Crypto Fund Investors Allege Fraud in Lawsuit

Plaintiffs David Powell and Merav Knafo, investors in a cryptocurrency investment fund, filed a complaint against Crypto Traders Management, LLC, the fund and its managers, on Wednesday in the District of Idaho for allegedly defrauding investors.

The plaintiffs alleged that the defendants “conned Plaintiffs into depositing money by assuring them their investments were growing in value and could be withdrawn at any time when in fact investments were simply being stolen or lost.” Specifically, Powell had a total net investment of $531,933, and Knafo invested $109,581 in the defendants’ “altcoin,” or alternative blockchain-based asset, offering which they claim that they have not been able to retrieve. In 2018, the defendants created the Crypto Fund, which the plaintiffs claimed “was simply a scam to induce investors to hand over ever increasing amounts of money” by making false claims and statements.

After the plaintiffs’ initial investments in the fund, they received a letter acknowledging their investment. Afterward, they received monthly email newsletters and earning updates. The plaintiffs asserted that they received updates, for example on December 1, 2018, stating that “despite a 40% drop in the altcoin market, the Crypto Fund made ‘a positive 9% gain for the month of November [2018].’” This statement led the investors to believe that their investments were growing. After receiving this information, Powell invested additional funds and encouraged plaintiff Knafo to invest; which she did. The plaintiffs continued to invest in the fund and receive updates about their investments, which were purported to be static or growing. The defendants continuously asserted that their investments were growing despite the decline of the altcoin markets, according to the complaint.

In August 2019, Powell started to request monthly withdrawals to cover expenses and taxes, and defendant manager Cutting agreed verbally and in writing, “but did not provide monthly withdrawals as agreed.” Powell claimed that he has not been able to contact Cutting since September 2019.

However, in March, Cutting supposedly “admitted that he was falsely reporting account values to investors. He wrote that altcoins held in the Crypto Fund could not be sold at market value without ‘causing a severe loss.’…he urged investors to wait until the portfolio prices rebounded and altcoin holdings could be sold without a loss but provided no information as to how long that would take.” Despite this alleged acknowledgment, the defendants stated that they received earnings updates that their investments had grown.

In May, Powell requested to close his account, totaling $603,750.35 from a net investment of $531,933; he has only recovered $50,000.00. Plaintiff Knafo also requested to close her account totaling $119,375.94 from a net investment of $109,581 but has not heard from the defendants.

The plaintiffs stated that investments in the Crypto Fund constitute securities. The defendants are accused of securities fraud under the Securities Exchange Act of 1934 and the Idaho Uniform Securities Act, sale of unregistered securities under the Securities Act, acting as an unregistered broker under the Idaho Uniform Securities Act, violating the Idaho Consumer Protection Act, common law fraud, breach of contract, conversion, negligence, unjust enrichment, liability for account stated, and breach of fiduciary duty for the aforementioned conduct.

The plaintiffs have sought an award for damages, plaintiff Powell has sought at least $609,724.27, with interest accruing at the rate of $87.59 per diem as of July 10, 2020; and plaintiff Knafo has sought at least $122,797.10, with interest accruing at the rate of $17.64 per diem as of July 10; they have also sought punitive and actual damages; imposition of a constructive trust on all of their investments; an award for costs and fees; and other relief as determined by the court.

The plaintiffs are represented by Mooney Wieland PLLC.