Crypto currencies are the new fad – uncorrelated, promised to rise to the moon, and slightly volatile. Many stock traders are leveraging their market experience in this new asset class. They have started hedge funds to attract investors. Quantitative strategies and arbitrage techniques are also deployed.
For cryptos like for any investment, due diligence and monitoring is key. Crooks and frauds abound, and crypto does not escape the lot. Case in point, Virgil Capital and its founder Stefan He Qin who recently pleaded guilty to using $100m of investor money to fund his lifestyle.
The 24-year old Australian geek was supposed to use trading algorithms to take advantage of price movements in a variety of cryptocurrencies, in a market-neutral approach. He claimed that the strategy had been profitable almost every month.
.@stefqin of Virgil Capital is the 21-year-old hedge fund manager who's got a way to make money on #bitcoin whether it goes up, down, or nowhere at all pic.twitter.com/loQrB7f0zH
— CNBC's Fast Money (@CNBCFastMoney) February 27, 2018
Besides the fact that borrowing cryptos is hard and expensive at this time (>>10% fee) and that fleeting trading opportunities in illiquid assets probably can’t absorb such notionals, it turns out that the money was used for penthouse rent and other dubious and unauthorized investments. He Qin drained almost all of the $90 m in assets he was trusted to invest. He then tried to use money raised for a second and independent hedge fund to answer the redemption requests in the first fund, the typical start of a Ponzi scheme.
Mr. He Qin notably:
- prepared and disseminated to investors fake reports about the value of their investments.
- prepared and distributed misleading marketing materials and tear sheets.
- filed erroneous K-1s tax reports.
Stefan He Qin is awaiting sentencing, expected in May 2021. He faces 20 years in prison. That’s a life-long sentence for a 24 year old.
How long will he serve? Quoting He Qin from his CNBC interview “Yeah, that’s a good question”.
Credits:
Daniel Tracer and Audrey Strauss at the SD NY and Peter C. Fitzhugh at the Homeland Security Investigations office.
