(Bloomberg) – Stefan Qin was just 19 when he claimed to have the secret of cryptocurrency trading.
Qin, a self-proclaimed math prodigy from Australia, threatened youthful self-confidence and left university in 2016 to start a hedge fund in New York called Virgil Capital. He told potential clients that he had developed an algorithm called Tenjin to monitor cryptocurrency exchanges around the world to take advantage of price fluctuations. A little over a year after it started, he boasted that the fund had yielded 500%, a claim that yielded a spate of new money from investors.
He became so cash-strapped that in September 2019, Qin signed a lease for a $ 23,000 monthly apartment in 50 West, a 64-story luxury apartment building in the financial district with expansive views of Manhattan, as well as a swimming pool , sauna, steam room, whirlpool and golf simulator.
According to federal prosecutors, the operation was in fact a lie, essentially a Ponzi scheme that stole about $ 90 million from more than a hundred investors to help Qin’s lavish lifestyle and personal investments in such high-risk bets as the to pay first coin offer. At one point, he blamed poor cash flow management ‘and’ loan sharks in China ‘for his problems for customers’ demands for their money. Last week, Qin, now 24 and expressing remorse, pleaded guilty in federal court in Manhattan to a single charge of security fraud.
“I knew what I was doing was wrong and illegal,” he told U.S. District Judge Valerie E. Caproni, who could face more than 15 years in prison. ‘I’m very sorry for my actions and will atone for the rest of my life for what I did. I am deeply sorry for the damage my selfish behavior has done to my investors who rely on me, my employees and my family. ”
Eager investors
The case reflects similar cryptocurrencies, such as those of BitConnect, which yield people double and triple digits and cost investors billions. Such a Ponzi scheme shows how investors who are eager to make money in a hot market can easily get lost by promising high returns. The Canadian stock exchange QuadrigaCX collapsed in 2019 due to fraud, which lost 76,000 investors at least $ 125 million.
As the oversight of the cryptocurrency industry intensifies, the sector is littered with inexperienced participants. A number of the approximately 800 crypto funds worldwide are managed by people who have no knowledge of Wall Street or finance, including some college students and recent graduates who launched funds a few years ago.
Qin’s path also began at university. He was a mathematician planning to become a physicist, he told a website, DigFin, in a profile published in December, just a week before regulators shut him down. He described himself on his LinkedIn page as a “quantity with a deep interest and understanding in blockchain technology.”
In 2016, he was accepted into a program for high-potential entrepreneurs at the University of New South Wales in Sydney with a proposal to use blockchain technology to accelerate currency transactions. He also attended the Minerva Schools, a mostly online college in San Francisco, from August 2016 to December 2017, the school confirmed.
Crypto Bug
He got the crypto-bug after an internship at a firm in China, he told DigFin. Its task was to build a platform between two locations, one in China and the other in the US, to enable the company to arbitrate cryptocurrencies.
Convinced that he had a business, Qin moved to New York to establish Virgil Capital. His strategy, he told investors, would be to take advantage of the tendency of cryptocurrencies to trade at different prices on different exchanges. He would be ‘market neutral’, meaning the company’s funds would not be exposed to price movements.
And unlike other hedge funds, he told DigFin, Virgil will not charge any management fees, but only fees based on the firm’s performance. “We never try to make money easily,” Qin said.
With its narration, Virgil got off to a fast start, claiming 500% returns in 2017, which attracted more investors eager to participate. A marketing brochure boasts monthly returns of 10% – or 2,811% over a three-year period ending in August 2019, evidenced by the legal fees.
His assets received an extra shock after the Wall Street Journal profiled him in a February 2018 story showcasing his skill in arbitrating cryptocurrency. Virgil “experienced significant growth as new investors flocked to the fund,” prosecutors said.
Missing assets
The first cracks appeared last summer. Some investors are becoming “increasingly upset” about missing assets and incomplete transfers, former investor relations chief Melissa Fox Murphy said in a court statement. (She left the firm in December.) The complaints increased.
“It’s now MID – DECEMBER and my MILLION DOLLARS ARE NOT SEEN ANYWHERE,” wrote one investor, whose name was blackened in court documents. “It’s a shame to treat one of your earliest and biggest investors.”
Around the same time, nine investors with $ 3.5 million in funds, according to prosecutors, asked for redemptions from the firm’s flagship Virgil Sigma Fund MP. But there was no money to transfer. Qin drained the Sigma fund of its assets. The fund’s balances are fabricated.
Instead of trading on 39 exchanges around the world, as he claimed, Qin spent investor money on personal expenses and investing in other unknown high-risk investments, including the initial currency offering, prosecutors said.
Therefore, Qin tried to stop. Rather, he persuaded investors to transfer their interests to his VQR Multistrategy Fund, another cryptocurrency fund he launched in February 2020 with a variety of trading strategies – and still had assets.
‘Loan sharks’
He also wanted to withdraw $ 1.7 million from the VQR fund, but this was suspected by chief trader Antonio Hallak. In a call taken up by Hallak in December, Qin said he needed the money to repay “borrowing sharks in China” for which he had borrowed to start his business, according to a lawsuit filed by the Securities and Exchange Commission filed. He said the loan sharks “can do anything to collect the debt” and that he has a “liquidity issue” that prevents him from repaying it.
“I had just as poor cash flow management to be honest with you,” Qin told Hallak. ‘I do not have money at the moment dude. It’s so sad. “
When the trader withdrew, Qin tried to take over the reins of VQR’s accounts. But now the SEC was involved. It received an exchange of cryptocurrencies to seize the remaining assets of VQR and filed a week later.
Asset recovery
By the end, Qin had drained virtually all the money that was in the Sigma fund. A court-appointed recipient who oversees the fund wants to recover assets for investors, said Nicholas Biase, a spokeswoman for U.S. Attorney Audrey Strauss in Manhattan. About $ 24 million of assets in the VQR fund were frozen and would be available to disperse, he said.
“Stefan He Qin has depleted almost all the assets of the $ 90 million cryptocurrency fund he owns, stolen the investor money, spent on indulgences and speculative personal investments, and lied to investors about the performance of the fund and what he did with it. made money, ”Strauss said in a statement.
In South Korea, when Qin learned of the investigation, Qin agreed to fly back to the US, prosecutors said. He surrendered to authorities on February 4, pleaded guilty the same day before Caproni was released and was released on a $ 50,000 bond pending his sentencing, scheduled for May 20. While the maximum statutory sentence requires 20 years in prison, as part of a lawsuit prosecutor agreed that he should receive 151 to 188 months behind bars under federal sentencing guidelines and a fine of up to $ 350,000.
Fate is far from the career his parents envisioned for him – a physicist, he told DigFin. ‘They were not too happy when I told them I had stopped doing the crypto thing. Who knows, maybe one day I will complete my degree. But what I really want to do is trade crypto. ”
The case is U.S. v Qin, 21-cr-75, U.S. District Court, Southern District of New York (Manhattan)
(Updates with prosecutor comments and case heading)
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