This is Bloomberg Law with June Brusso from Bloomberg Radio. In what was an elaborate sting operation in which the FBI created its own crypto tooken. Fifteen crypto promoters and traders were charged with market manipulation and fraud, the first ever criminal charges against financial services firms for market manipulation
and wash trading in the cryptocurrency industry. The acting US Attorney for Massachusetts, Joshua Levy, said, these are cases where an innovative technology cryptocurrency met a century old scheme, the pump and dump. The sting operation also led to the seizure of more than twenty five million dollars in cryptocurrency, and multiple trading bots responsible for wash trades for about
sixty different cryptocurrencies were deactivated. Joining me is former federal process computer Seth Gertz, a partner at Dorsey and Whitney, tell us about this sting operation.
Set A sting operation is a good way to put it, actually, and it's not something you often see in a context of investment frauds. And it's an interesting example where I can sort of think of the analogy of what is good for the goose is apparently also good for the gander, and in this case, the FBI created their own cryptocurrency token, next fund Ai. Marketed as a novel security related cryptocurrency token.
It was on the Ethereum blockchain. And actually what the FBI did was quite clever, working with the SEC and other law enforcement agencies, was they was held a large balance of the tokens themselves, and so it was almost from its outset, appeared to be a lucrative, novel, unique token that attracted a lot of interest from the market and in particular to unscrupulous market participants in other cryptocurrency traders.
And so that was the basic format and the programming of the token that the goal was then obviously to see how improper traders or cryptocurrency fraudsters were going to
use and utilize the token. And what's unique in this space is that because the token was being traded on this Ethereum blockchain, every transaction that occurs for each one of these tokens is viewable and can be seen and tracked and followed, and so that allows law enforce in the FBI an incredible window and to see how the coin was going to be utilized and in this case manipulated and.
Tell us about the charges against the defendants here, and so they.
Are alleged to have done what is called wash trading that facilitate a pump and dump scheme, and that those are the technical investment fraud terms. Wash trading is typically traditionally when the same firm or entity buys and sells the same instrument like a stock or a bond repeatedly to artificially inflate its value and to demonstrate additional trading activity to make it team more lucrative, but the entity itself suffers no risk or market adjustment because it's simply
buying and reselling the same instrument. What was interesting about this case is that some of the defendants, the cryptocurrency markets here had utilized bots to buy and sell the token, this token, the next fund Ai token, along with sixty others repeatedly, and because it was a bot and realizing bots, some of these tokens were being bought and sold like ten times a minute, and that activity, that trading activity artificially inflated the value of the coins, and one of
the coins that issue went up to multi billion dollars worth of value. And then when they reached the apex of value. Defendants then sold off the token, causing their value to then plummet, and so that's sort of the wash trading was the quick buying and selling. It reaches its apex, and then it's sort of part of the pump and dump and then is sold off kind of
in a fire sale. And because all of this is occurring on a public ledger, this blockchain, the FBI was able to witness all of it, and in some cases even there were allegations that there were complete sham transactions that were occurring. I mean, that's especially what was occurring, but even beyond that, some of the markets were trading created multiple different wallets, which is a sort of unique cryptocurrency term, but allowed them to really facilitate completely sham
transactions that would have otherwise likely got unnoticed. But for again the ability for the FBI to be almost completely embedded in every one of these transactions.
Were they targeting specific firms when they came up with this plan, You.
Know, that's really interesting. I think it remains to be seen. We'll have to see how the case unfolds and what discovery shows us. Several defendants of already plead guilty which makes you think that perhaps they were at the same time. Though, what is so unique about like cryptocurrency is that and that this was so novel, is that they postured this coin as a really unique security related token, and that
from the outset was going to attract possible criminals. Criminals or their frausters were attempting to use a token with other security measures to protect their trading activity, to protect their own finances, and so they think they certainly postured it in a way that would have been to hopefully
attract possible bad actors. Whether they intentionally had specific ones in mind, I would think that would be a little bit difficult to do, just based upon the nature and the fluidity of cryptocurrency, But they were certainly posturing it from the outset in an attempt to sort of cast a broad net and hope to bring in some bad actors. Certainly, I mean.
They're selling this token. Didn't a lot of people buy it, like average people or you know, people who didn't have a criminal intent.
Absolutely, that's what's so fascinating about it. And if you look at the press release that came out, there's a link for anyone who bought this just part of the general public. It's still trading. I think I thought it's market value was somewhere like two hundred dollars a coin or something at least as of a sort of last week. So it's still trading. It's still out there. That is what's so unique in this case. One of the things unique about this the ability to create a cryptocurrency token.
