Blockchain and Cryptocurrency firm SafeMoon has filed for Chapter 7 bankruptcy after its founder and two key executives were accused of misappropriating customers’ funds and violating different securities laws.
Kyle Nagy, the founder of SafeMoon, along with the chief technology officer Thomas Smith and chief executive Braden Karoney, were accused by the regulators of misusing funds and defrauding the investors after they falsely claimed that the assets held in SafeMoon’s liquidity pool were locked and couldn’t be withdrawn by anyone.
What they failed to mention, or rather what they didn’t want anyone to know, was that these funds were accessible to them. They decided to misuse those funds for their personal use by purchasing expensive items or improving their lifestyle after spending it on luxury items.
Karoney and Smith were arrested on the charges mentioned above, while SafeMoon’s founder, Kyle Nagy, is still at large.
According to the United States Department of Justice (DOJ), the three key executives of the blockchain firm used $200 million worth of clients’ funds to pay for different expensive items like real estate or luxury vehicles while hiding the information at the same time.
The charges filed by the DOJ also include money laundering charges and committing securities fraud.
Trouble was brewing for the crypto firm in the past few weeks. The signs of the upcoming end of the once-promising blockchain project looked evident when the SEC filed charges against the company’s top officials last month.
According to the SEC filings, the regulatory authority accused the blockchain project creator Kyle Nagy and the firm’s CEO and CTO of formulating a massive fraud scheme by selling crypto securities that were not registered by the SEC. The SEC’s exact statement regarding the matter included claims like:” perpetrating a massive fraudulent scheme through the unregistered sale of the crypto asset security, SafeMoon.”
The complaint also highlighted the point that Nagy’s claims in his whitepaper and on the company’s website regarding claims that the retained assets would be locked and inaccessible for four years proved to be a hoax. These false claims were reiterated by Smith and Karony at different intervals in their social media posts.
Following a significant decline, Karony and Smith purportedly utilized misappropriated funds to engage in substantial SafeMoon acquisitions to artificially boost its price and manipulate the market.
Additionally, Karony allegedly employed an account he established on a trading platform to execute buy and sell transactions of SafeMoon. This created a deceptive appearance of market activity, a tactic referred to as wash trading, according to the SEC complaint.
The SEC claims that the SafeMoon token is considered a securities offering based on the criteria outlined in the Howey test. This classification is attributed to investors having a reasonable expectation of earning profits or returns that result from the entrepreneurial or managerial efforts of others.
The Howey test is a legal assessment used by the SEC to determine whether a particular transaction qualifies as an investment contract and thus falls under securities regulations. According to the test, an investment contract exists if there is an investment of money in a common enterprise with an expectation of profits primarily from the efforts of others. If these criteria are met, the investment is deemed a security and subject to regulatory oversight by the SEC.
What happens in Chapter 7 bankruptcy?
When a company files for Chapter 7 bankruptcy, it signifies a complete shutdown, not a reorganization or attempt to recover. Instead, the company will be dismantled piece by piece, with its assets sold off to pay off creditors as much as possible.
This includes everything from tangible property and equipment to intellectual property like patents or trademarks and even any remaining cryptocurrency in its possession. After this liquidation process, the company ceases to exist entirely.
For SafeMoon specifically, this means the company as we know it is gone. While creditors may receive some portion of their debts back, investors are unlikely to see anything after the dust settles. Chapter 7 essentially marks the final chapter for SafeMoon, leaving its investors facing potential losses and the cryptocurrency landscape changed by its demise.
The price of the SafeMoon token SFM also took a hit when the news of the bankruptcy became public. According to CoinMarketCap, SFM was trading at $0.000041 at the time of writing this article.
