Bitcoin Exchange Operator Jon Montroll Charged With Fraud

The US Securities and Exchange Commission (SEC) has charged defunct bitcoin ‎securities exchange BitFunder and its founder Jon E. Montroll with violations of the anti-fraud and registration provisions of the federal securities laws.

Montroll, also known as “Ukyo,” operated two online bitcoin services: WeExchange Australia and BitFunder. WeExchange functioned as a bitcoin depository and currency exchange service. BitFunder facilitated the purchase and trading of virtual shares of business entities that listed their virtual shares on the BitFunder platform. BitFunder was operated by Montroll, also known as “Ukyo,” from December 2012 until its closure on November 14, 2013.

The SEC charged that BitFunder operated as an unregistered online securities exchange. The regulator also alleges that BitFunder and Montroll defrauded investors by misappropriating their bitcoins and failing to disclose a cyberattack on BitFunder’s system that resulted in the theft of more than 6,000 bitcoins. In today’s value, the stolen cryptocurrency were worth more than $60 million. The SEC complaint, filed in federal district court in Manhattan, seeks permanent injunctions and disgorgement plus interest and penalties.

According to the complaint, In November 2013, hackers exploited a weakness in BitFunder’s programming code to cause it to credit them with profits they had not actually earned. Due to the hacking, BitFunder and WeExchange lacked enough bitcoins to cover what Montroll owed users. Montroll provided sworn testimony to the SEC’s New York Regional Office in connection with their investigation into the hack and BitFunder’s activities.

In that testimony, Montroll denied that the hack had been successful, testifying that, “When the hackers went to withdraw, the system stopped them because the amount was obviously causing issues with the system.” Montroll later added that the software issue “was corrected immediately, whenever the system started having the problems, and I caught on to what was happening I’d say within a few hours.”

“As alleged in the complaint, Montroll defrauded exchange users by misappropriating their bitcoins and failing to disclose a cyberattack on the exchange’s system and the resulting bitcoin theft,” said Lara S. Mehraban, Associate Regional Director of the SEC’s New York Regional Office. “We will continue to vigorously police conduct involving distributed ledger technology and ensure that bad actors who commit fraud in this space are held accountable.”

Marc Berger, Director of the SEC’s New York Regional Office, said that platforms that engage in the activity of a national securities exchange, regardless of whether that activity involves digital assets, tokens, or coins, must register with the SEC or operate pursuant to an exemption.

“We will continue to focus on these types of platforms to protect investors and ensure compliance with the securities laws,” said Berger.

Manhattan US Attorney Geoffrey S. Berman and Federal Bureau of Investigation’s William F. Sweeney Jr. also announced on Wednesday that Montroll had been taken into custody for allegedly giving false sworn testimony and false documentation while under oath during the SEC’s investigation into the exchange.

“As alleged, Montroll committed a serious crime when he lied to the SEC during sworn testimony,” said FBI Assistant Director-in-Charge William F. Sweeney Jr. “In an attempt to cover up the results of a hack that exploited weaknesses in the programming code of his company, he allegedly went to great lengths to prove the balance of bitcoins available to BitFunder users in the WeExchange Wallet was sufficient to cover the money owed to investors. It’s said that honesty is always the best policy – this is yet another case in which this virtue holds true.”

Montroll is charged with two counts of perjury and one count of obstruction of justice. The perjury counts each carry a maximum penalty of five years in prison.

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