In this decentralized world of finance, where you can do this, it can still have its own independent value. It's being utilized for law enforcement purposes, but if I were to just go buy it, there's still a potential that I could derive some you know, independent value as a result
of of how it's set up. It is almost impossible to think of an analogous situation in the financial world similar to this, Like the amount of work that would be required they have we had to create a company to go public, to sell something on the stock exchange, it's just completely inconceivable, really, Whereas in this unique financial contact that we have with cryptocurrency, this can be done and it's both a value at the law enforcement and even those of us who unwittingly bought it because we
thought it was interesting perhaps are not really being harmed necessarily and so it is super interesting and this.
Also involves Cytoma. Tell me about the connection.
There, Well, Saitama was one of these coins that was also being utilized here and part of the pump and dumps game. The reason it is being talked about so much is because this activity caused that token loan to rise to be worth multi billion dollars, So to the extent there was sort of large dollar amounts of fraud. It relates to this Sitoma token.
Are the FEDS targeting cryptocurrency because they're seeing more crimes in the area or they're seeing a potential for more crimes in.
The area, Well, certainly, I mean you are saying increased heightened regulatory activity within cryptocurrency rit large. I mean you see the security is an exchange commission essentially going to war with various cryptocurrency exchanges, attempting to regulate all of cryptocurrency as a security. And you are seeing now the FBI more aggressively target cryptocurrency investment schemes and activities, and
it is certainly drawing increased regulatory scrutiny. The more ways in which cryptocurrency gained mainstream attention and is utilized by regular investors, the more you're going to see regulators step in to ensure the playing fielder is level and bad actors aren't exploiting it. It is one thing to use, and cryptocurrency has been used as a powerful money launering device, but when you are getting into straight up investment schemes and investment frauds, this is what you would hope to
see from government regulators stepping into police this activity. And I think this is certainly a sign of things to come. So other bad actors, people with improper investment schemes, certainly, I think, are going to be on high alert and should be given the increased regulatory and law enforcement scrutiny in this space.
So does the DOJ have a specific team deals with cryptocurrency.
They do, and they have they have several actually, so within DOJ's Made Justice component there is that what's called the National Cryptocurrency Enforcement Team, and they do a lot of cryptocurrency cyber related fraud. That actually that that team and set, as they're known, does not appear to have been involved in this investigation, though it's possible they were behind the scenes. It looked like there was a lot
of different components that were helping. Within various US Attorney's offices and Department of Justice components, there are specific sections that work with financial crimes, cybercrimes, and cryptocurrency related activity.
And as cryptocurrency becomes more mainstream because we're part of the financi system, you are seeing greater capabilities within federal law enforcement to both trace cryptocurrency, to follow investment schemes, and in this case, a very sophisticated and novel effort to really create exactly to describe it, an undercover sting operations related to cryptocurrency.
I mean you.
Would see stuff like this in like a drug dealer context, where you watch that you have an undercover agent deliver the drug. You see it sometimes in like money laundered investigations, where you have the government or federal agents attempt to launder clean funds through a money laundering organization to see where the money goes. But even still you don't quite have the control and the visibility that you would have
with cryptocurrency. This is a real demonstration of sophisticated efforts by the DOJ to track and to follow cryptocurrency investment fraud.
Coming up, could the defense raise entrapment. This is Bloomberg. We've been talking about an elaborate sting operation in which the FBI created its own crypto tokens, and as a result, prosecutors were able to bring the first ever criminal charges against financial services firms for market manipulation and wash trading in the cryptocurrency industry. I've been talking to former federal prosecutor Seth Kertz of Dorsey and Whitney. Do you think that the defense will raise entrapment claims?
You know, entrapment is always a potential when you have undercover operations, when you have issues like this, But what you can always do to well, what the government will surely do is that the defendants were doing this with or without them anyway, and you show that by their
repeated pattern of conduct. And so when you have sixty other tokens that were being manipulated in the same manner that we're being washed, traded and then pumped and dumped in the same way as next one, that's a very difficult argument to make in good faith the entrapment issue. I think one of them certainly will likely make it.
What becomes difficult cyber and cryptocurrency context is putting a person, an individual person behind the keyboard, behind the computer screen, attributing specific conduct to an individual when it's occurring digitally, and so it will be interesting to see what contemporaneous emails, with contemporaneous text messages that the DOJ was able to get to attach specific individuals.
