2021-03-06 12:30:53

Feds indict John McAfee for cryptocurrency pump-and-dump fraud

Enlarge / John McAfee on his yacht off the coast of Cuba in 2019.

Adalberto ROQUE / AFP / Getty

Federal prosecutors have indicted noted cybersecurity eccentric John McAfee for securities and wire fraud for misleading investors at the peak of the last cryptocurrency boom. In late 2017 and early 2018, McAfee urged his hundreds of thousands of Twitter followers to invest in a number of obscure cryptocurrencies. Prosecutors say he failed to disclose his own financial stake in those tokens—and in some cases outright lied about it.

McAfee has been in custody in Spain since his arrest at a Barcelona airport last October. He was already facing extradition to the United States on tax evasion charges; the self-described Libertarian hasn’t filed a tax return for several years. Now he will face additional charges of securities and wire fraud alongside bodyguard Jimmy Watson, who allegedly helped McAfee carry out some of his pump-and-dump schemes.

The criminal complaint covers much of the same ground as a civil lawsuit filed by the Securities and Exchange commission at the time of his arrest last October.

“I am not pumping for my gain”

Prosecutors say McAfee engaged in two types of illegal schemes. In one, he would buy an obscure cryptocurrency, talk it up on Twitter, and then unload it at a higher price. In other cases, he would agree to hype up a new cryptocurrency sale on Twitter in exchange for a cut of the proceeds.

Buying and promoting cryptocurrencies isn’t necessarily illegal on its own. The problem, prosecutors say, is that McAfee tried to boost the effectiveness of his endorsements by falsely claiming that he had no financial stake in his recommendation. The government says that made his actions a violation of federal fraud statutes.

For example, prosecutors say that around December 20, 2017, McAfee bought more than $100,000 of the obscure cryptocurrency Electroneum (ETN). The next day, he tweeted that he’d gotten “more than one DM” telling him that Electroneum was “the holy grail of cryptocurrency.”

When someone asked McAfee if he was invested in ETN himself, McAfee denied it.

“I own no ETC,” he tweeted, according to the indictment. “I am not pumping for my gain. I am showing you the incredible value of supporting a coin that will change the world.”

Prosecutors say McAfee actually was pumping for his gain. The price of ETN jumped by 40 percent in the hours after McAfee tweeted about it. McAfee liquidated his shares, netting a nice profit. Since then, ETN’s value has fallen by almost 90 percent.

In another case, also in December 2017, the creator of a new cryptocurrency called SETHER promised to pay McAfee 30 percent of the proceeds from the SETHER ICO. McAfee was also supposed to get “a substantial percentage” of the newly created SETHER tokens. In exchange, McAfee agreed to tweet that the coin was “the first token to open the door to a new paradigm of social marketing,” among other things.

On Twitter, someone asked him if he got paid to promote tokens like SETHER.

“I do not,” he responded. “I merely sift through the mass [of] tokens to find the gems and share them.” Though he did claim that he had “been advising them on cyber security.”

The same day, McAfee wrote privately to SETHER’s founder: “For the next few weeks, take my name off your site,” he suggested. “I want to be able to leverage my Twitter with people assuming I have no relationship with you. Removing my name now will add at least a million dollars to your sale.”

The next month, as he was touting an initial coin offering for a token called PODONE, McAfee became indignant at accusations that he was being paid to promote cryptocurrencies:

In total, federal prosecutors say that McAfee earned more than $13 million through misleading cryptocurrency promotional schemes.

Prosecutors say McAfee knew he was breaking the law

Just weeks earlier, the Securities and Exchange Commission had explicitly warned that celebrities may be breaking the law if they promote a cryptocurrency offering without disclosing that they have a financial stake in it.

“Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion,” the SEC wrote. According to federal prosecutors, McAfee did the opposite. And the government argues that McAfee knew he was breaking the law. Prosecutors say that McAfee participated in several direct message conversations discussing the SEC rules.

In a December 16 speech, McAfee claimed he was working on a new cryptocurrency called McAfee Coin—as far as I can tell, that project never came to fruition

“I am actually trying to adhere to the letter of the law,” McAfee said. He said he wanted McAfee coin to be “a legitimate entity that the SEC cannot come into a year down the line and say Mr. McAfee you’re under arrest. That’s going to happen to a lot of tokens, I promise you.”

In a December tweet, McAfee’s wife said that life in prison has “rapidly deteriorated” McAfee’s 75-year-old body and has “virtually destroyed his health. He’s lost close to 30 lbs now and has major problems internally.”

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