The McAfee Cryptocurrency Fraud Case

Tech celebrity John McAfee and his former bodyguard and business associate Jimmy Watson, Jr. were indicted last week on fraud and money laundering charges. The indictment alleges that in 2018 the two engaged in a series of fraudulent schemes related to investments in cryptocurrencies, taking in more than $13 million. The charges highlight the ability of alleged fraudsters to adapt old-school techniques to new technologies. As the McAfee fraud case demonstrates, when it comes to fraudulent schemes, the classics never grow old.

John McAfee
John McAfee

The Defendants

John D. McAfee is a 75-year-old American citizen who was born in the U.K. He is best known for creating the computer antivirus software and company that still bear his name. Since selling his company, McAfee has been a popular figure at tech industry conferences and on various media platforms such as YouTube and CNBC. He has cultivated an image as an expert in cryptocurrency and cybersecurity. Of particular relevance to the criminal case, at the time of his alleged crimes his official McAfee Twitter account had more than 750,000 followers.   

The co-defendant Jimmy G. Watson Jr. is forty years old and a former Navy Seal. At the end of 2017 he began working for McAfee as a private security guard, and later became his “Executive Advisor.” McAfee had a team of people working for him on cryptocurrency investments, and Watson ultimately became a leading member of that team.

Cryptocurrency: Bitcoin and Beyond

Cryptocurrencies, or digital currencies, are electronic representations of value that operate like traditional coin or paper currencies. They can be used as a medium of exchange to make purchases or investments, and may be traded back and forth among individuals. The issuance and exchanges of cryptocurrencies are tracked in digital ledgers known as blockchains. Unlike more traditional currencies, cryptocurrencies are not issued by, or backed by, any government. Ultimately they depend for their value on the agreement and faith among those who use them.

The best-known cryptocurrency is bitcoin, which has been extremely volatile and, for many of its investors, extremely lucrative. It has undergone a number of boom and bust cycles, but the overall trend is hard to ignore: a single bitcoin that was worth less than a dime in 2010 is worth more than $54,000 at this writing (of course, by the time you read this, it could be worth twice that – or half).

Returns like that inevitably attract attention. Many companies and individuals have launched their own cryptocurrencies, with varying degrees of success, and several thousand are now available on the market. Cryptocurrencies other than bitcoin are often referred to as “altcoins.” Startup companies use an “initial coin offering” or “ICO” – similar to an initial public offering or IPO – to raise funds by issuing and selling the digital tokens in their new altcoins.

Returns like that also inevitably attract the interest of government regulators and law enforcement. The government alleges in the indictment that certain uses and aspects of digital currencies qualify them as commodities under federal law, making trading in them subject to regulation by the Commodity Futures Trading Commission. The indictment also alleges that in some cases cryptocurrencies qualify as securities subject to federal securities law and regulation by the Securities Exchange Commission. More broadly, just last October the Attorney General’s Cyber-Digital Task Force released a detailed report, “Cryptocurrency Enforcement Framework,” analyzing multiple law enforcement issues related to the rise of cryptocurrencies.

McAfee Indictment

The Fraud Schemes

The indictment charges that McAfee, with the help of Watson and other unnamed co-conspirators, engaged in two different types of fraud schemes involving altcoins. The first was what is known as a “pump and dump” or “scalping” scheme. McAfee would direct his team members to purchase large quantities of a particular altcoin, either in his name or on his behalf. After the purchases, McAfee would endorse that altcoin on his official Twitter account and encourage others to invest in it (the “pump”) without disclosing that he owned large amounts of it himself. When the price rose based on the interest and activity created by his endorsements, McAfee and his team members would sell their holdings (the “dump”). This often left those who invested based on his recommendations holding the bag, as the value of the altcoin would drop significantly over time once McAfee stopped endorsing it.

McAfee allegedly pumped and dumped a number of altcoins this way, using his Twitter account to promote a “coin of the day” or “coin of the week”. McAfee’s Tweets allegedly contained false and misleading statements about the investments and did not disclose his true reason for the endorsement: to run up the price so he could sell. He also allegedly repeatedly lied when asked on Twitter and elsewhere whether he was pursuing his personal financial interests, and denied owning the altcoins he was promoting.

The indictment charges that in December 2017 and January 2018, the defendants and other McAfee team members earned more than $2 million through pump and dump schemes involving twelve different publicly-traded altcoins.