To this conduct because they use bots.
Because they use bots, because when it's an entity, when it's an online and essentially an online decentralized entity that is causing the activity to occur, it's hard to know which specific you know, human being was actually causing that occur. So you're exactly right, it's certainly these entities, these market platforms were doing the were guilty of the bad conduct, But which actual individuals have the specific criminal intent that
were causing these activities to occur. That's where it becomes tricky in a cyber fraud cryptocurrency related criminal investigation. You know, the activities occurred, demonstrate that is no problem in this case, you see it, you can watch it. But actually attributing that to a specific human being and then demonstrating criminal intent to commit a fraud, that's where it becomes a
little trickier. And so you will need you would think specific communications, other types of evidence to attach a person to the actual conduct.
Has the DOJ done many trials involving cryptocurrency or do they usually settle beforehand?
No, the DOJ, this is an area in which they are definitely increasing their competence, their capabilities. They are in trial routinely on these issues. I think this is the first instance in which you have a full fledged undercover operations of the creation of their own token. So it will be interesting to see how the DOJ has to put on that evidence. That's to explain how they did it, how they created it, and communicate it in a way in which they don't lose the jury, in which they
can demonstrate the activity of the curve. And there's a lot of different concepts going on here. You have cryptocurrency just on the one hand, explain that to a jury, explain the creation of a token, explaining that the issues with the type of investment fraud that was occurring here, explaining the crime that occurred, and then having to put specific individuals or tax specific individuals to that crime. So there is a lot of moving parts. You know, several
defendants have already played guilty. They're likely going to cooperate against those who don't, and so that's going to be very powerful evidence. Having cooperating testimony, which will be I would imagine its hugely helped with the government here, But there is still a lot of moving parts and a lot that you would have to prove and a trial like this and so well, the dj certainly has experience
in cybercrimes and cryptocurrency. This is novel, and it will be interesting to see how they put this evidence on at trials should one occur.
In researching this, I saw some basically anonymous allegations that the FBI, in creating this token had violated the copyright laws, perhaps by not getting a license on the code.
Oh that's interesting, well, you know, and that will be that's that's where this does become interesting, because how the FBI created its token and you know, the propriety of it doing so, and whether it was a you know, legally authorized token for any number of reasons. It's certainly an interesting question and possibly goes to an entrapment defense. Potentially, it is something I would think defense would certainly try
to raise. But whether that was or not, I think the difficult to get defendants have in this case is that it wasn't just the FBI token that was manipulated. It was the FBI token along with sixty others. And what the FBI token allowed FBI to do was to get complete visibility into how these defendants were manipulating the cryptocurrency market through their activities. And so even if sort of there were issues with this FBI tokens, they still have all the evidence of the visibility of how they
were manipulating fifty nine others. That's speculation of my part without sort of knowing too much of the weeds of how the token was created. But it is interesting, and the unique thing about cryptocurrency is once you can get a window into the activity that's occurring and you sort of get an ability to model it to understand it.
The nature of a public ledger, a blockchain allows so much visibility into how activity is occurring that if you are doing it on a wide scale basis, as it appears these defendants were, law enforcement is given a tremendous amount of information as a result of that.
And the acting US Attorney said, this is a case where an innovative technology cryptocurrency met a century old scheme to pump and dump.
It's an interesting case and that you have in a lot of ways, these old school methods, old school types of investment fraud being brought forward into a more advanced digital age. And you have various investigative tools like undercover operations that have existed forever but being brought forward into again more advanced digital age. And you're seeing the interplay of those and you're seeing, you know, cryptocurrency so often hear about how it is utilized by criminals to obviouscate
in the high activity. Well, the government has now entered the playing field, and he was using it in a way to hide and to allow a very sophisticated undercover operation to go forward.
Perhaps this is the first of many. Thanks so much, Seth. That's Seth Gertz, a partner at Dorsey and Whitney. Turning to a trial now in which the jury is being selected in Illinois. The defendant's reign over Illinois politics is reflected in his nickname the Velvet Hammer, earned because of the way he led the Illinois House of Representatives and extracted fealty from its members. As the longest serving House leader of any state in US history, but now at
eighty two. Michael Madigan is facing corruption charges for allegedly running a criminal enterprise for nearly a decade, a multimillion dollar racketeering and bribery scheme that included the state's largest utility comm ed and the case will test the government's ability to prosecute corruption after the Supreme Court case narrowing the scope of a federal bribery law last term. Joining me is former federal prosecutor Brian Klein, a partner Waymaker tell us about the charges here.
