Investors Must Be Wary of Bitcoin Schemes

By Zachary Sonenblum

The Securities and Exchange Commission (SEC) has taken action against an alleged multi-million dollar fraud scheme involving both Bitcoin- and office space-related investments. On June 30, 2017, the SEC filed charges against Renwick Haddow, the founder of a Bitcoin platform and chain of shared office spaces located in restaurants and bars, alleging that Haddow defrauded investors in both companies out of $37.7 million.

Bitcoin is a digital currency, or crypto-currency, that isn’t backed by any government or central bank. In simple terms, crypto-currencies are monies without any physical presence.

Haddow did not register his broker-dealer firm with the SEC, even though federal securities laws obligated him to do so. The SEC alleges Haddow defrauded these investors by having sales representatives perform cold calls, misrepresent key information, and sell securities in both Bitcoin Store Inc. and Bar Works Inc.

The SEC filed the complaint in the Southern District of New York, the state in which Haddow resides. Renwick Haddow allegedly created and used “sham companies,” defrauding investors into believing that ongoing operations existed in each company and that very capable senior executives were in place to run said operations. In the complaint, the SEC alleges that the aforementioned executives, “do not appear to exist,” and also added that the Bitcoin Store did not have any operations or gross sales.

Other key facts about the operations of both Bitcoin Store Inc. and Bar Works Inc. were misrepresented to potential investors. Allegedly, the materials provided to potential investors called the Bitcoin Store “an easy-to-use and secure way of holding and trading Bitcoin,” and claimed that the “Store” had generated several million dollars in gross sales. The SEC alleges that not only did Bitcoin Store not generate these claimed sales, but that the store never had any operations at all. Representatives falsely claimed that a location for Bar Works would be profitable within just a few months. Haddow allegedly diverted more than 80 percent of the Bitcoin Store invested funds and also diverted approximately $5 million of the Bar Works Inc. invested funds to overseas banks in Mauritius and Morocco, rather than investing the money in company operations, as promised to investors.

According to Andrew M. Calamari, the Director of the SEC’s New York Regional Office, “[a]s alleged in our complaint, Haddow created two trendy companies and misled investors into believing that highly-qualified executives were leading them to quick profitability.  In reality, Haddow controlled the companies from behind the scenes and they were far from profitable.”

The U.S. Attorney’s Office for the Southern District of New York also announced criminal charges in a parallel action against Haddow for violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, as well as Rule 10b-5. Courts often analyze these rules together as each rule involves protection against fraud. It certainly looks as if Renwick committed major fraud violations, but, as always, people are innocent until proven guilty.

Investors must be careful when investing in Bitcoin, especially conservative investors. Bitcoin possesses a very high degree of volatility and is not backed by any government nor any bank, and therefore, most Bitcoin investments are extremely risky for investors with conservative goals.