`7.
`
`To mask the fact that they were not deploying investor funds to be traded with the
`
`purported Trading Bot they described to investors, BitConnect and Kumbhani conducted a
`
`Ponzi-like scheme in which they at times used funds deposited by newer investors in order to
`
`satisfy withdrawal demands made by earlier investors.
`
`8.
`
` In return for their promotional efforts, BitConnect and Kumbhani paid Arcaro
`
`and the Arcaro Promoters a percentage of the funds they raised from investors, in the form of
`
`“referral commissions” that ranged, initially, from 0.2% to 7% of the funds raised, and then,
`
`beginning on or about November 3, 2017, from 2% to a maximum of 5%.
`
`9.
`
`BitConnect and Kumbhani also paid Arcaro and other top promoters, including
`
`the Arcaro Promoters, additional sums from the monies investors paid, and which Defendants
`
`referred to as “development funds.” These were commissions BitConnect and Kumbhani paid to
`
`
`
`3
`
`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 4 of 44
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`Arcaro and the Arcaro Promoters on a weekly basis on top of the referral commissions, and were
`
`calculated as a percentage of new loans made during that week by investors that were recruited
`
`by the individual promoter, or by investors that the individual promoter’s investors had recruited.
`
`10.
`
`Unlike the referral commissions, which BitConnect publicly disclosed, Kumbhani
`
`and BitConnect, as Arcaro knew, did not publicly disclose the payment of these “development
`
`fund” commissions to promoters, and on the contrary actively sought to conceal this information
`
`from investors and potential investors.
`
`11.
`
`From the approximately 325,000 Bitcoin, or approximately $2 billion, that
`
`Kumbhani and BitConnect fraudulently induced investors to pay into the Lending Program and
`
`into their control, Arcaro and Future Money received more than $24 million in “referral
`
`commissions” and “development funds.”
`
`VIOLATIONS
`
`12.
`
`By virtue of the foregoing conduct and as alleged further herein, Defendants
`
`BitConnect, Kumbhani, Arcaro and Future Money engaged in securities fraud in violation of
`
`Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. § 78j(b)],
`
`and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]; Defendants BitConnect, Kumbhani, and
`
`Arcaro engaged in securities fraud in violation of Section 17(a) of the Securities Act of 1933
`
`(“Securities Act”) [15 U.S.C. § 77q(a)], and Future Money engaged in securities fraud in
`
`violation of Sections 17(a)(1) and (3), of the Securities Act [15 U.S.C. § 77q(a)]; Defendants
`
`BitConnect, Kumbhani, Arcaro and Future Money engaged in the unregistered sale and offer to
`
`sell securities in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a),
`
`77e(c)] and Defendants Arcaro and Future Money violated Section 15(a) of the Exchange Act
`
`[15 U.S.C. § 78o(a)].
`
`
`
`4
`
`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 5 of 44
`
`13.
`
`Unless Defendants are restrained and enjoined, they will engage in the acts,
`
`practices, transactions, and courses of business set forth in this Complaint or in acts, practices,
`
`transactions, and courses of business of similar type and object.
`
`NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT
`
`14.
`
`The Commission brings this action pursuant to the authority conferred upon it by
`
`Securities Act Section 20(b) and Section 20(d) [15 U.S.C. §§ 77t(b) and 77t(d)] and Exchange
`
`Act Section 21(d) [15 U.S.C. § 78u(d)].
`
`15.
`
`The Commission seeks a final judgment: (a) permanently enjoining Defendants
`
`from violating the federal securities laws and rules this Complaint alleges they have violated; (b)
`
`permanently enjoining Defendants as specified in the Prayer for Relief below; (c) ordering
`
`Defendants to disgorge all ill-gotten gains and/or unjust enrichment they received as a result of
`
`the violations alleged here and to pay prejudgment interest thereon, pursuant to Exchange Act
`
`Sections 21(d)(5) and 21(d)(7) [15 U.S.C. §§ 78u(d)(5) & 78u(d)(7)]; (d) ordering Defendants to
`
`pay civil money penalties pursuant to Securities Act Section 20(d) [15 U.S.C. § 77t(d)] and, with
`
`respect to Defendants Arcaro and Future Money, also pursuant to Exchange Act Section 21(d)(3)
`
`[15 U.S.C. § 78u(d)(3)]; and (e) ordering any other and further relief the Court may deem just
`
`and proper.