Yeah, he's charged with racketeering, bribery, and wire fraud. And that's expected to be a ten week trial. Obviously, things have been going on for quite some time. There's been other trials of other defendants tied to these charges. He's charged with basically trading on his position as the leader
of the state House of Representatives. I'm the chairman of the Democratic Party in Illinois as well as he's also I believe involved an award and he worked at a law firm to a tax firm, probably tax firm, So basically trading his position of power for financial benefits getting things through the legislature.
How far back to the allegations.
Go, they switched back to years and he was really like a living legend in the state of Illinois because of the power he accumulated at length time that he was in power. And this is obviously a very important case following the Supreme Court Snyder ruling that came out earlier this year, which essentially said that you know, just giving a politician to gratuity isn't enough to make it
a federal crime. The federal bribery laws, you actually have to have a quid pro quote an exchange, so you give them some money or a watch or something in exchange, they are going to actually take an official act.
The government here is alleging that there was this quid pro quote, that there was a deal in place before the alleged corruption.
They are his lawyers. After the Snyder ruling came down, sought to have certain of the charges dismissed and challenge them and they lost that ruling, and they're in the Seventh Circuit. That circuit has its view of the bribery statutes and how briberry is effectuated, has this stream of payments theory, so it's not just one payment for one act.
You can have an agreement that you reach and then over time, there can be these streams of payment, and it's I think potentially possible that, like you can't match up every payment with some act, but it's sort of the theory is there's this ongoing relationship where you're doing these quid pro quos and you're getting payments over time. So those are the focus of these allegations. Of course,
his lawyers dispute this. You know, he's presumed innocent, found guilty, and you know there's been fighting very hard on his behalf before we.
Get to his possible defenses. So is the heart of the prosecution's case, this informant former Chicago alderman appears to be.
They also have a lot of tastes. Unclear who actually made all those tastes, at least right now, but there's a lot of you know what you call like secret recordings they plan introduced. I think there's hundreds of them.
I don't know if they're prod uce all of them, but it does appear that, you know, their case is built on sort of peeking behind the curtain of what happened here with recordings, and presumably they're going to call witnesses who were around and actually witnessed them, whether they knew about them or just were asked to do.
Something incline of waymaker. The government has already won convictions against several people since it started to investigate the former speaker and other Illinois politicians. Individuals known as the comment for for instance, were convicted of facilitating the hiring of Madigan associates for no work jobs. So jurors delivered guilty
verdicts in those cases for conspiring to bribe Madigan. But then but the jury failed to reach a verdict in a case charging former at and T Illinois President Paul Lochiatza with bribing Madigan. So the government has had mixed verdicts having to do with these facts.
Well, it's a little hard to say because each trial is so specific, you know, and Madigan's going to be He's the center point, you know, He's the big fish here what they're going after. So sometimes, and I'll just call it a little fish, trials go mix directions for various reasons. But it doesn't mean, you know, I wouldn't read too much into it about how successful they may be improving their charges against Madigan. Now, there's an advantage to the defense here, which is they learn a lot
about the government theory of the case. They also have transcripts from those trials, So the defense has an advantage in that sense. It's not walking into you know, there's not going to be as many surprises for them, and allows them to prepare better for cross examination, exhibit, to think through how they're going to challenge the government's case.
I mean, does the government have any advantage by having been through a presentation of something close to what they have against Madigan?
Yeah, they had this. They had a like sort of the other side of that coin, which is they now can see what was resonating arguably with the jury and what wasn't. So in the hung trial hujury trial, they may they feel like they can recalibrate some of their presentation to deal with issues. They may. I don't know that they did, but it's possible they spoke with some of the jurors afterwards. Possible they learned things during the trial just because observe jurors, how they were responding, whether
they were paying attention. So each side gains information. You know, the real question is who's going to be able to put its better use.
So you mentioned that the Supreme Court has narrowed the scope of the federal bribery law. That's the federal bribery law that's at issue.
Here, Snyder case. You know, it's far reaching implications, not just for this case with Madigan, but when the federal prosecutes are playing federal bribery statutes, you know, the courts are going to be looking at whether there was a quid pro qo and how that's viewed is open to interpretation by lower courts. But you know, not all of his charges relate to that either. So he has other charges fire fraud right as an example, So that's not
going to be covered by that. So but you know, I think if you're a defense lawyer, and I'm sure his lawyers here are looking at them and saying, look, we want to maybe we can use those charges to help undermine the other charges too, So you know, we can knock out, you know, the bribery charges either with the jury or the judge at some point along the way, and that will expose deficiencies or cause the judge or the jury or both to question the government's case overall.