The indictment also charges a second, more lucrative scheme, the “IPO touting scheme.” It alleges that over about a three-month period in late 2017 and early 2018 the defendants and other McAfee team members promoted at least seven ICOs on Twitter. As compensation for these promotions, the McAfee team received more than $11 million worth of bitcoin and other cryptocurrencies from the ICO offerors. In each case, McAfee allegedly failed to disclose to the ICO investors that a substantial portion of the funds raised by the ICO he was promoting would be paid to McAfee. The indictment also alleges that the defendants took active steps to conceal their compensation arrangements from the ICO investors.

Criminal Charges in the McAfee Fraud Case

The indictment uses several different theories to charge the two schemes:

  • Count 1: Conspiracy to commit commodities and securities fraud (pump and dump scheme)
  • Count 2: Conspiracy to commit wire fraud (pump and dump)
  • Count 3: Wire fraud (pump and dump)
  • Count 4: Conspiracy to commit securities fraud (touting scheme)
  • Count 5: Conspiracy to commit wire fraud (touting)
  • Count 6: Wire fraud (touting).

Finally, Count 7 charges conspiracy to commit money laundering under 18 U.S.C. § 1957. Unlike money laundering charges under the more commonly charged section 1956, section 1957 does not require proof of any intent to disguise or conceal the nature and source of the funds or any other specific purpose for the laundering transaction. It may be violated simply by taking criminal proceeds and depositing them in the bank, so long as the transaction exceeds $10,000. The indictment alleges that the defendants did this with the proceeds of the touting wire fraud alleged in Count 6.

Most of the criminal charges carry a maximum penalty of 20 years in prison. The conspiracy charges in counts 1 and 5 carry a maximum penalty of 5 years, and the money laundering count carries a maximum penalty of 10 years.

The indictment also seeks forfeiture of the money earned through the schemes or of any assets whose purchase can be traced to those proceeds.

Possible Defenses

As in many white collar cases, it appears the facts of the case will be largely undisputed. There will be a substantial paper trail to prove the investments that McAfee and his team made, their Twitter endorsements, what was and was not disclosed, what they earned, and what they did with the money. So any defense likely will be not “we didn’t do it” but rather “it wasn’t a crime.”

A key legal issue will be whether these transactions were in fact subject to federal securities or commodities regulation. Watson’s attorney hinted at this kind of defense when the indictment was announced, suggesting there would be a dispute over whether cryptocurrencies are securities, commodities, or something else. If the court determines they do not legally qualify as securities or commodities, the criminal charges would fail.

The cryptocurrency craze erupted relatively quickly over the past decade and there has been considerable uncertainty over the regulatory status. Cryptocurrency markets have had a “wild west” feel to them and the government has been slow to respond. SEC leaders have said in recent speeches that they do not consider bitcoin itself to be a security. But the SEC has not been reluctant to pursue civil actions related to ICOs in new cryptocurrencies under specific factual circumstances. Suffice it to say that the legal status of cryptocurrencies is still somewhat up in the air, and that status may depend a great deal on the facts of a particular offering or transaction.

The McAfee indictment is full of hedges in this regard. It says that “certain uses and aspects of digital currencies qualify them as commodities” and that “in certain circumstances, digital assets can also qualify as securities.” Although the indictment confidently asserts that these particular transactions were subject to federal jurisdiction, the language of the indictment itself appears to recognize this is a gray area. This case may lead to a judicial determination concerning the status of cryptocurrencies that could have much wider implications.

Twitter logo

Twitter Cryptocurrency Fraud: Old Wine in New Bottles

At the press conference announcing the indictment, FBI Assistant Director William F. Sweeney, Jr. said the case involved an “age old pump-and-dump scheme.” It’s true that, despite the glitzy new technologies involved, the alleged schemes in the McAfee fraud case involve old, tried-and-true fraud techniques. And there are several characteristics of the cryptocurrency markets that make them prime candidates for these kinds of classic schemes.

The first is the complex and confusing nature of the product. Many, if not most, people probably don’t have a clear understanding of what exactly a cryptocurrency is, how it works, or why it has any value at all. That makes the area ripe for fraud. One hundred years ago, when pioneering the type of fraud scheme that still bears his name, Charles Ponzi relied on obscure instruments known as postal reply coupons and claims about international variations in currency and postal rates – difficult things for the typical 1920s investor to understand or verify. If an investment is difficult to understand, it makes it easier for potential fraudsters to deceive people about that investment.

Related to the obscure nature of the investment is the ability of a celebrity or other well-known figure to attract investors – or in this case, victims. Many watching the frenzy in cryptocurrencies likely wanted to get in on the action but felt uncertain about which altcoins might be good investments. If a tech leader with McAfee’s stature throws his name behind a particular coin, that will attract many who feel unqualified to evaluate the investment for themselves. That, of course, is why some of the IPO issuers were willing to pay McAfee such huge sums of money for his endorsement.

