The Australian blockchain entrepreneur Sam Lee has been charged with conspiracy to commit fraud in the US for his alleged role in operating the HyperVerse crypto investment schemes, described in court documents as a “pyramid and Ponzi scheme” alleged to have defrauded investors of US$1.89bn (A$2.86bn).
The US attorney for the district of Maryland, Erek L Barron said the Department of Justice would “hold perpetrators accountable for these and other fraud schemes”, with Lee facing up to five years in jail if convicted.
“The level of alleged fraud here is staggering,” Barron said.
The criminal complaint lodged in the district court of Maryland charges Lee with conspiracy to commit securities and wire fraud, while a separate civil complaint brought by the US Securities Exchange Commission charges Lee with fraud and with the unregistered sale of securities in breach of the US Securities Act.
The charges against Lee, once dubbed the “crown prince of bitcoin” in Australia, come alongside the charge and arrest of another US promoter of the HyperVerse and HyperFund crypto schemes, Brenda Chunga, who has pleaded guilty to conspiracy to commit securities and wire fraud for her role.
The criminal complaint alleges that Lee and his co-conspirators operated the Hyper schemes to “unjustly enrich themselves” by inducing investors into the scheme.
“It was further part of the conspiracy that Lee and his co conspirators knowingly devised and intended to devise a scheme and artifice to defraud and to obtain money and property by means of false and fraudulent pretences, representations and promises,” the complaint alleges.
It orders that if found guilty, Lee is to “disgorge all ill-gotten gains” received directly or indirectly as a result of the schemes.
The court documents refer to crypto schemes run by the HyperTech group collectively as HyperFund but the funds operated under various names, including HyperCapital, HyperFund, HyperVerse and HyperNation.
Lee was chairman of the HyperTech group, which was co-founded with his business partner, Ryan Xu. Xu is not named in the court documents.
The charges come after a Guardian Australia investigation revealed details of the scheme’s operation, including widespread investor losses, the use of a fake chief executive officer for the launch of the HyperVerse scheme and HyperVerse’s links to the collapsed Australian crypto company Blockchain Global, of which Lee was a director.
The SEC complaint, which is lodged against both Lee and Chunga, alleges that its case “involves a global, crypto asset-related, multi-level marketing pyramid and Ponzi scheme that raised over $1.7 billion from victims worldwide, including millions from U.S. investors”.
The criminal complaint estimates that the losses were higher, alleging that HyperFund was a “global securities fraud and wire fraud scheme that obtained approximately US$1.89 billion from victim-investors world-wide”.
The SEC’s division of enforcement director, Gurbir S Grewal, alleges that Lee and Chunga attracted investors with the allure of profits from crypto asset mining – “but the only thing that HyperFund mined was its investors’ pockets”.
“This case illustrates yet again how noncompliance in the crypto space facilitates schemes where promoters capitalize on the promise of easy money, without providing the detailed investor protection disclosures required by the registration provisions of the federal securities laws.”
The SEC complaint outlines Lee’s alleged role in operating the HyperFund schemes, claiming that he was “centrally involved with HyperFund throughout its lifecycle”.
“On information and belief, Lee was not only a co-founder of HyperFund, but he maintained control over HyperFund throughout its existence,” the SEC alleges.
It alleges that from approximately June 2020 to approximately November 2022, Lee and Chunga sold memberships in HyperFund and “made materially false and misleading statements about the investments and knowingly or recklessly engaged in a scheme to defraud investors – bilking the investors out of over $1.7 billion – by enticing them with the false promise of guaranteed, high returns from investments in securities.
“Defendants knew, or were reckless in not knowing, that their statements about HyperFund’s returns and profits were materially false and misleading. Defendants further knew, or were reckless in not knowing, that they were operating a scheme to defraud investors in HyperFund’s securities.”
The SEC further alleges that Lee played an “integral role in the distribution of the HyperFund memberships”, with his business background and links to Australian companies used to attract investors to the scheme.
“Lee’s appearance and speech during the launch of HyperVerse was an offer of securities. Lee’s reputation and public-facing crypto asset persona deceived investors into believing that HyperFund was not a scam because it was backed by a known crypto asset entrepreneur.
“Those details were used to add legitimacy and credibility to the scheme, and to convince investors that their money was not only safe, but that the money they expected to make was coming from purportedly legitimate sources.”
The court documents allege that HyperFund operated as a Ponzi scheme, with funds from later investors used to pay off early investors.
“HyperFund had no real source of revenue other than funds received from investors, and Defendants had no basis for the promised returns,” the documents claim.
“Lee, as one of the Founders of HyperFund, knew, or was reckless in not knowing, that HyperFund did not generate revenue sufficient to be able to reasonably expect to meet its payment obligations to investors, other than income generated from the sales of new HyperFund memberships, and therefore was a Ponzi scheme.”
The HyperFund rewards system, which was used to bring in new investors, was “nothing but a pyramid scheme recruiting tool”, the court documents allege.
Investors into HyperFund and its subsequent iterations bought “membership” packages with the promise of daily rewards of 0.5% and a 300% return over 600 days. The SEC complaint alleges that investors were told that these “exorbitant passive returns” were derived from HyperFund’s crypto asset mining operations, “however these representations were false”.
Lee, who launched HyperFund in mid 2020 and appeared in the 2021 launch presentation of HyperVerse, is alleged to have allowed this false representation to continue “despite knowing that the HyperFund promoters’ representations about large scale-crypto asset mining were false”.
The court documents also refer to HyperFund’s claims not to be offering an investment product through its sale of membership, applying the so-called Howey test which finds that an investment contract exists where there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.
The case file shows that Lee, who has lived in Dubai since 2021, is yet to appoint a defence attorney. Guardian Australia has contacted Lee for comment. He has previously denied HyperVerse was a scam, and has claimed he was only involved in the funds management and technology side of the business.
The charges against Lee and Chunga are the result of a joint investigation conducted by the Department of Homeland Security’s New York-based El Dorado taskforce and the Internal Revenue Service’s criminal investigation unit.
The El Dorado taskforce is the oldest anti money-laundering taskforce in the US, with more than 200 members targeting sophisticated financial crimes, including those in the cyber and cryptocurrency space.
Despite Lee being an Australian citizen and Australian companies being central to the promotion of the Hyper group of investor schemes, they have escaped the scrutiny of Australia’s corporate watchdog, the Australian Securities and Investments Commission.
Since Guardian Australia’s investigation into the HyperVerse schemes, Asic has said it will assess the liquidator’s report into Blockchain Global, which collapsed in 2021 owing creditors A$58m.
