A former financial advisor with a history of allegations and ejections from two different industries is accused of leveraging “the perceived ambiguity of the crypto market” to bilk ordinary investors out of $100 million.
Joshua David Nicholas, 28, of Stuart, Florida, was indicted on charges of conspiracy to commit wire fraud and conspiracy to commit securities fraud, according to documents filed on June 30 in a Florida federal court.
A grand jury in the case also indicted Emerson Pires, 33, and Flavio Goncalves, 33, both of Brazil, in connection with the global crypto fraud. Pires and Goncalves face an additional charge of conspiracy to commit international money laundering.
The federal indictment and court papers tell the story of an old-school caper with a fresh coat of blockchain paint. The filings allege that Pires and Goncalves are the founders of EmpiresX, a cryptocurrency investment platform and unregistered securities offering they launched in early 2020.
Regulatory concerns related to cryptocurrency are common. But often the conversations live in the realm of bleeding edge cybersecurity, not within the scope of tried-and-true client manipulation.
“Unscrupulous fraudsters are nothing new to the investment world,” said George L. Piro, Special Agent in Charge of FBI Miami. “What’s changing is they are now pushing their criminal activity into the cryptocurrency realm.”
Court records filed Wednesday show that Nicholas was released on a $50,000 bond under the conditions of location monitoring and a curfew. Attempts to reach Nicholas for comment were unsuccessful.
“Our office is committed to protecting investors from sophisticated scammers seeking to capitalize on the relative novelty of digital currency,” Juan Antonio Gonzalez, U.S. Attorney for the Southern District of Florida, said in a statement. “As with any emerging technology, those who invest in cryptocurrency must beware of profit-making opportunities that appear too good to be true.”
Acting as company pitchmen, Pires and Goncalves used in-person meetings, video calls with investors and social media to tout the purported power of their platform and a proprietary trading bot they claimed could generate guaranteed returns.
In the pitches, Nicholas was positioned as the in-house expert, according to court documents. Touted as a “genius” and given the title of head trader for EmpiresX, targeted victims of the deception were presented with the option to have Nicholas manually handle their crypto investments.
During investors' calls, Nicholas fabricated his professional history and gave fictitious demos purporting to show the EmpiresX trading bot making trades in real time. In reality, the bot was fake, Nicholas' trading resulted in significant losses and the defendants transferred only a small portion of investors' funds to EmpiresX's brokerage account.
To assure investors of the safety of their investments, the defendants told victims that EmpiresX filed paperwork with the SEC to register as a hedge fund. The trio also presented Nicholas as a licensed trader while concealing that he was suspended by the National Futures Association from trading for misappropriating customer funds.
With investments in hand, Pires and Goncalves are accused of laundering investors’ funds through a foreign-based cryptocurrency exchange and paying out early EmpiresX investors with money obtained from later investors in a classic Ponzi-style scheme.
The ill-gotten gains were then used to lease a Lamborghini, shop at Tiffany & Co., make payments on a second home and more.
In late 2021, EmpiresX began to place restrictions on investor access to funds and slapped large fees on capital withdrawals. Breaking earlier promises that investors could easily withdraw their money caused trust to erode, the scheme began to collapse.
By early 2022, Pires and Goncalves allegedly began winding down EmpiresX's operations and had left the United States.
Securities litigation consultant and former regulator Louis Straney said the case – which shows new sides to an old coin – exemplifies why regulators are so focused on locked in on digital assets.
He added that lack of understanding turns an already complicated conversation into a potentially dangerous “opportunity” for fraudsters preying on unsophisticated investors.
“Anything that goes from a dollar to thousands of dollars per coin gets people's attention,” Straney told Financial Planning. “If I was an advisor, we would not be involved in the crypto market. Not because you can't make money there. You can. But because if you don't understand it and there's really no value behind it except speculation, that's not a place for traditional investors.”
In 2018, Straney said that he and former SEC enforcement officer Celiza Braganca authored research on cryptocurrency’s workings and regulatory issues. It was met with head scratching at the time, but Straney assured others in the regulatory community to pay attention over the next couple of years.
“In my opinion, it's like saying that volatility is an asset class. It's a non-traditional class at best that is certainly complex and not suitable for anyone except for the very narrow band of sophisticated investors that can put all the money that they invest at risk. One-hundred percent of it,” Straney said. “Because you've seen what's happened to the collapse of that market in the last few months. And not only the market, but exchanges, which is even more critical to the investor because you're losing liquidity.”
Straney added that as trusted advisors and not “blackjack dealers at the casino,” financial planners should meet the standard of fully understanding crypto or any other potential investment before presenting it to clients.
At the same time, regulators have to be up to the task of hitting the moving target that is digital assets.
“Who has jurisdiction? And what do you do when the thing is created in Canada, traded somewhere in Sweden and then marketed by somebody in the Cayman Islands?” Straney asked. He called regulators “very attentive to trends … they lock in on things. And if they see a missile coming, they want to build a missile defense system.”
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In August 2020, a customer dispute in connection to the matter was filed and eventually settled for $275,000.
The next month, Nicholas was suspended by the National Futures Association, a self regulatory organization for the U.S. derivatives industry, for failing to cooperate and to produce documents during the investigation of a $300,000 loan for securities trading that Nicholas solicited with misleading information. The NFA said Nicholas misappropriated funds for personal expenses and failed to provide bank records to the NFA to show what he actually did with the funds he received.
The NFA fined Nicholas $125,000 and barred him from applying for NFA membership or associate membership.
Nicholas’ next ban would come from FINRA in January 2022. Without admitting or denying, Nicholas consented to the entry of findings that he engaged in futures contracts through an outside business activity that resulted in two of his customers losing more than $1 million.
In a purported effort to recoup some of their losses, Nicholas convinced the customers to invest $300,000 in a promissory note with his OBA so that entity could invest the additional funds in securities on their behalf, according to FINRA BrokerCheck.
Nicholas then transferred $280,000 from his company’s bank account to his personal bank account and spent approximately $58,000 of these funds on personal expenses.
Piro said that while financial technology has changed, the crime and motivation behind it hasn’t. “Investors beware,” he said. “Conduct your due diligence before investing.”
