SEC charges crypto firm NovaTech with fraud

The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against cryptocurrency startup NovaTech for allegedly scamming more than $650 million from more than 200,000 investors, the majority of whom were Haitian-Americans.

The SEC is framing NovaTech, founded in 2019 by husband-and-wife duo Cynthia and Eddy Petion, as a multi-level marketing (MLM) scheme that lured investors with claims of investing in the lucrative crypto and forex markets. In reality, NovaTech allocated only a portion of investor funds to trading, with the bulk going to payments to existing investors and commissions to promoters, according to the SEC.

The SEC alleges that the Petitioners embezzled millions of dollars of investors’ assets for themselves. And when the company collapsed, many of the clients recruited by promoters who downplayed NovaTech’s red flags were left unable to withdraw their money.

“NovaTech and Petions have inflicted untold losses on tens of thousands of victims worldwide,” Eric Werner, director of the SEC’s Fort Worth regional office, said in a statement. “As we allege, MLM schemes of this magnitude require promoters to support them, and today’s action demonstrates that we will hold accountable not only the principal architects of these massive schemes, but also the promoters who unlawfully deceived victims and spread their fraud.”

In addition to NovaTech and the Petitions, the SEC names NovaTech backers Martin Zizi, Dapilinu Dunbar, James Corbett, Corrie Sampson, John Garofano and Marsha Hadley as defendants in the securities fraud lawsuit. The agency is seeking permanent injunctions, restitution of ill-gotten gains and civil penalties; Zizi agreed to a partial settlement.

“Overall, this unfortunately appears to be a textbook affinity group Ponzi scheme,” Seth Goertz, a partner at the law firm Dorsey & Whitney and former associate U.S. attorney for the Department of Justice, told TechCrunch via email. “But the size and scale of the scheme is remarkable, and you always wonder if it would have been possible if it had been based on traditional fiat currency rather than cryptocurrency, which remains ethereal enough that scammers can more easily promise outsized returns.”

The lawsuit against NovaTech is the latest development in the SEC’s broader crackdown on legally dubious crypto startups.

In 2020, the SEC sued Ripple, the blockchain developer and creator of the XRP cryptocurrency token, for allegedly raising more than $1.3 billion by selling XRP to investors in an unregistered securities offering in 2013. Last month, the SEC charged BitClout founder Nader Al-Naji with fraud, saying that proceeds from the startup’s crypto activities paid for Al-Naji’s Los Angeles mansion and gifts. The SEC also sent letters to VCs about their relationships with decentralized crypto exchange operator Uniswap Labs, Axios reported on Monday.

Speaking recently to the William & Mary Business Law Review, SEC Enforcement Division Director Gurbir Grewal said the agency has processed more than 100 cryptocurrency-related transactions over the past decade.