Key Takeaways
- From October 2018 to April 2019, they used an automated trading application, or “bot,” to flood the market with fake orders.
- Price Manipulation resulted in approximately $7 million in “wash trades” and over $300 million in “spoof trades.”
A Florida judge has sentenced Michael Kane, former CEO of Hydrogen Technology Corporation, to 45 months in prison for securities fraud related to a cryptocurrency price manipulation scheme. This decision comes after Kane and his co-conspirators defrauded investors in connection with the purchase of Hydrogen Technology’s crypto token, HYDRO.
The United States Justice Department announced that on June 24, Kane received his sentence following a federal court’s findings. Shane Hampton, Hydrogen Technology’s former Head of Financial Engineering, was also sentenced to 35 months for similar offenses.
Court documents and trial evidence revealed that Kane and Hampton, along with an external firm, Moonwalkers Trading Limited of South Africa, manipulated HYDRO’s price on a U.S.-based cryptocurrency exchange. From October 2018 to April 2019, they used an automated trading application, or “bot,” to flood the market with fake orders.
This resulted in approximately $7 million in “wash trades” and over $300 million in “spoof trades.” The fraudulent trades artificially inflated HYDRO’s price, inducing retail investors to purchase the token. Through these manipulative efforts, Kane, Hampton, and their associates reaped about $2 million in profits over ten months.
Kane pleaded guilty in November 2023 to charges including one count of conspiracy to commit securities price manipulation, one count of conspiracy to commit wire fraud, and two counts of wire fraud.
Principal Deputy Assistant Attorney General Nicole Argentieri emphasized the significance of the case, stating, “For the first time, a jury in a federal criminal trial found that a cryptocurrency was a security and that manipulating cryptocurrency prices was securities fraud. This prosecution and the sentences imposed today should serve as a warning: The Criminal Division will not hesitate to use all tools at its disposal — including the federal securities laws — to protect the integrity of cryptocurrency markets.”
Hampton, convicted by a federal jury on February 7, faced charges of conspiracy to commit securities price manipulation and conspiracy to commit wire fraud. The jury’s unanimous decision confirmed that the sales of HYDRO were investment contracts, thereby classifying the token as a security under federal law. This was the first criminal jury trial to determine a cryptocurrency as a security.
In addition to the criminal charges, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Kane and Hydrogen Technology in September 2022. The SEC alleged that Kane used the firm’s market maker to manipulate HYDRO’s volume and price. In April 2023, a New York judge ordered Kane and the firm to pay $2.8 million in remedies and civil penalties. Simultaneously, the criminal indictments for Kane and Hampton in the Southern District of Florida were announced.
Kane had been awaiting sentencing since his guilty plea in November 2023. Hampton was convicted of similar charges in February. Additionally, two other former Hydrogen Technology executives, Andrew Chorlian and Tyler Ostern, pleaded guilty in May 2023 for their involvement in the scheme.
The latest development comes as part of a broader trend in which the SEC has been accusing cryptocurrencies of being securities. Last year, the SEC filed a lawsuit against Coinbase alleging that the exchange acted as an unregistered securities broker, an unregistered securities exchange, and an unregistered securities clearing agency.
The securities regulator’s biggest one-time lumping of crypto came when it charged Terraform Labs with fraud in February 2023. A total of 16 crypto assets were labelled securities, such as Terra Luna Classic (LUNC), Terra Classic USD (USTC), Mirror Protocol (MIR) and an estimated 13 Mirrored Assets (mAssets) that aimed to copy the price of stocks such as Apple and Tesla. As per reports, the SEC has accused around 60 plus cryptocurrencies of being securities.