Another “high tech” feature that makes this case interesting is the role of Twitter. Virtually all of McAfee’s promotions and endorsements in furtherance of the alleged schemes took place on Twitter. We’ve seen how that social media platform transformed political communications in the hands of former president Trump and other users with large numbers of followers. The same characteristics that make it so easy to spread “fake news” when it comes to politics also make it easier to tout fraudulent investments. Twitter has a massive reach but is largely unregulated, making it easy to spread phony information to millions.

Something like a pump-and-dump scheme operates much more efficiently in the age of Twitter. In the days before digital communications, those engaging in such a scheme might have to print a newsletter or other document touting the stock in question and deliver it by mail. That involves printing and postage expenses and takes much more time.  In the digital age a potential fraudster can reach hundreds of thousands of people in an instant. Technology makes everyone’s job easier – including criminals’.

The final characteristic of cryptocurrencies that McAfee apparently was able to exploit is the investment frenzy surrounding them. When people see the astounding returns in something like bitcoin they want to get in before they miss out – and that can cause people to let down their guard. Some have compared the frenzy surrounding bitcoin to the famous Dutch tulip mania in the 1700s, the first great investment bubble. If you read some of the online commentary about altcoins on sites like Reddit or Twitter, much of it has almost an evangelical tone. This is not only a warning sign of a potential bubble – it also creates an environment where criminals can prey on those caught up in the frenzy.

What to Watch

McAfee is currently in custody in Spain, awaiting extradition. He was arrested there several months ago on federal tax evasion charges filed in a separate case in Tennessee.  In the meantime, he continues to take to Twitter, now to defend his conduct and attack the government’s case.

McAfee Tweet

Watson has been arrested on the criminal charges. In addition to the criminal indictment, both men are also facing civil charges from the CFTC and SEC.

The McAfee fraud case should be a cautionary tale for investors eager to jump on the latest hot bandwagon based on celebrity endorsements. And it could be a sign of things to come as the federal government, under the Biden administration, seeks to flex its muscles when it comes to policing the cryptocurrency markets.

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Prosecuting Trump for the Capitol Riot

The riot at the Capitol on January 6 has led to many calls for President Trump to be removed from office. Regardless of whether that happens, there needs to be a criminal investigation into the events leading up to the riot, and in particular into Trump’s role in inciting the riot. Criminal charges against Trump and the others involved may well be appropriate.

I’ve previously resisted calls for criminal investigations of Trump once he leaves office. The risk of criminalizing policy differences requires that we be very cautious about prosecuting an outgoing president. Part of what led so many to recoil when Trump led chants of “lock her up” at his rallies was the specter of a president using his Justice Department to pursue political enemies. DOJ has already been severely damaged during the Trump administration, and a criminal investigation of Trump by the Biden DOJ will result in further charges of politicization. And most of Trump’s misconduct in office, however odious, was likely not criminal.

But Trump inciting a mob to storm the Capitol is on a whole different level. There is no possible way to  characterize Trump’s actions as the legitimate exercise of his presidential authority; no risk that we would be criminalizing mere political disputes. This was an assault on our most cherished institutions – on our democracy itself. It requires a thorough criminal investigation, followed by any appropriate indictments.

The Riot at the Capitol

On Wednesday, January 6, Congress convened for the formal count of the electoral college votes that would officially certify Joe Biden as the president-elect. In the weeks leading up to the certification, Trump and many of his supporters made repeated unfounded allegations of voter fraud and claimed the election had been “stolen” from him. They filed dozens of lawsuits around the country alleging problems with the election. These claims were uniformly rejected by both state and federal judges, including judges appointed by Trump.

In the days leading up to January 6, Trump exhorted his millions of followers to show up in D.C. to protest the “fraudulent” election. For example, on December 19 he Tweeted: “Big protest in D.C. on January 6. Be there, will be wild!” 

On January 6, Trump held a “Save America” rally at the White House, addressing the large crowd that had gathered in response to his pleas. In a speech lasting over an hour, Trump used incendiary language, repeatedly urging the crowd to “fight” to save the country. He exhorted them to march down Pennsylvania Avenue to “stop the steal” and prevent the Democrats from “fraudulently” taking over the country. Others spoke as well, including the president’s son Don Jr. and Trump’s personal attorney, Rudy Giuliani, who urged the crowd to settle the dispute over the election via “trial by combat.”