`
`JURISDICTION AND VENUE
`
`16.
`
`This Court has jurisdiction over this action pursuant to Securities Act Section
`
`22(a) [15 U.S.C. § 77v(a)] and Exchange Act Section 27 [15 U.S.C. § 78aa].
`
`17.
`
`Defendants, directly and indirectly, have made use of the means or
`
`instrumentalities of interstate commerce or of the mails in connection with the transactions, acts,
`
`practices, and courses of business alleged herein.
`
`
`
`5
`
`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 6 of 44
`
`18.
`
`Venue lies in this District under Securities Act Section 22(a) [15 U.S.C. § 77v(a)]
`
`and Exchange Act Section 27 [15 U.S.C. § 78aa]. Certain of the acts, practices, transactions, and
`
`courses of business alleged in this Complaint occurred within this District. Defendants, for
`
`example, solicited investors in this District. In addition, during the relevant time period, Arcaro
`
`maintained one or more accounts at a digital asset exchange and custodian company at a New
`
`York trust company headquartered in the District. To obtain payment from BitConnect for the
`
`conduct alleged here, Arcaro also transacted in Bitcoin between wallet addresses controlled by
`
`BitConnect and wallet addresses associated with his own individual accounts, and the accounts
`
`of others, at the New York digital asset exchange and custodian company.
`
`DEFENDANTS
`
`19.
`
`BitConnect is an unincorporated organization established in approximately 2016
`
`by Kumbhani. Between July 2016 and September 2017, BitConnect registered several companies
`
`with Companies House in the United Kingdom: BitConnect Ltd., BitConnect International PLC,
`
`BitConnect Trading Ltd., and BitConnect Public Ltd. These entities are currently either defunct
`
`or dissolved.
`
`20. Kumbhani, age 35, is an Indian citizen who resided in Surat, India but whose
`
`current whereabouts are unknown. Kumbhani founded, managed, and controlled BitConnect at
`
`all relevant times.
`
`21.
`
`Arcaro, age 44, is a United States citizen residing in Moorpark, California.
`
`Arcaro served as BitConnect’s lead national promoter in the United States from approximately
`
`August 2017 to January 2018. In that role, he was responsible for, among other things,
`
`promoting BitConnect and the Lending Program to retail investors and prospective investors in
`
`the United States, and communicating information and instructions from BitConnect to its
`
`
`
`6
`
`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 7 of 44
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`regional promoters, including the Arcaro Promoters, in the United States.
`
`22.
`
`Future Money Ltd. (“Future Money”), is a limited company incorporated by
`
`Arcaro in Hong Kong on October 12, 2017. Arcaro is the sole founder, director, and shareholder
`
`of Future Money.
`
`RELATED INDIVIDUALS
`
`23.
`
`Brown, age 32, resides in Myrtle Beach, South Carolina. He was a regional
`
`promoter for BitConnect under Arcaro.
`
`24. Grant, age 47, resides in Kissimmee, Florida. He was a regional promoter for
`
`BitConnect under Arcaro.
`
`25.
`
`Jeppesen, age 37, resides in East Falmouth, Massachusetts. Jeppesen was a
`
`“Continental Promoter” for BitConnect, and, starting in late October 2017, BitConnect’s
`
`“Second United States National Promoter.” In this capacity, Jeppesen served as a liaison between
`
`BitConnect and Kumbhani on the one hand, and BitConnect’s national promoters, including
`
`Arcaro. Jeppesen is also a named defendant in the related case discussed above (see ¶ 3, supra)
`
`in the United States District Court for the Southern District of New York, entitled SEC v. Brown,
`
`et al., 21 Civ. 4791 (JGK).
