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FBI Creates Ethereum-Based Token To Lure Market Manipulators

The FBI busted several market-making firms offering illegal wash trading services.
By: Mehab Qureshi • October 10, 2024
FBI Creates Ethereum-Based Token To Lure Market Manipulators

The U.S. Federal Bureau of Investigation (FBI) is no stranger to undercover operations, with the agency creating its own cryptocurrency token in a bid to expose wash-trading syndicates.

On Oct. 9, the Department of Justice (DoJ) announced charges against nine individuals and three market makers — ZM Quant, CLS Global, and MyTrade — for fraud, market manipulation, and wash trading.

“The FBI took the unprecedented step of creating its very own cryptocurrency token and company to identify, disrupt, and bring these alleged fraudsters to justice,” said Jodi Cohen, special agent in charge of the FBI’s Boston Division.

According to the indictment, the conspirators manipulated multiple cryptocurrency tokens, including Saitama, VZZN, and NexFundAI — a token created by the FBI — to mislead investors and make off with ill-gotten gains.

On Oct. 9, the FBI also published a public request for information from individuals impacted by trading the tokens targeted by the fraudsters, including NexFundAI, Robo Inu, Saitama, VZZN, and Lillian Finance.

NexFundAI

The FBI's sting operation centered around NexFundAI, an Ethereum-based token issued by the FBI under the guise of a venture firm investing in early-stage artificial intelligence ventures.

According to the indictment, the FBI commissioned ZM Quant ZM, a company based in the British Virgin Islands, to provide market-making services and manipulate the trade volume and price action of NexFundAI in May.

ZM Quant is headed by Baijun Ou, also known as “Eric Ou,” and Ruiqi Liu, aka “Ricky Lau.”

The FBI communicated with ZM Quant via a Telegram group named “AI Token MM.” On May 31, Liu messaged the group, announcing that ZM Quant could use hundreds of wallets to manipulate NexFundAI.

“For 100K volume, we make 1000 transactions," Lui said, that each transaction would cost roughly $3 each.

On the same day, another ZM Quant associate confirmed that the scheme was underway, with ZM Quant executing hundreds of trades via the Uniswap decentralized exchange and BitMart centralized exchange to create the illusion of high trading activity.

Market manipulation

According to the FBI’s findings, ZM Quant previously manipulated several other cryptocurrencies, including the Saitama token.

Liu said the Saitama scheme was “easy” to pull off, with the company using thousands of wallets to transact multiple times every minute.

“When we hit the top gainer on Uniswap, the users will come to trade, they will see the potential opportunities and they will chase the price — they will come to do trading,” Lui said. “That's how we do market-making on Uniswap."

Co-conspirators

CLS Global FZC, a “market maker” run by Andrey Zhorzhes from the United Arab Emirates, also offered to help manipulate NexFundAI. Like ZM Quant, CLS advertised illegal market manipulation services.

MyTrade MM, another market maker led by Liu Zhou, also offered to participate in the scheme. The firm gave clients access to a dashboard where they could specify the value of wash trading carried out daily. Zhou pleaded guilty to conspiracy to commit market manipulation and wire fraud.

Meanwhile, Gobit, another trading firm, allegedly provided wash trading services to multiple token issuers, including the developers behind the Saitama and Robo Inu cryptocurrencies.

Legal fallout

The defendants are now facing a litany of charges, including conspiracy to commit market manipulation, wire fraud, and conspiracy to commit money laundering. If convicted, the accused could face up to 20 years in prison for each wire fraud charge alongside millions in fines.

The FBI seized more than $25 million in digital assets from the firms and shut down several of their trading bots. The U.S. Securities and Exchange Commission (SEC) also filed civil complaints against the accused firms, including Gotbit, ZM Quant, and CLS Global, over alleged securities law violations.

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