SEC accuses crypto firm NovaTech of fraud

The US Securities and Exchange Commission (SEC) is suing a crypto startup, NovaTech, for fraudulently raising more than $650 million from more than 200,000 investors, many from the Haitian-American community.

The SEC is framing NovaTech, founded in 2019 by husband and wife Cynthia and Eddy Petion, as a multi-level marketing (MLM) scheme — one that lured investors by claiming to invest in lucrative crypto and forex markets. In fact, NovaTech set aside only a fraction of investors’ funds for trading, devoting most of its payments to existing investors and fees to promoters, according to the SEC.

Fraudsters siphoned off millions of dollars in investor assets for themselves, the SEC alleges. And when the company collapsed, most customers — recruited by promoters who downplayed NovaTech’s red flags — found themselves unable to make withdrawals.

“NovaTech and Petions have caused untold loss to tens of thousands of victims around the world,” Eric Werner, director of the SEC’s Fort Worth regional office, said in a statement. “As we argue, MLM schemes of this size require promoters to fuel them, and today’s action demonstrates that we will hold accountable not only the principal architects of these massive schemes, but also the promoters who spread their fraud by illegally soliciting victims.”

In addition to NovaTech and Petions, the SEC names NovaTech promoters Martin Zizi, Dapilinu Dunbar, James Corbett, Corrie Sampson, John Garofano and Marsha Hadley as defendants in its securities fraud lawsuit. The agency is seeking a permanent injunctive relief, restitution of ill-gotten gains and civil penalties; Zizi has already agreed to partially settle.

“Overall, this unfortunately appears to be a manual affinity group ponzi scheme,” Seth Goertz, a partner at the law firm Dorsey & Whitney and a former assistant attorney at the Department of Justice, told TechCrunch via email . “The size and scale of the scheme is noteworthy though, and you always wonder if it would have been possible if it had been linked to traditional fiat currency rather than cryptocurrency, which remains ethereal enough that fraudsters can more easily promise large profits. “

The lawsuit against NovaTech is just the latest development in the SEC’s broader crackdown on legally dubious crypto businesses.

In 2020, the SEC sued Ripple, the blockchain developer and creator of the XRP cryptocurrency token, for allegedly raising more than $1.3 billion in 2013 by selling XRP in an unregistered security offering to investors. Just last month, the SEC charged BitClout founder Nader Al-Naji with fraud, saying proceeds from the startup’s crypto activities paid for Al-Naji’s LA mansion and gifts. And the SEC has sent letters to VCs regarding their involvement with decentralized crypto exchange operator Uniswap Labs, Axios reported Monday.

In a recent address to the William & Mary Business Law Review, Gurbir Grewal, director of the SEC’s enforcement division, said the agency has taken more than 100 crypto-related actions over the past decade.