`
`26. Maasen, age 40, resides in Tulsa, Oklahoma. He was a regional promoter for
`
`BitConnect under Arcaro.
`
`27.
`
`Noble, age 52, resides in Pacific Palisades, California. He was a regional
`
`promoter for BitConnect under Arcaro.
`
`STATUTORY AND LEGAL FRAMEWORK
`
`28.
`
`Sections 5(a) and 5(c) of the Securities Act require that an issuer of securities,
`
`such as BitConnect, register offers and sales of those securities with the Commission when they
`
`
`
`7
`
`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 8 of 44
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`offer and sell securities to the public, absent certain specified exemptions. Registration
`
`statements relating to an offering of securities thus provide public investors with material
`
`information about the issuer and the offering, including financial and managerial information,
`
`how the issuer will use offering proceeds, and the risks and trends that affect the enterprise and
`
`an investment in its securities.
`
`29.
`
`The definition of a “security” under the Securities Act includes a wide range of
`
`investment vehicles, including “investment contracts.” As the United States Supreme Court
`
`noted in SEC v. W.J. Howey Co., Congress defined “security” broadly to embody a “flexible
`
`rather than a static principle, one that is capable of adaptation to meet the countless and variable
`
`schemes devised by those who seek the use of the money of others on the promise of profits,”
`
`328 U.S. 293, 299 (1946), such that “investment contracts” are instruments, schemes, or
`
`transactions through which a person invests money in a common enterprise and reasonably
`
`expects profits or returns derived from the entrepreneurial or managerial efforts of others. Courts
`
`have found that novel or unique investment vehicles constitute investment contracts, including
`
`interests in orange groves, animal breeding programs, railroads, mobile phones, enterprises that
`
`exist only on the Internet, and sales of certain digital assets that exist on distributed ledgers or
`
`“blockchains.”
`
`30.
`
`Section 15(a)(1) of the Exchange Act [15 U.S.C. § 78o(a)(1)] requires securities
`
`brokers to register with the Commission or, if they are individuals, to be associated with a
`
`brokerage firm registered with the Commission.
`
`31.
`
`This registration requirement ensures that, among other things, brokers have
`
`adequate supervision and training before soliciting funds from investors.
`
`32. While courts have recognized a number of factors that render a person a securities
`
`
`
`8
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`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 9 of 44
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`broker (none of which by itself is dispositive), the hallmarks of being a broker include actively
`
`soliciting investments (rather than passively obtaining them) and receiving transaction-based
`
`compensation, often in the form of a percentage of the funds raised for investments.
`
`BACKGROUND ON DIGITAL ASSETS AND DISTRIBUTED LEDGERS
`
`33.
`
`The term “digital asset” or “digital token” generally refers to an asset issued
`
`and/or transferred using distributed ledger or blockchain technology, including assets sometimes
`
`referred to as “cryptocurrencies,” “virtual currencies,” digital “coins,” and digital “tokens.”
`
`34.
`
`A blockchain or distributed ledger is a peer-to-peer database spread across a
`
`network of computers that records all transactions in theoretically unchangeable, digitally
`
`recorded data packages. The system relies on cryptographic techniques for secure recording of
`
`transactions.
`
`35.
`
`Entities have offered and sold digital assets in fundraising events, often called
`
`initial coin offerings (“ICOs”), in exchange for consideration.
`
`36.
`
`Digital tokens may be traded on digital asset trading platforms in exchange for
`
`other digital assets (such as Bitcoin) or fiat currency (i.e., legal tender issued by a country).
`
`37.
`
`Some digital assets may be “native tokens” to a particular blockchain—meaning
`
`that they are represented on their own blockchain. Like other “digital tokens,” native tokens may
`
`also be sold and traded for consideration.