Following the rally the crowd marched  down Pennsylvania Avenue to the Capitol. They overwhelmed the Capitol Police and broke into the building — breaching barricades, scaling walls, and breaking down doors. Once inside they broke windows and destroyed other property. They threatened the safety of members of Congress, who were forced to cower behind locked doors. Some in the crowd were armed or carried explosive devices.  Some carried nooses and chanted slogans crying they should hang Mike Pence or assassinate Nancy Pelosi. Some carried zip ties, suggesting they might intend to take prisoners. One capitol police officer died after the rioters beat him in the head with a fire extinguisher. One rioter was shot and killed by the police.

It was six hours before law enforcement was able to re-take the building. In the days since the riot it has become clear that it’s very lucky more people were not injured or killed, including members of Congress or the vice president.

The Relevant Criminal Statutes

The seditious conspiracy  statute, 18 U.S.C. § 2384, makes it a crime for two or more persons to conspire to oppose the U.S. government by force, or “by force to prevent, hinder, or delay the execution of any law of the United States.” It provides a penalty of up to twenty years in prison.

The crime of rebellion or insurrection, 18 U.S.C. § 2383, provides a ten-year penalty for anyone who “engages in any rebellion or insurrection against the authority of the United States or the laws thereof, or gives aid or comfort thereto.”  It also provides for disqualification from holding public office in the future.

Under either of these statutes, the prosecution argument would be that Trump, through his  rally and conduct leading up to the rally, conspired with others to use force to delay the “execution of [a] law of the United States” – the electoral certification by Congress. In the words of the rioters that Trump adopted, he was trying to “stop the steal.” Through the same actions he also took part in a rebellion or insurrection against the authority of the United States and gave “aid or comfort” to those who stormed the Capitol.

Those who actually broke into the Capitol may face a number of other charges as well, including unlawful entry, destruction of property, assault, and homicide. Many of those people are currently being rounded up by law enforcement, having helpfully posted pictures of themselves committing the crimes on social media.

The First Amendment Defense

Trump’s most likely defense, one already raised by a number of legal commentators, is that his speech to the mob is protected by the First Amendment. He didn’t intend for the mob to riot, this defense would argue, he merely wanted them to protest outside the Capitol to try to influence the lawmakers inside. Accordingly, his address to the crowd was protected political speech and cannot form the basis of a prosecution.

The Supreme Court has held that speech intended to incite imminent violence is not protected by the First Amendment, but the category of speech that may be prosecuted is very narrow. In the leading case of Brandenburg v. Ohio, the Court held that speech may lawfully be criminalized only if it is “directed to inciting or producing imminent lawless action and is likely to incite or produce such action.” In Brandenburg  the Court threw out the conviction of a Ku Klux Klan member for a rally speech at a farm in Ohio. The speech contained derogatory language about Jews and African Americans and vague references to possible “revengeance” against the government if it did not stop oppressing whites, but called for no immediate action.

The Brandenburg analysis can be broken down as follows: 1) was the speech likely to produce lawless action; 2) was that action imminent; and 3) was that the speaker’s intent. Numbers one and two here seem pretty clear. The speech was not merely likely to produce lawless action, it did in fact produce lawless action. And unlike the speech in Brandenburg itself, Trump’s speech did call for imminent action: he directed the crowd to march to the Capitol as soon he was done. The primary legal issue then becomes whether what happened was really Trump’s intent.

Evidence of Trump’s Intent   

Intent in a criminal case is usually proven by circumstantial evidence. Trump’s speech is full of references to the need for the crowd to “fight like hell,” to be “strong,” and to stop the Democrats from “stealing” the election.  On the other hand, his defenders can point to the fact that he never explicitly called for the crowd to “storm the barricades,” and that he inserted a couple of references in the hour-plus long speech to “peaceful protest.” The defense would argue that the violent phrases were just colorful metaphors. Political speech, they would note, is full of references to “fighting” for various rights. That can’t be construed as a call for actual violence.

Commentators who defend the speech as protected by the First Amendment tend to focus on simply the speech itself, isolating a few lines and arguing they don’t amount to incitement. But Trump’s intent can’t be determined one way or another by looking only at the text. Context matters, and we can’t parse Trump’s intent by looking at the speech alone any more than we can parse the intent of the entire speech by looking at a few isolated passages.

Trump’s speech and intent first have to be evaluated in the context of the events leading up to the rally. It was preceded by weeks of Trump whipping up his supporters to help stop the “fraudulent” election. Right-wing social media was full of memes issued in response, urging his supporters to show up and “fight” for Trump.

The speech also has to be evaluated in the context of the rally as a whole. Others speaking at the rally used even more explicit violent language, such as Giuliani’s call for “trial by combat.” And the rally was taking place immediately prior to an actual march to the Capitol by the crowd. This is tied to the “imminence” issue – a similar speech using similar violent language directed at Congress but given at a campaign rally in Florida, for example, would not be nearly as menacing. Here the crowd was in a position to act immediately in response to Trump’s words — and did so.   

