SEC Charges Eleven Individuals in $300 Million Crypto Pyramid Scheme known as Forsage
August 1, 2022 — The Securities and Exchange Commission (the “SEC”) today charged 11 individuals for their roles in creating and promoting Forsage, a fraudulent crypto pyramid and Ponzi scheme that raised more than $300 million from millions of retail investors worldwide, including in the United States.
Those charged include the four founders of Forsage, Vladimir Okhotnikov, Jane Doe a/k/a Lola Ferrari, Mikhail Sergeev, and Sergey Maslakov, who were last known to be living in Russia, the Republic of Georgia, and Indonesia (the “Founders”), as well as three U.S.-based promoters, Samuel D. Ellis, of Louisville, Kentucky., Mark F. Hamlin, of Henrico, Virginia. and Sarah L. Theissen, of Hartford, Wisconsin (the “Promoters”), engaged by the founders to endorse Forsage on its website and social media platforms, and several members of the so-called “Crypto Crusaders”, Cheri Beth Bowen, of Pelahatchie, Mississippi., Ronald R. Deering, of Coeur d’ Alene, Idaho, Carlos L. Martinez, of Chicago, Illinois. and Alisha R. Shepperd, of Dunedin, Florida.
According to the SEC’s complaint, in January 2020, Vladimir Okhotnikov, Jane Doe a/k/a Lola Ferrari, Mikhail Sergeev, and Sergey Maslakov launched Forsage.io, a website that allowed millions of retail investors to enter into transactions via smart contracts that operated on the Ethereum, Tron, and Binance blockchains.
However, Forsage allegedly operated as a pyramid scheme for more than two years, in which investors earned profits by recruiting others into the scheme.
Forsage did not sell or purport to sell any actual, consumable product to bona fide retail customers during the relevant time period and had no apparent source of revenue other than funds received from investors. The primary way for investors to make money from Forsage was to recruit others into the scheme.
To participate, an investor created a crypto-asset wallet and then purchased “slots” in Forsage’s smart contracts, which gave the investor the right to earn compensation from others whom the investor recruited into the scheme (the “downlines”) and compensation from the larger Forsage community of investors in the form of profit sharing of payments known as “spillovers.”
When an investor purchased a slot, a portion of that investment was directed to the persons who recruited the investor (the “uplines”), and the investor, in turn, became an upline to whomever the investor recruited. Thus, all payouts to earlier investors were made using funds received from later investors.
The SEC alleges that the Founders coded one of Forsage’s smart contracts on the Ethereum blockchain (Forsage xGold) to divert a portion of investor funds to a crypto-asset wallet that was not associated with a Forsage ID assigned to any investor, essentially funneling funds away for their own personal use.
Sales of slots in Forsage’s smart contracts began on or about January 31, 2020 and have continued through the present. As of May 10, 2022, at least 1,056,932 Forsage investors participated in Ethereum; 455,246 participated in Tron; and as of the present, at least 434,992 are participating in BUSD.
According to the SEC, through their participation in Forsage, and as of April 25, 2022, the Founders, on information and belief, jointly received at least $4,803,943; Okhotnikov and Sergeev received additionally at least $433,909; Ferrari received additionally at least $256,731; and Maslakov received additionally at least $110,741; and, as for the remaining Defendants, Ellis received at least $72,405; Hamlin received at least $565,828; Theissen received at least $130,118; Martinez received at least $462,925; Deering received at least $267,075; Bowen received at least $303,000; and Shepperd received at least $549,075.
The operation quickly came under much scrutiny around the internet and even drew backlash from regulators.
On July 1, 2020, just a few months after its launch, the Philippines Securities and Exchange Commission (the “Commission”) named Forsage in a public warning about individuals and groups engaged in unauthorized activities such as investment-taking in the guise of cryptocurrency trading and online selling.
According to the Commission, Forsage was not duly registered with the Commission and lacked the necessary license to solicit, accept or take investments from the public or issue investment contracts and other forms of securities. The Commission’s warning letter referred to Forsage’s compensation plan as resembling a Ponzi scheme and warned the public against placing money in Forsage.
On September 23, 2020, the Philippines Securities and Exchange Commission took things further and issued a Cease and Desist Order against Forsage, barring it from operating in the Philippines.
The order cites an aggressive marketing campaign by which Forsage solicits and entices the public to invest in its program through promotional videos, social media posts, online presentations, and other gimmicks. And by doing so, it is soliciting individuals to invest in a security offering without being registered as a broker-dealer. The order explicitly calls the Forsage operations a “fraud” and a “gullibility scheme.” In Commission determined that “the investment practices of Forsage, if not restrained, will operate as a fraud on investors or to the investing public as it utilizes a ‘Ponzi scheme’” and “It is not an investment strategy but a gullibility scheme, which works only as long as there is an ever increasing number of new investors joining the scheme.”
On March 22, 2021, the US regulators took action against Forsage. The Montana Commissioner of Securities and Insurance office (CSI) had begun an investigation after receiving multiple complaints from Montanans related to Forsage. The Commissioner, Troy Downing, determined that Forsage was operating as a “Pyramid and Ponzi scheme” and ordered Forsage to Cease and Desist operations in the state of Montana.
According to the CSI, “There is no product sold other than positions on the pyramid, and the only way to make money is to recruit more people into the pyramid.”
The CSI further criticized Forsage for misleading investors by branding its pyramid scheme as having “zero risk,” a claim that, to the contrary, is “a significant red flag to walk away and alert the [proper authorities].” The CSI press release closed by saying that Forsage “appears to be a scam,” and in order to protect Montanans, the CSI decided to order Forsage to cease and desist operations in the state and pay a fine of up to $5,000 for each identifiable violation, a fine of up to $20,000 per violation of a vulnerable person, and restitution for financial losses incurred by its victims.
Despite cease-and-desist actions against Forsage for operating as a fraud and the allegations around the internet that Forsage was operating as a pyramid scheme, the Founders, Promoters, and Crypto Crusaders expressly denied the allegations, falsely assured investors that Forsage was a legitimate operation and continued to promote the scheme in several YouTube videos and by other means.
The complaint filed in the United States District Court in the Northern District of Illinois charges the Founders, Promoters, and Crypto Crusaders, with Unregistered Offers and Sales of Securities in Violation of Sections 5(a) and 5(c) of the Securities Act, Fraud in Violation of Section 17(a)(1) of the Securities Act, Fraud in Violation of Section 17(a)(3) of the Securities Act, Fraud in Violation of Section 10(b) and Rule 10b-5(a) of the Exchange Act, and Fraud in Violation of Section 10(b) and Rule 10b-5(c) of the Exchange Act.
The SEC’s complaint seeks injunctive relief, disgorgement, and civil penalties.
Without admitting or denying the allegations, two of the defendants, Ellis and Theissen, agreed to settle the charges and to be permanently enjoined from future violations of the charged provisions and certain other acts. Additionally, Ellis agreed to pay disgorgement and civil penalties, and Theissen will be required to pay disgorgement and civil penalties as determined by the court. Both settlements are subject to court approval.
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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