A crypto trading teacher and aspiring hedge fund manager has been sanctioned by the U.S. Securities and Exchange Commission (SEC) for allegedly defrauding his students.

In a deal that remains subject to court approval, the SEC settled with Brian Sewell and his company, Rockwell Capital Management, over allegations that they defrauded some of the students taking Sewell’s online crypto trading course, known as the American Bitcoin Academy, of a combined US$1.2 million.

According to the SEC’s complaint, between early 2018 and mid-2019, Sewell encouraged his online students to invest in a hedge fund that he planned to launch that would use trading strategies powered by artificial intelligence (AI) to generate returns for investors.

The SEC alleged that, while raising money from investors, “the defendants misrepresented to prospective investors Sewell’s background and education, the identities of the Rockwell Fund’s management team, administrator, and custodian, the demand for and size of the Rockwell Fund, and the supposedly multifaceted investment strategy Sewell said he would use to grow the fund and generate returns for investors.”

In fact, the SEC said the fund was never launched, and instead Sewell held investors’ money in a crypto wallet, which was ultimately hacked and looted.

The SEC alleged that, for over a year, “Sewell deceived investors into thinking that the fund had launched as planned when it had not, including by sending them fictitious monthly account statements.”

After he lost their money, “Sewell concealed the hack and losses from the victim investors to prevent the fraud from unravelling,” the regulator said.

“Among other things, he falsely claimed that his investment strategies would be guided by his own ‘artificial intelligence’ and ‘machine learning’ technology which, like the fund itself, never existed,” said Gurbir Grewal, director of the SEC’s division of enforcement, in a release.

“Whether it’s AI, crypto, DeFi or some other buzzword, the SEC will continue to hold accountable those who claim to use attention-grabbing technologies to attract and defraud investors,” he said.

Without admitting or denying the allegations, Sewell and his company consented to injunctive relief. Rockwell Capital Management agreed to pay over US$1.6 million in disgorgement and prejudgment interest, and Sewell agreed to a civil penalty of US$223,229.