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SEC busts celebrity-backed cryptocurrency scheme for fraud

SEC busts celebrity-backed cryptocurrency scheme for fraud
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The Securities and Exchange Commission (SEC) on Monday announced fraud charges against two men behind a $32 million cryptocurrency investment scheme hawked by celebrities such as Floyd Mayweather Jr. and DJ Khaled.

Sohrab “Sam” Sharma and Robert Farkas, co-founders of Centra Tech Inc., were arrested and charged with several counts of fraud after allegedly duping investors through an “initial coin offering,” or ICO.

Sharma and Farkas, through Centra, offered unregistered investments in the company through the sale of CTR virtual tokens, a cryptocurrency akin to bitcoin, Ethereum and other digital coins.

"We allege that Centra sold investors on the promise of new digital technologies by using a sophisticated marketing campaign to spin a web of lies about their supposed partnerships with legitimate businesses,” said Stephanie Avakian, co-director of the SEC's enforcement division.  

“As the complaint alleges, these and other claims were simply false."

The SEC alleges that Sharma and Farka misled investors with lofty promises to develop cutting edge technology through funds raised in the ICO. Centa claimed support from Visa and MasterCard in creating a credit card that could convert cryptocurrencies into U.S dollars, and promoted the scheme through a company website with fictional executives, the SEC alleged.

Centra also paid celebrities to promote the ICO on social media. Mayweather — a boxer with a extensive history of domestic abuse — and Khaled, a popular music producer and rapper, have both promoted the ICO, but neither were charged by the SEC.

“The defendants relied heavily on celebrity endorsements and social media to market their scheme,” added Steve Peikin, co-director of the SEC's enforcement division.

“Endorsements and glossy marketing materials are no substitute for the SEC’s registration and disclosure requirements as well as diligence by investors.”

The SEC’s action against Centra is the latest in its extensive efforts to police fraud among emerging cryptocurrency investments. The commission is reportedly probing dozens of companies that have offered cryptocurrency-related investments or have pivoted to the field.

SEC Chairman Jay Clayton and Commodity Futures Trading Commission Chairman J. Christopher Giancarlo have worked together on several crackdowns and have called on Congress for greater authority to police cryptocurrency exchanges.

But lawmakers have held back on writing new rules and standards as they try to learn more about the ways cryptocurrencies work. The virtual currencies are blurring decades-old lines that regulators use to police financial markets, and investors fear a knee-jerk reaction from Congress that could derail the cryptocurrency industry.