`
`FACTS
`
`I.
`
`Background: Kumbhani Created and Controlled BitConnect.
`
`38.
`
`In approximately 2016, Kumbhani created and developed BitConnect. To do so,
`
`among other things, he created a digital token called the “BitConnect Coin” (“BCC”), which was
`
`based on an algorithm he developed, and a blockchain (the “BitConnect Blockchain”), which he
`
`
`
`9
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`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 10 of 44
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`managed. BCC was the “native token” of the BitConnect Blockchain.
`
`39.
`
`Kumbhani used fake names to register domain names for three BitConnect
`
`websites -- https://bitconnect.co, https://bitconnect.com, and https://bitconnectcoin.co
`
`(collectively, the “BitConnect Website”). The BitConnect Website provided information to the
`
`investing public about, among other things, BitConnect, BCC, and the Lending Program, and
`
`also provided an account login link.
`
`40.
`
`Kumbhani developed the “lending wallet,” the investor interface for the Lending
`
`Program on the BitConnect website. He hired a neighbor to develop the BitConnect Website and
`
`implement the algorithms he had developed. Kumbhani used his own PayPal account to pay two
`
`website hosting services to BitConnect.
`
`41.
`
`Kumbhani also used fake names such as “Vindee,” “VND,” and the Skype handle
`
`“vndbcc” to communicate with BitConnect promoters and other third parties, including those
`
`hired to write content for the BitConnect Website.
`
`42.
`
`By no later than 2017, Kumbhani drafted the content (e.g., blog posts and news
`
`updates), or reviewed and approved the content prepared by those he hired, that appeared on the
`
`BitConnect Website.
`
`43.
`
`From no later than May 2017 and likely earlier, Kumbhani had access to the login
`
`credentials to manage BitConnect’s online presence, including the Website’s Internet domain
`
`registrar, web host providers, VPN providers, cloud infrastructure providers, and website
`
`performance services, as well as for BitConnect’s email accounts, Github profile, Apple ID,
`
`Slack, and bitcointalk.org (an online discussion forum focused on Bitcoin, blockchain
`
`technology, and cryptocurrency).
`
`44.
`
`From 2016 through at least January 2018, Kumbhani managed and supervised all
`
`
`
`10
`
`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 11 of 44
`
`aspects of BitConnect’s operations.
`
`II.
`
`BitConnect Conducted an Initial Coin Offering in 2016.
`
`45.
`
`BitConnect claimed on the BitConnect Website that BCC “is an open source,
`
`peer-to-peer, community driven decentralized cryptocurrency.” BitConnect also claimed that it
`
`was based on “decentralized blockchain transaction technology, so no centralized third party to
`
`trust [sic]. Transactions are performed directly between the users.”
`
`46.
`
`From approximately November 2016 to January 2017, BitConnect conducted an
`
`ICO of BCC, during which BitConnect sold approximately 5 million BCC out of the maximum
`
`supply of 28 million BCC tokens that Kumbhani created upon the launch of the BitConnect
`
`Blockchain.
`
`47.
`
`In January 2017, BitConnect launched a purported digital asset trading platform
`
`on the BitConnect Website (the “BitConnect Exchange”).
`
`48.
`
`BitConnect stated that users could buy, sell, and trade BCC for Bitcoin and vice
`
`versa on the BitConnect Exchange by transacting directly with other BCC holders in peer-to-
`
`peer transactions with “no central organization involved.”
`
`III. Defendants Engaged in an Unregistered Offering,
`
`and Sale, of Investments in the Lending Program.
`
`
`49.
`
`Beginning in January 2017, Kumbhani and BitConnect offered investors the
`
`opportunity to participate in a series of schemes or transactions that would purportedly give them
`
`the opportunity to earn daily interest payments by essentially tendering Bitcoin to BitConnect in
`
`return for “interest” payments, i.e., the “Lending Program.”
`
`50.
