The Securities and Exchange Commission (SEC) exposed an old fraud
with a modern twist used to swindle crypto investors out of more than $1.7
billion. The SEC’s complaint said the defendants operated a pyramid scheme advertising
significant profits stemming from non-existent revenue streams.
The SEC took action against Xue Lee, also known as Sam Lee,
and Brenda Chunga, aka Bitcoin Beautee, for their roles in orchestrating a
fraudulent crypto asset pyramid scheme named HyperFund.
“As alleged in our complaint, Lee and Chunga attracted
investors with the allure of profits from crypto asset mining, but the only
thing that HyperFund mined was its investors’ pockets,” SEC Director of
Enforcement Gurbir Grewal said in a press release. “This case illustrates yet
again how noncompliance in the crypto space facilitates schemes where promoters
capitalize on the promise of easy money, without providing the detailed
investor protection disclosures required by the registration provisions of the federal
securities laws.”
Between June 2020 and early 2022, Lee and Chunga promoted
HyperFund “membership” packages, promising investors that HyperFund’s crypto
asset mining operations and affiliation with a Fortune 500 company would yield substantial
returns, according to the complaint filed in the federal district court in the
District of Maryland.
“HyperFund’s membership packages were offered and sold as investment
contracts, and therefore, securities under the federal securities laws, because
investors made an investment of money in a common enterprise with a reasonable
expectation of profits from the efforts of defendants or third parties,” the
complaint states. “The membership packages were offered and sold without
registration, and without qualifying for any exemption from registration.”
However, the duo allegedly knew, or were recklessly
ignorant, that HyperFund operated as a pyramid scheme with no legitimate
revenue source apart from investor funds. In 2022, the scheme collapsed,
leaving investors unable to make withdrawals.
“HyperFund did not engage in large-scale crypto asset
mining, despite the claims by promoters like Chunga that the investors’ passive
rewards were being paid by such efforts,” the complaint states. “HyperFund even
hired an actor to pretend to be the new CEO when HyperVerse was launched. With
no apparent legitimate source of revenues, investor withdrawals were paid with
new investor deposits.”
Lee and Chunga are charged with violating anti-fraud and
registration provisions of federal securities laws. The complaint seeks
permanent injunctive relief for harmed investors, conduct-based injunctions,
disgorgement of ill-gotten gains, prejudgment interest and civil penalties.
Chunga agreed to settle the charges, with terms including a
permanent injunction from future violations and payment of disgorgement and
civil penalties, subject to court approval. The charges against Lee are set to
be litigated.
In a concurrent action, the U.S. Attorney’s Office for the
District of Maryland announced criminal charges against Lee and Chunga. Chunga pleaded
guilty to conspiracy to commit securities fraud and wire fraud.