Crypto Hedge Fund Fraudster Sentenced to Seven Years in Prison

Key Takeaways

  • Stefan He Qin, a 24-year-old college dropout was sentenced to seven and a half years in prison for securities fraud.
  • Qin ran two fraudulent Manhattan-based crypto hedge funds with over $100 million in assets between 2017 and 2020.
  • On Thursday, Qin pleaded guilty to embezzling more than $54 million from investors.

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Stefan He Qin, the 24-year-old founder of two New York-based cryptocurrency hedge funds, has pleaded guilty to securities fraud, receiving a seven and a half year prison sentence and a $54 million fine.

Stefan He Qin: I Thought Life Was a Video Game

Stefan He Qin pleaded guilty to running a $100 million Ponzi scheme, defrauding investors out of more than $54 million.

According to a Thursday Department of Justice (DOJ) press release, the 24-year-old college dropout ran two New York-based cryptocurrency hedge funds with over $100 million in assets under management. After pleading guilty to securities fraud in Feb. 2021, Qin was sentenced to 90 months in prison and ordered to forfeit $54 million on Thursday.

In 2016, Qin started a crypto hedge fund called Virgil Sigma. The fund promised investors 500% annual returns through a proprietary “market neutral” and supposedly “safe” investment strategy that claimed to exploit arbitrage opportunities across different exchanges. 

Qin’s fund amassed $23.5 million in assets under management during the first year of operations, leading to him being featured in the Wall Street Journal. Banking on the notoriety, by 2020, the Virgil fund had raised more than $90 million, prompting the young college dropout to start a second fund, called VQR, which amassed an additional $24 million in assets under management.

Despite claiming to invest the assets in cryptocurrency arbitrage strategies, the DOJ found that since 2017, Qin had engaged in a scheme to steal assets from Virgil Sigma and defraud its investors. Instead of investing the fund’s assets, Qin embezzled the investor’s capital and used the money to pay for personal expenses, including food, services, and rent for a $23,000 a month Manhattan penthouse. Moreover, Qin also used the fund’s capital to make personal investments in real estate and initial coin offerings (ICO).

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As a result of his reckless behavior, Qin soon used up nearly all of Virgil Sigma’s capital. “Qin’s investors soon discovered that his strategies weren’t much more than a disguised means for him to embezzle and make unauthorized investments with client funds,” said Manhattan US Attorney Audrey Strauss in a statement. 

Faced with redemption requests Qin could no longer fulfill, he doubled down on his scheme by attempting to steal assets from his second fund, VQR, to cover his tracks. Speaking before the judge, Qin said:

“Instead of coming clean I did the worst thing and doubled down on my lies… I thought I was the main protagonist and life was a video game and I had just found the cheat code to beat it. As we know, life is not a video game.”

Qin turned himself in to U.S. authorities in February this year, pleading guilty on the same day. While he faced as much as 20 years in prison, on account of his clean record and voluntary return, he was sentenced to seven and a half years in prison and ordered to forfeit the $54 million stolen from clients.

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SEC issues first ever charges over phoney ‘insider information’ on darknet

The U.S. Securities and Exchange Commission has announced charges against California resident James Roland Jones in the first-ever enforcement action from the commission to target securities fraud on the darknet.

According to the March 18 complaint, Jones is accused of accessing a darknet-based insider trading forum in late 2016 to seek material non-public information, or MNPI, on which to trade securities.

He was unsuccessful in obtaining any useful MNPI from the forum, but in the spring of 2017, Jones allegedly began selling insider stock tips himself under the false pretext he was privy to MNPI obtained both from the forum and corporate sources he claimed to be personally affiliated with. Jones is believed to have received roughly $27,000 worth of BTC for the fraudulent tips.

Jones’ tips were believed to be general predictions as to whether a stock would go up or down, with Jones sometimes selling tips for the same stock to go in both directions to different customers. When tips failed, Jones would offer another tip for free in exchange for positive reviews on a darknet marketplace.

The alleged fraudster also began operating a collective investment pool in 2017, laiming to make trades on behalf of investors. However, Jones was not trading with investors’ funds, and would instead return a small amount of the principal invested as purported profits to lure his victims into depositing additional funds.

The SEC accuses Jones of having acted in violation of anti-fraud provisions of the Exchange Act, and is seeking disgorgement of ill-gotten gains plus interest, civil penalties, and permanent injunctive relief.

David Peavler, the director of the SEC’s Fort Worth regional office, noted that the agency has committed significant resources to investigate crime on the dark web, stating:

“This case shows that the SEC can and will pursue securities law violators wherever they operate, even on the dark web. We have committed staff and technology to pierce the cloak of anonymity these wrongdoers try to throw over their crimes.”