`
`During the relevant period, Kumbhani and BitConnect posted daily interest rates,
`
`historical returns, periodic updates and news releases about the Lending Program on the
`
`BitConnect Website.
`
`
`
`11
`
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`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 12 of 44
`
`51.
`
`From August 2017 (at the latest) to January 2018, BitConnect also advertised the
`
`Lending Program on Coinmarketcap.com, a popular website in the digital asset space that tracks
`
`price, available supply, trade volume, and market capitalization of various digital tokens.
`
`52.
`
`To participate in the Lending Program, an investor was first required to create an
`
`account on the BitConnect Website, and then to transfer Bitcoin to a Bitcoin blockchain address
`
`controlled, and provided to the investor, by BitConnect. The investor’s account page on the
`
`BitConnect Website would then reflect the investor’s Bitcoin investment in the investor’s Bitcoin
`
`wallet. The investor could then remit the Bitcoin to BitConnect to purportedly purchase BCC
`
`tokens on the BitConnect Exchange, and then “lend” the BCC tokens to BitConnect, which, in
`
`turn, would purportedly invest these proceeds into the volatility of Bitcoin via the Trading Bot.
`
`A.
`
`53.
`
`Lending Program Investments Were Securities.
`
`The series of transactions, schemes, and contracts that comprised the Lending
`
`Program (offered by Kumbhani and BitConnect, and in which Arcaro and Future Money were
`
`necessary participants (as discussed below)), were investment contracts and, therefore, securities
`
`under the federal securities laws.
`
`54.
`
`Specifically, an investment into the Lending Program was an investment of
`
`money into a common enterprise from which investors had a reasonable expectation of profit
`
`based upon the efforts of others—BitConnect.
`
`55.
`
`BitConnect accepted consideration in the form of Bitcoin in exchange for
`
`investment into the Lending Program.
`
`56.
`
`BitConnect pooled investor assets (in the form of Bitcoin) into accounts that
`
`BitConnect controlled, and claimed all investors were entitled to the same supposed returns
`
`depending upon their level of investment and amount of time they committed or locked up their
`
`
`
`12
`
`
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`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 13 of 44
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`funds into the Lending Program—no investor was entitled to a greater or lower return from their
`
`Lending Program investments than others.
`
`57.
`
`BitConnect touted the efforts that the purported Trading Bot it supposedly created
`
`would make in securing returns for investors—and marketed the handsome returns an investor
`
`could hope to obtain from participating in the Lending Program.
`
`58.
`
`Kumbhani and BitConnect claimed on the BitConnect Website that the interest
`
`returns investors would receive were generated by BitConnect’s Trading Bot. In particular, they
`
`claimed that the Trading Bot generated returns by “tracking the volatility of BTC [Bitcoin] vs
`
`USD [the United States dollar (“USD”)] and the volatility of USD against major world
`
`currencies” (the “Trading Bot”) (emphasis in original).1
`
`59.
`
`The BitConnect Website claimed, for example, that “[t]he interest rate on lending
`
`will be calculated by our Bitconnect price volatility software. The earning interest on bitcoin
`
`lending float over the time [sic] and is exclusively decided by the software and Bitconnect
`
`Trading Bot. Bitconnect will consider last closing interest rate of Bitconnect price volatility
`
`software for next day’s interest rate.”
`
`60.
`
`Kumbhani and BitConnect marketed its Lending Program to prospective investors
`
`as a safe, profitable investment: “Investing on BitConnect platform, as you will find,” they
`
`claimed on the BitConnect Website, “is a safe way to earn a high rate of return on your
`
`investment without having to undergo a significant amount of risk.”
`
`61.
`
`The BitConnect Website featured an advertising banner promising profits as high
`
`as 40% interest per month “with no risk.”
`
`
`A “trading bot” is computer software programmed to trade a digital asset based upon pre-
`1
`determined parameters.
`
`
`
`13
`
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`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 14 of 44
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`62.
