Bloomberg
A Crypto Kid had a condominium of $ 23,000 a month. Then the Feds came
(Bloomberg) – Stefan Qin was just 19 when he claimed to have the secret to cryptocurrency trading. With youthful confidence, Qin, a self-proclaimed mathematical prodigy from Australia, dropped out of college in 2016 to start a hedge fund in New York he called Virgil Capital. He told potential customers that he had developed an algorithm called Tenjin to monitor cryptocurrency exchanges around the world to assess price fluctuations. Just over a year after it started, he boasted that the fund had returned 500%, an assertion that sparked a flood of new money from investors. It got so full of cash that Qin signed a lease in September 2019 for $ 23,000 a month apartment at 50 West, a 64-story luxury condominium in the financial district with expansive views of lower Manhattan as well as swimming pool, sauna, steam room, hot tub and golf simulator. In reality, federal prosecutors said, the operation was a lie, essentially a Ponzi scheme that stole nearly $ 90 million from more than 100 investors to help pay for Qin’s luxurious lifestyle and personal investments in high stakes. risk like initial coin offers. At one point, facing customer demands for his money, he blamed “poor cash flow management” and “loan sharks in China” for their problems. Last week, Qin, now 24 and expressing remorse, pleaded guilty in a Manhattan federal court to a single charge of securities fraud. “I knew what I was doing was wrong and illegal,” said Judge Valerie E. Caproni, who could have sentenced him to more than 15 years in prison. “I deeply regret my actions and will spend the rest of my life expiating what I did. I deeply regret the damage my selfish behavior has done to my investors who have trusted me, my employees and my family. ”Anxious investors The case echoes similar cryptocurrency frauds, like that of BitConnect, promising people two- and three-digit returns and costing investors billions. Ponzi schemes like this show how investors eager to profit in a heated market can easily be sidetracked by promises of big returns. The Canadian stock market QuadrigaCX collapsed in 2019 as a result of fraud, causing at least $ 125 million in losses for 76,000 investors. While the regulatory oversight of the cryptocurrency industry is tightening, the sector is full of inexperienced players. Several of the nearly 800 cryptographic funds worldwide are managed by people with no knowledge of Wall Street or finance, including some college students and recent graduates who launched funds a few years ago. Qin’s path started in college, too. He had been a math whiz who planned to become a physicist, he told a website, DigFin, in a profile published in December, just a week before regulators closed in on him. He described himself on his LinkedIn page as a “quant with deep interest and knowledge in blockchain technology”. In 2016, he was accepted into a program for high-potential entrepreneurs at the University of New South Wales in Sydney with a proposal to use blockchain technology to accelerate foreign exchange transactions. He also attended Minerva Schools, a mostly online college based in San Francisco, from August 2016 to December 2017, the school confirmed. Crypto bug. He contracted the encryption bug after an internship at a company in China, he told DigFin. His task was to build a platform between two locations, one in China and the other in the United States, to allow the company to arbitrate cryptocurrencies. Convinced that he had found a business, Qin moved to New York to found Virgil Capital. His strategy, he told investors, would be to explore the tendency for cryptocurrencies to trade at different prices on various exchanges. It would be “market neutral”, which means that the company’s funds would not be exposed to price movements. And, unlike other hedge funds, he told DigFin, Virgil would not charge management fees, only charging fees based on the company’s performance. “We never try to make easy money,” said Qin. From what he said, Virgil started fast, ensuring a 500% return in 2017, which brought more investors eager to participate. A marketing brochure boasted monthly returns of 10% – or 2,811% over a three-year period ending in August 2019, legal records show. His assets received an extra shock after the Wall Street Journal described his profile in a February 2018 story that praised his ability to arbitrate cryptocurrency. Virgil “experienced substantial growth as new investors migrated to the fund,” prosecutors said. Missing assets The first cracks appeared last summer. Some investors were “increasingly concerned” about asset losses and incomplete transfers, former head of investor relations, Melissa Fox Murphy, said in a court statement. (She left the company in December.) Complaints have increased. “It is now MID DECEMBER and MY MILLION DOLLARS ARE NOT PLACE,” wrote an investor, whose name was erased in court documents. “It is a shame the way you are treating one of your first and biggest investors.” At the same time, nine investors with $ 3.5 million in funds called for redemptions of the company’s flagship, Virgil Sigma Fund LP, according to prosecutors. But there was no money to transfer. Qin had drained the assets of the Sigma Fund. Fund balances have been manufactured. Rather than trading on 39 exchanges around the world, as he claimed, Qin spent the investor’s money on personal expenses and other undisclosed high-risk investments, including initial currency offers, promoters said. to delay. He persuaded investors to transfer their interests to his Multistrategy Fund VQR, another cryptocurrency fund he started in February 2020 that used a variety of trading strategies – and still had assets.’Loan Sharks’He also sought to withdraw $ 1, 7 million of the VQR fund, but this aroused suspicion from the trader, Antonio Hallak. In a telephone call recorded by Hallak in December, Qin said he needed the money to pay “loan sharks in China” from those he had loaned to start his business, according to court documents in a lawsuit filed by the Securities and Exchange Commission. He said loan sharks “can do anything to collect the debt” and that he had a “liquidity problem” that prevented him from repaying them. “To be honest with you, I just had such poor cash flow management,” Qin told Hallak. “I don’t have money right now, man. It’s so sad. When the trader refused to withdraw, Qin tried to take over the reins of VQR’s accounts. But now the SEC was involved. He managed the cryptocurrency exchanges to put control over VQR’s remaining assets and, a week later, filed a lawsuit. Credit recovery In the end, Qin had drained almost all of the money that was in the Sigma Fund. An appointed judicial administrator who oversees the fund is looking to recover assets for investors, said Nicholas Biase, a spokesman for Manhattan Attorney General Audrey Strauss. About $ 24 million in assets in the VQR fund have been frozen and should be available for dispersal, he said. “Stefan He Qin drained almost all of the assets of the $ 90 million cryptocurrency fund he owned, stealing investors’ money, spending it on speculative personal investments and indulgences and lying to investors about the fund’s performance and what it did with their money, ”said Strauss in a statement. In South Korea, when Qin learned of the investigation, he agreed to fly back to the US, prosecutors said. He surrendered to the authorities on February 4, pleaded guilty the same day before Caproni and was released on $ 50,000 bail pending his sentence, scheduled for May 20. While the maximum legal sentence provides for 20 years in prison, as part of a plea deal, prosecutors agreed that he should face 151 to 188 months behind bars under federal sentencing rules and a fine of up to $ 350,000. That fate is a far cry from the career his parents had envisioned for him – a physicist, he told DigFin. “They weren’t very happy when I said I left university to do this encryption thing. Maybe one day I’ll finish my course. But what I really want to do is negotiate cryptography. ”The case is US x Qin, 21-cr-75, United States District Court, Southern District of New York (Manhattan) (updates with prosecutor’s comments and case caption) For more articles like this, visit us at bloomberg. comSubscribe now to stay on top of the most trusted business news source. © 2021 Bloomberg LP