Crypto platform defrauded investors, SEC alleges

According to the regulator’s complaint filed yesterday, between January 2020 and October 2021, the company allegedly sold memberships in the firm that promised investors high returns from its crypto trading and provided investors with incentives to recruit additional investors. 

Those memberships amounted to securities, which weren’t registered, the SEC alleged. And, the company engaged in almost no trading on behalf of investors, it said. Instead, it reported fictitious profits to investors and misled them about the status of their accounts. 

The SEC also alleged that Palafox misappropriated more than US$57 million of investors’ funds, and used most of the rest of the money to pay purported returns and referral rewards to other investors “in a Ponzi-like scheme” until it collapsed in late 2021.

“As alleged in our complaint, Palafox attracted investors with the allure of guaranteed profits from sophisticated crypto asset and foreign exchange trading, but instead of trading, Palafox bought himself and his family cars, watches, and homes using millions of dollars of investor funds,” said Scott Thompson, associate director of the SEC’s Philadelphia office, in a release. 

“Palafox used the guise of innovation to lure investors into lining his pockets with millions of dollars while leaving many victims empty-handed,” said Laura D’Allaird, chief of the SEC’s new Cyber and Emerging Technologies Unit. 

“In reality, his false claims of crypto industry expertise and a supposed AI-powered auto-trading platform were just masking an international securities fraud,” she said.

The SEC’s complaint seeks permanent injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties. 

In a parallel action, Palafox was also arraigned on criminal charges brought by the U.S. attorney’s office for the Eastern District of Virginia.

None of the allegations have been proven.