coindesk.com
Three former executives with bankrupt crypto lender Cred were indicted Thursday on charges of conspiracy to commit wire fraud, wire fraud and engaging in financial transactions for illicit purposes.
Daniel Schatt, a Cred co-founder and former CEO, Joseph Podulka, former CFO, and James Alexander, the former chief capital officer, were indicted by the U.S. Attorney's Office in the Northern District of California. Schatt and Podulka were arrested and made their initial appearances in a San Francisco court earlier in the day, according to a press release published Friday.
Cred filed for bankruptcy in November 2020, estimating its liabilities to be between $100 million and $500 million at the time, but saying it had less than $100 million in estimated assets. At the time, the company blamed its failure on "irregularities" in how "specific corporate funds" were handled. A reorganization plan was later approved by a federal judge, according to court records.
Cred was among the first of a slate of high-profile crypto lender bankruptcies – preceding 2022's Celsius and Voyager bankruptcies by around two years.
Similar to these other failed companies, Cred offered a lending program, "CredEarn," that accepted deposits from investors and offered market-leading interest rates before it filed for bankruptcy without enough money to pay back creditors. Depositors had entrusted more than $100 million worth of crypto with Cred by the time it collapsed.
"[T]he defendants lured customers to make investments by promising to return a significant yield on cryptocurrency investments—the defendants did not disclose, however, that virtually all the assets to pay the yield were generated by a single company whose business was to make unsecured micro-loans to Chinese gamers," the U.S. Department of Justice said in a press release.
"Contrary to the defendants’ assurances, Cred engaged in lending that was neither collateralized nor guaranteed. Moreover, Cred’s hedging strategy did not protect the company’s investments against volatility," the statement read.
"The Cred Liquidation Trust and its professionals have been working tirelessly to pursue recoveries for creditors. We spent a lot of time and effort cooperating with law enforcement. We are thankful for the hard work and diligence by the DOJ and FBI, which resulted in indictments of the key executives responsible for the first major crypto bankruptcy case in the United States," said attorneys Darren Azman and Joseph Evans with McDermott Will & Emery LLP, who are the lead counsel for the Cred Inc. Liquidation Trust.
In its 2020 bankruptcy filing, Cred put most of the blame for its collapse on the failure of an outside investment manager, Quantcoin, with whom Cred entrusted 800 BTC – worth around $10 million at the time. Later on, the Cred Liquidation Trust alleged in a lawsuit that most of the lost customer funds had, in fact, been quietly loaned out to the Chinese micro-lender MoKredit, which ultimately failed to repay its debts.
MoKredit made most of its money from unsecured loans to Chinese gamers, and its relationship with Cred – along with the fact that the two companies shared a co-founder – was not properly disclosed to Cred creditors, according to Friday's indictment.
The Cred Liquidation Trust has separately alleged that Cred funneled users into CredEarn through the retail-oriented crypto exchange Uphold, which at one point counted Cred Founder Dan Schatt as a board member. '"Uphold drove thousands of retail customers to lend cryptocurrency to the CredEarn program by falsely marketing it as 'safe,' 'secured,' 'insured,' and 'fully hedged,'" the suit read.
According to the suit, which was dismissed earlier this year, CredEarn was initially supposed to be called "UpholdEarn" but was renamed to avoid regulatory risk.
"Uphold knew that Cred was implementing a highly risky hedging strategy, and that there was regulatory risk associated with cryptocurrency yield earning programs," read the suit. "Rather than take on all of these risks, Uphold and Schatt decided to shift the risks away from Uphold by running ['Earn'] through Cred."
Uphold denied the claims in the lawsuit and said Schatt was removed from its board involuntarily. Although the lawsuit from Cred's Liquidation Trust was dismissed (that dismissal was upheld on appeal), an additional class action suit from Cred's creditors against Uphold is still pending.