`
`The BitConnect Website included a chart showing historical returns of up to 2%
`
`daily, with no negative returns for any day, and an average daily return of approximately 1%, or
`
`approximately 3700% on an annualized basis.
`
`63.
`
`The BitConnect Website also provided a “projected earnings calculator,” which
`
`purported to calculate projected future earnings on investors’ loans by using the Lending
`
`Program interest rates reported by BitConnect over the prior thirty days.
`
`64.
`
`BitConnect pooled the investors’ Bitcoin in a series of addresses (also known as
`
`“digital wallets”), which BitConnect controlled, on the Bitcoin blockchain.
`
`65.
`
`The Lending Program required investors to “lock-up” (commit) their funds for
`
`investment to terms ranging between 120 days and 299 days.
`
`66.
`
`BitConnect purported to “pay” daily interest to Lending Program investors in the
`
`form of credits denominated in USD appearing on each investor’s individual account page on the
`
`BitConnect Website. According to BitConnect, only the principal amount of the funds loaned by
`
`investors were locked up, not the purported “interest,” or “returns.”
`
`67.
`
`The supposed interest payments generated by the Lending Program and an
`
`investor’s principal were represented as USD amounts, although BitConnect’s Website did not
`
`allow investors to withdraw funds, including supposed investment returns, in USD.
`
`68.
`
`Instead, to cash out interest or principal on a Lending Program investment, an
`
`investor had to request that BitConnect convert the value displayed in USD back into BCC
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`tokens (only at the end of the “lockup” period in the case of principal), which the investor then
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`had to purportedly sell for Bitcoin on the BitConnect Exchange and, then, finally, the investor
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`would request that BitConnect send the Bitcoin to the investor’s chosen address on the Bitcoin
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`blockchain.
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`
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`14
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`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 15 of 44
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`69.
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`BitConnect marketed and promoted the Lending Program as paying investors
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`profits based solely upon BitConnect’s entrepreneurial and managerial efforts.
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`70.
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`For example, the BitConnect Website’s FAQs represented that the profit or
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`revenue BitConnect generated from its Trading Bot would be shared pro rata with the Lending
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`Program investors, and the FAQs described the Lending Program as follows:
`
`1. When you invest in Bitconnect lending platform [sic], your
`investment directly goes to Bitconnect [T]rading [B]ot to generate
`profit.
`2. Bitconnect volatility software calculate [sic] and share generated
`revenue to all members.
`3. Members profit deposited daily [sic] on their lending wallet.
`4. You can transfer it to BitConnect wallet at market price of
`BitConnect coin and exchange BitConnect coin to Bitcoin on
`exchange platform (emphasis in original).
`
`71.
`
`In fact, because BitConnect marketed the Trading Bot that formed the supposed
`
`centerpiece of the Lending Program as proprietary, investors had no control over the success or
`
`failure of their Lending Program investment and could take no steps that would determine the
`
`fate of their investments—all investors could do was decide whether, when, and how much to
`
`invest into the Lending Program, and whether to withdraw supposed returns before the lock-up
`
`periods required them to do so.
`
`72.
`
`No registration statement was ever filed with the Commission, nor was any
`
`registration statement in effect, for any of these offers or sales of investments into the Lending
`
`Program.
`
`73.
`
`No exemption from the registration requirements under the federal securities laws
`
`was at any time applicable to these offers and sales.
`
`
`
`
`
`
`
`
`
`15
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`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 16 of 44
`
`B.
`
`
`74.
`
`Kumbhani and BitConnect Recruited Arcaro and Other
`Promoters Through The Lending Program’s “Referral Program.”
`
`The series of schemes or transactions that comprised the Lending Program also
`
`included a “referral program.”
`
`75.
`
`To sell more Lending Program investments, Kumbhani and BitConnect, through
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`BitConnect’s Website, offered investors the opportunity to earn additional returns, as bonuses or
`
`“commissions,” via a “referral program” that would offer payouts based on how many new
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`investors the investor recruited into the supposed Lending Program.
