The U.S. Securities and Exchange Commission (SEC) is suing cryptocurrency startup NovaTech, alleging that it fraudulently raised more than $650 million from over 200,000 investors in the Haitian-American community.
The SEC has accused Novatec, founded in 2019 by husband and wife duo Cynthia and Eddie Petion, of operating as a multi-level marketing (MLM) scheme that lured investors with promises of lucrative cryptocurrency and foreign exchange market investments. In reality, Novatec only used a small portion of investor funds for trading, while the majority was used to pay existing investors and provide commission to promoters, according to the SEC.
The SEC alleges that the petitioners misappropriated millions of dollars of investor assets, and when the company collapsed, most of the customers recruited by promoters who downplayed Novatec's red flags were unable to withdraw their money.
“Novatec and the petition have caused immeasurable losses to tens of thousands of victims around the world,” Eric Warner, director of the SEC's Fort Worth Regional Office, said in a statement. “As we allege, multi-level marketing schemes of this magnitude require promoters, and today's action demonstrates that we will hold accountable not only the principal architects of these massive schemes, but also the promoters who illegally recruited victims and perpetuated their scams.”
In addition to Novatec and the petitioners, the SEC has named Novatec promoters Martin Zizzi, Dapirine Dunbar, James Corbett, Corey Sampson, John Garofano and Marsha Hadley as defendants in the securities fraud lawsuit. The SEC is seeking a permanent injunction, disgorgement of ill-gotten gains and civil penalties, and Zizzi has already agreed to a partial settlement.
“Overall, unfortunately, this appears to be a classic affinity group Ponzi scheme,” Seth Goetz, a partner at law firm Dorsey & Whitney and a former assistant U.S. attorney at the Department of Justice, told TechCrunch in an email. “But the size and scale of this scheme is notable, and the question always remains as to whether this would have been possible had it been tied to traditional fiat currency rather than a still-opaque cryptocurrency where fraudsters could more easily promise bigger profits.”
The lawsuit against NovaTech is just the latest development in the SEC's broader crackdown on legally questionable cryptocurrency ventures.
In 2020, the SEC sued Ripple, the blockchain development company and creator of the cryptocurrency token XRP, for raising more than $1.3 billion by selling XRP in an unregistered securities sale to investors in 2013. Last month, the SEC accused BitClout founder Nader Al Naji of fraud, alleging he used proceeds from the startup's cryptocurrency activities to buy Al Naji's Los Angeles mansion and gifts. The SEC also sent letters to venture capital firms over their involvement in decentralized crypto exchange operator Uniswap Labs, Axios reported Monday.
In a recent speech to the William & Mary Business Law Review, Gurbir Grewal, head of the SEC's enforcement division, said the agency has brought more than 100 cryptocurrency-related actions over the past decade.