The nature of the crowd is also important when inferring Trump’s intent. He knows he’s not speaking to the Rotary Club here. Trump knows that his supporters routinely use the language of violence, insurrection, civil war, and “second amendment rights.” All outward signs would indicate this was a crowd stoked for violence – all they needed was their leader to give them a little nudge.

How exactly did Trump expect the protestors to “stop the steal” and prevent Congress from certifying Biden as the winner, if not by storming the Capitol to shut it down? Is it plausible that he believed the unruly mob before him was going to seek to “Save America” by peacefully linking arms outside the Capitol and singing Kum-ba-yah?

I think given Trump’s history and the overall context of the speech, the evidence of his intent is strong. But what really seals it for me is what he did once the riots started.

Trump’s Actions During the Riot

Although Trump promised the crowd he would be there with them as they marched to the Capitol, in fact he retreated to the White House to watch the developments on TV. There were reports from sources inside the White House that he expressed delight and excitement as he watched the riot unfold. He also was reportedly calling lawmakers, while the riot was going on, still trying to persuade them to delay the certification process or overturn the election.

There are also published reports that when the Mayor of D.C. called for reinforcements from the national guard, Trump resisted. (Because D.C. is not a state, the local national guard is controlled by the U.S. Department of Defense – so ultimately by Trump.) Vice president Pence was reportedly the one who finally ordered the D.C. national guard to respond, after a significant delay.

Finally, after allowing the riot to proceed for more than two hours and only after president-elect Biden had already called for the violence to cease, Trump released a tepid video statement to his supporters. He repeated the false claims that the election had been stolen. He told the rioters that he understood their pain. Remarkably, he said “we love you, you’re very special,” before saying it was time to go home.  Shortly thereafter he Tweeted:

These are the things and events that happen when a sacred landslide election victory is so unceremoniously & viciously stripped away from great patriots who have been badly & unfairly treated for so long. Go home with love & in peace. Remember this day forever!

These events are compelling evidence of Trump’s true intent. If he did not intend for the rioters to storm the Capitol, you would expect him to react with shock and horror and immediately try to stop it. Instead he watched excitedly on TV, delayed sending help, and continued working to try to stop Congress from acting while Congress itself was under attack. He praised his followers, told them he loved them, called them great patriots, and told them to be proud. Those are not the words of a man disappointed by what happened. That crowd did exactly what Trump wanted them to do.

I’m not suggesting that overcoming a First Amendment defense would be a slam-dunk. It’s possible to argue that he is just a terrible person who enjoyed the riot once it began but never really intended for it to happen. The First Amendment claim would clearly be the key legal issue to be resolved in any prosecution. But if I’m the prosecutor with this evidence, I like my case.

The Benefits of a Grand Jury Investigation

Launching a grand jury investigation is not the same as determining that criminal charges are appropriate. But a federal grand jury investigation would allow prosecutors to subpoena all relevant documents including emails, phone records, text messaging records, social media posts, and the like, to fully piece together all the events leading up to and during the riot. The grand jury could compel witnesses to testify under oath, such as witnesses to the president’s conduct and statements in the Oval Office while the riot was unfolding.

Such an investigation could uncover information that makes the evidence of Trump’s intent and role in the riot much clearer. We don’t know what is contained in the text messages or emails leading up to the riot, or what conversations witnesses could testify about. The grand jury could probe all of these details to see whether charges are appropriate. 

Any investigation also needs to explore the potential liability of others around president Trump, including others who spoke at his rally, as potential co-conspirators. The president’s prime enabler, Rudy Giuliani, who called for “trial by combat” after working for weeks to overturn the election, is certainly a potential target.

A conspiracy investigation should not be limited to events on the day of the riot. It would also make sense to explore other instances of misconduct, such as Trump’s recent call to Georgia election officials asking them to “find” the  votes they would need to overturn Biden’s victory in that state. As I wrote here, due to the heightened “willfulness” standard of intent for election offenses, prosecuting that call as a stand-alone election crime would be an uphill battle. But it would make sense to investigate that incident, and others, as potentially part of a conspiracy involving a pattern of overt acts seeking to overturn the lawful election results, culminating on January 6. 

There is a great deal about what happened on January 6 that we still need to learn, but it’s clear there is at least potential criminal conduct by Trump and others. Shortly after January 20, president Biden’s Department of Justice should convene a grand jury to investigate. We can’t say for certain at this point that criminal charges would be appropriate. But we can say for certain that a grand jury investigation is called for.

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