`
`76.
`
`Initially, Kumbhani and BitConnect offered a seven-tier structure of referral
`
`commissions, as described below, with the commission reflected on the investor’s BitConnect
`
`Website account for every new investment directly or indirectly procured by the original investor
`
`or “sponsor.”
`
`77.
`
`For directly bringing in a new investor, the sponsor received 7% of the new
`
`investors’ (the “Level 1 investors”) investment value, denoted as a USD “credit” in the sponsor’s
`
`BitConnect Website account.
`
`78.
`
`The sponsor also received additional, residual referral commissions for any new
`
`investments made by investors recruited by the Level 1 investors, or by investors recruited by
`
`those investors continuing downstream, also known as a promoter’s “downline.” Thus, in
`
`addition to the 7% commission for a Level 1 investor, BitConnect credited a sponsor 3%, 1%,
`
`0.5%, 0.3%, and 0.2% commissions on the investment of each investor brought in through the
`
`sponsor’s downline, depending on the investment level (i.e., 3% for investors procured by a
`
`promoter’s Level 1 investor, 1% for investors procured by the foregoing investors, and so on).
`
`This structure was set forth by BitConnect utilizing the figure shown in Graphic 1, below.
`
`
`
`16
`
`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 17 of 44
`
`Graphic 1: BitConnect Referral Program Payouts
`
`
`
`79.
`
`On approximately November 3, 2017, Kumbhani and BitConnect changed the
`
`referral commission payout structure, reducing the commission levels to three tiers. Sponsors
`
`then received a 5% commission for the investment values of their Level 1 investors, a 3%
`
`commission for the investment values of any new investors their Level 1 investors brought in,
`
`and a 2% commission for the investment values of any investors those new investors brought in.
`
`80.
`
`Through the referral commissions and other means, Kumbhani and BitConnect
`
`organized a global network of promoters, with a hierarchy of regional, national, and continental
`
`promoters, and recruited such promoters by, among other things, advertising on the BitConnect
`
`Website.
`
`81.
`
`Though the referral program was an important component of Defendants’
`
`solicitation of investors, an investor’s participation in the referral program was entirely
`
`optional—the investor could simply invest in the Lending Program and await the supposed
`
`returns on her investment based solely upon BitConnect’s efforts via the supposed Trading Bot.
`
`82.
`
`Kumbhani and BitConnect used the referral program to attract more investors, as
`
`well as recruit those who would act as promoters.
`
`
`
`17
`
`
`
`Case 1:21-cv-07349 Document 1 Filed 09/01/21 Page 18 of 44
`
`83.
`
`Their post on BitConnect’s Website, entitled “Bitconnect promoters rules and
`
`regulation” and dated March 18, 2016, explained the role of BitConnect promoters:
`
`Bitconnect promoters…are able to attract new members online and
`offline. Bitconnect promoters will
`teach other Bitconnect
`members…how to attract participants in social networks, how to
`make promotional pictures, how to create your own blogs and
`websites…. A Promoter has an active role in Bitconnect System. He
`is a person who is responsible to control and guide his team. His
`primary duty is to consult and register new participants….
`
` Promoter must be aware about all the activities and updates going
`on in BitConnect System. He should be well versed about how the
`system works, how to register new participants. He should know
`about the Current growth on Bitcoin lending and current referral
`commission, as well as, keep a daily watch on the official web-site
`Bitconnect.co for Updates…. All Promoters are required to execute
`any order given by the Bitconnect system without any undue delay.
`
` A
`
`As part of their promotional efforts to recruit both investors and promoters,
`
`
`84.
`
`Kumbhani and BitConnect also sponsored in-person events promoting BitConnect and/or the
`
`Lending Program, which many BitConnect investors and promoters attended, during which
`
`BitConnect or BitConnect representatives promoted the Lending Program by displaying or
`
`gifting