As an analyst with extensive experience in the crypto and finance industries, I find the indictment of three former executives of Cred for wire fraud and engaging in financial transactions for illicit purposes to be a significant development. The fact that this case predates the high-profile bankruptcies of Celsius and Voyager by around two years underscores the importance of scrutinizing crypto lenders and their business practices.
As a crypto investor, I’ve kept a close eye on the latest developments regarding the now-bankrupt crypto lender Cred. I was surprised to learn that three of its former executives were indicted last Thursday. According to the charges, they allegedly conspired to commit wire fraud, engaged in wire fraud themselves, and facilitated financial transactions for illicit purposes.
Three top executives at Cred – Daniel Schatt (co-founder and former CEO), Joseph Podulka (former CFO), and James Alexander (former chief capital officer) – have been indicted by the U.S. Attorney’s Office in the Northern District of California. The trio were taken into custody and appeared before a San Francisco judge for their first hearing, as stated in a release put out on Friday.
In November 2020, Cred announced its bankruptcy filing, indicating that its liabilities ranged from $100 million to $500 million, while its estimated assets were below $100 million. The company attributed its downfall to questionable management of certain corporate finances, as stated in court records. Subsequently, a federal judge approved the company’s reorganization plan.
Among the early wave of notable crypto lenders that filed for bankruptcy, Cred’s case predates the 2022 bankruptcies of Celsius and Voyager by approximately two years.
As a crypto investor, I’ve come across similar situations where companies offering attractive yields on deposits, like Cred and its “CredEarn” program, have ultimately failed to deliver. These platforms promised competitive interest rates by accepting our crypto deposits. However, when Cred filed for bankruptcy, it became apparent that they didn’t have sufficient funds to repay their creditors, including those of us who had trusted them with over $100 million worth of cryptocurrency.
The defendants enticed customers into investing in cryptocurrency by guaranteeing substantial returns. However, they failed to disclose that almost all the funds used to generate these yields came from a single company. This business primarily focused on providing unsecured loans to Chinese gamers. (U.S. Department of Justice press release)
As a researcher examining the case at hand, I discovered that contrary to the defendants’ assertions, Cred did not practice collateralized or guaranteed lending. Additionally, their hedging strategy, rather than safeguarding Cred’s investments against market fluctuations, proved ineffective.
Attorneys Darren Azman and Joseph Evans of McDermott Will & Emery LLP, representing the Cred Liquidation Trust, have been persistently collaborating with authorities to recover funds for creditors. We are deeply appreciative of the dedication and rigor displayed by the Department of Justice (DOJ) and Federal Bureau of Investigation (FBI) in their investigations, which led to the indictment of the main executives implicated in the first significant crypto bankruptcy case in the US.
As a researcher investigating the reasons behind Cred’s bankruptcy filing in 2020, I discovered that the company placed significant blame on Quantcoin, an external investment manager they had entrusted with 800 Bitcoin, equivalent to approximately $10 million at the time. However, subsequent legal actions brought by the Cred Liquidation Trust revealed a different story. It was alleged in the lawsuit that most of the lost customer funds hadn’t been mishandled by Quantcoin, but rather had been covertly loaned out to MoKredit, a Chinese micro-lender. Unfortunately, MoKredit failed to repay its debts, leading to significant financial losses for Cred and its customers.
The primary source of revenue for MoKredit came from extending unsecured loans to Chinese gamers. However, the close connection between MoKredit and Cred, including their shared co-founder, was not transparently disclosed to Cred’s creditors, as stated in the indictment on Friday.
The Cred Liquidation Trust asserts that Cred led users towards CredEarn via Uphold, a crypto exchange with retail focus, where Dan Schatt once sat on the board. According to the complaint, Uphold misrepresented CredEarn as safe, secure, insured, and hedged to attract thousands of retail investors.
Based on the dropped lawsuit this year, the company, CredEarn, originally planned to call itself “UpholdEarn,” but changed its name to reduce potential regulatory risks.
As an analyst, I recognized that Cred was adopting a daring hedging approach with significant risks involved in cryptocurrency yield earning programs. Instead of shoulderering all these hazards myself, I chose to transfer the risks to Cred by managing our ‘Earn’ program through them.
The allegations in the lawsuit brought forth by Cred’s Liquidation Trust were disputed by Uphold. They asserted that my removal from their board was not of my own volition. Although the initial dismissal of the lawsuit was upheld on appeal, another class action suit from Cred’s creditors against Uphold is still under consideration in the courts.