So I think, you know, it's always helpful with the defense lawyer if you have Supreme court precedent coming out that generally is supportive or helps you.
One of the defenses is something that we hear over and over again. I mean Eric Adams, who was just indicted in New York. The mayor of New York has said this, and his attorneys have said it basically, you know, this is what politicians do. We do favors for people.
Yes, And I think that's a common defense in these types of cases. And also, frankly, a lot of jurors are going to understand or feel that politicians do trade on favors, right, that's just the practical reality and perception of politicians. Now, a lot of people also think that all or most politicians are corrupt, So that cuts both ways, right. Probably, you know they're going to get these twelve jurors plus
six or whatever number of ultimates. They're going to have their own real life experiences understanding of politics and their views on it. This is going to be vetted during the jury selection process. But you know, you ask most people in the street, are politicians corrupt? Do they trade favors? The answer is going to be yes, A lot of them are. So I don't know how that's going to
play out. With this jury. But I think, you know, they're because of these recordings, which is the presumably has listened to, and because they've seen a lot of the evidence because the government has to give it to him in advance. You know, they have to deal with the reality of some of the statements, some of the things that happened. They can't just pretend it didn't happen. My guess is that the government has a lot of proof
of a number of these things. The question is, how do you, you know, look at it overall, like what happened?
And I think the defense is going to say, Okay, each of these may be little trees, but let's look at the forest here, right, or maybe the opposite that say, government's trying to tell you this is one big forest, but let's look at each of these acts and look at the trees and it is so you know, that's going to be an interesting thing to see play out, is how the defense responds to the recordings, however, responds
to the witnesses who come in. And you know, we will learn a lot with the opening statements, because that's both sides opportunity to frame the case for the jury at the very beginning and how they expect the evidence to come in, both witness testimonies and documents and recording.
So I mean this is a kind of case if he loses, that the Supreme Court could take up as sort of the next And they're continuing cutting back on prosecutions of public corruption.
Spreme Court has been very interested in public corruption cases in the last five to ten years. They've addressed a number of it. They've really narrowed prosecutors' views of the statutes and the cases. And I think that the defense is clearly aware of that. I think brief Snyder recently, there's no doubt thinking ahead of it. If our client gets convicted, we want to have a good record for appeal.
We'd want this to be something the Seventh Circuit would decide in our favor, but if they don't, then we'd want something that the Supreme Court might bite at. Supreme Court takes very few cases nowadays, under one hundred cases a year typically, so it's very hard to assume the Supreme Court is going to take your case. The fact that this is a very prominent case, very prominent former politician, you know, a very high profile case makes it more likely.
But it's just really impossible to predict this juncture.
The Supreme Court's limiting of public corruption cases started quite a while ago with the McDonald case, but still, were you surprised by how far they went in the Snyder case last term?
I mean, I wasn't surprising, since I think they were getting to the right of result, but you just never know where they're going to come down. I think this Supreme Court often reads statutes fairly narrowly and interprets them very narrowly overall because of the composition of them and their backgrounds and how they approached statutory interpretation. So I guess it wasn't that surprising in this sense, but you
just really never know. Then the world of criminal defense, in the world of criminal law, prosecutors who do these cases, that obviously is a seminal case that's gotten a lot.
Of attentions mentioned it in the Eric Adams case as well. So it seems like it's a tougher road for prosecutors these days to get someone on bribery.
I would, says the Temple, It should always be a tough road. Proving criminal chargers should always should not be easy. I mean, you know, the burden of proof is on the government. They have a lot of power and it's really important that they be appropriately constrained. You know, both sides are going to be very mindful of Snyder and they're not going to want to trip over well, the government's not going to want to trip over it, and the defense is going to be opening that the government
does right. So I think that's going to be an important overlay here.
Thanks for being on the show. That's former federal prosecutor Brian Klein, a partner at Waymaker. And that's it for this edition of the Bloomberg Law Podcast. Remember you can always get the latest legal news by subscribing and listening to the show on Apple Podcasts, Spotify, and at Bloomberg dot com, slash podcast, Slash Law. I'm June Grosso and this is Bloomberg