NovaTech, founded in 2019 by Cynthia and Eddy Petion, initially looked like an official enough forex trading outfit. But if the “AI trading bot” clocking high returns and lacking a legal address didn’t raise alarm bells, the convoluted multi-level marketing scheme where you could earn millions by recruiting others to invest might.
The SEC charged NovaTech and the Petions with raising more than $650 million in crypto assets from more than 200,000 investors around the world in a textbook affinity group Ponzi scheme targeting the Haitian American community.
This article examines what happened and how it could affect the crypto markets.
What Happened?
The Securities and Exchange Commission (SEC) charged Cynthia and Eddy Petion and their company, NovaTech Ltd., with operating a fraudulent scheme that raised more than $650 million in crypto assets from more than 200,000 investors worldwide, making it one of the most significant cases of fraud in the crypto space over the past few years.
The SEC alleges that the two promoted a multi-level marketing scheme that only reserved a fraction of investor funds for trading. They spent the rest making payments to existing investors, paying commissions to promoters, and padding the Petions’ own bank accounts—a familiar playbook for those running Ponzi schemes.
In addition to NovaTech and the Petions, the SEC named NovaTech promoters Martin Zizi, Dapilinu Dunbar, James Corbett, Corrie Sampson, John Garofano, and Marsha Hadley as defendants in its securities anti-fraud suit. Despite regulatory actions and red flags, these individuals continued to recruit investors and downplay the risks.
The move comes after several other regulatory agencies became interested in the case. For instance, in 2022, California’s Department of Financial Protection & Innovation (DFPI) issued a securities fraud cease and desist, making the first regulatory action against NovaTech FX in the U.S., for making untrue statements of material facts and omissions.
Crypto Scam Evolution
Crypto scams have been around for years. According to Chainalysis, more than $24 billion was received by illicit addresses last year, representing about 0.34% of total on-chain transaction volume. While crypto scamming and hacking revenue fell, criminals stole about $5 billion from unsuspecting individuals last year alone.
Scams represent just a fraction of illicit crypto activity. Source: Chainalysis
Ponzi schemes like the NovaTech scam have become less popular over the years. More recently, criminals have turned toward more targeted campaigns like “pig butchering,” which involves building a relationship over time with a victim before pushing them to spend a large amount of money at the tail end of the scam.
Other types of crypto scams include:
- Rug Pulls. Developers raise capital by selling coins in a project and then abandon it, leaving investors with losses. Most rug pulls are decentralized finance (DeFi) projects promising high returns to their early adopters.
- Phishing. Phishing scams involve using fake websites or emails that mimic legitimate crypto services to steal login credentials and private keys.
- Giveaways. Scammers may impersonate celebrities or well-known figures, promising to multiply any cryptocurrency sent to them. These are incredibly commonplace on social media platforms like Twitter/X.
- Pump and Dump. Scammers artificially inflate the price of a low-value cryptocurrency using false statements, then sell their holdings once the price has risen, leaving “bag holders” with losses.
The Department of Financial Protection and Innovation (DFPI) provides a crypto scam tracker based on consumer complaints. If someone presents you with a suspicious opportunity, you can search the site to see if someone else reported it as a scam. But, of course, these are only a handful of the many thousands of active crypto scams.
Tips for Avoiding Scams
Crypto scams always seem obvious in hindsight, but they can be very compelling in the moment. And the pressure to act quickly is enough even for tech-savvy individuals to get caught up in the occasional scam. The good news is that you can avoid becoming a victim by adhering to a few ground rules when trading crypto assets.
Here are some tips to avoid becoming a victim:
- Take a Breath. Most scams are successful because they encourage a snap decision. By sleeping on a big decision or at least taking a moment to step back before buying, you can avoid many costly scams by seeing them for what they are.
- Never Share Secrets. Never share your private keys or seed phrases. Legitimate exchanges and companies will never ask you for these sensitive credentials; anyone asking for these over social media is up to no good.
- Use Reputable Exchanges. Stick to well-known platforms with strong security measures rather than lesser-known platforms that may have slightly lower costs. In the long run, you’ll be much safer with larger organizations.
- If It’s Too Good to Be True… Be wary of promises of guaranteed high returns. If it sounds too good to be true, it probably is. There are no guarantees with investment returns; any high returns typically come with higher risks, too.
Unfortunately, if you lose money in a scam, there’s rarely a good way to recoup it. After the 2018 Tax Cuts and Jobs Act, you can no longer deduct theft losses on your tax returns unless they have been attributed to federally declared disaster areas. And, even if regulators recoup funds, you may only receive a small portion back, if anything at all.
More Regulation Ahead
The SEC’s action against NovaTech is one of the many cases it filed this year—albeit one of the larger scams. Since January, the agency has charged at least eight other organizations, including similar crime rings, like CryptoFX, which ran a $300 million Ponzi scheme targeting more than 40,000 predominantly Latino investors.
While most people support these crackdowns, the agency has also been actively targeting more legitimate organizations with conducting unregistered securities offerings. And those crackdowns have enjoyed less support among the crypto community, which views some of these actions as an overreach of its regulatory powers.
Most recently, in July 2024, the SEC charged Consensys Software—the maker of MetaMask—with engaging in the unregistered offer and sale of securities through a service it calls MetaMask Staking and with operating an unregistered brokerage through that product and another one called MetaMask Swaps.
Since the SEC’s landmark case against Ripple in 2020, the agency has been staking its authority within the crypto ecosystem. While the court decided in Ripple’s favor earlier this year, the ruling limited the judgment to Ripple’s specific case, meaning the agency can still pursue cases against other companies.
The Bottom Line
The NovaTech scam is just one of many crypto scams that steal billions of dollars yearly from unsuspecting victims. While most people agree with the SEC shutting down these operations, the agency has also been targeting more legitimate organizations that it sees as subverting U.S. securities laws.
If you trade crypto assets, ZenLedger can help you comply with the IRS’ complex tax reporting requirements. Our platform automatically aggregates transactions across wallets and exchanges, computes your capital gains and losses, and generates the paperwork you must file each year. You can also find opportunities to save with tax-loss harvesting!
The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
