Two partners in a San Francisco-based cryptocurrency trading fund have been charged with fraud after allegedly misrepresenting the fund's technological capabilities and investment practices.
San Francisco resident Japheth Dillman and 42-year-old David Mata, of Spokane Washington, both former general partners of Block Bits Fund I, LP, are accused of bending the truth to fraudulently obtain $960K from approximately 22 investors from at least June 2017 to July 2018.
Dillman, founder and managing director of Block Bits Capital, LLC, and Block Bits Capital GP I, LLC, allegedly told potential investors that the fund had developed a novel autotrading bot. The 44-year-old allegedly claimed that the technology was generating substantial profits by automatically completing cryptocurrency arbitrage trades on different exchanges and exploiting the price differences between the cryptocurrencies being sold on various exchanges.
Potential investors were allegedly told that money they invested in the Block Bits Fund I would be used to operate and further develop the autotrader technology. However, a complaint filed April 26 in the Northern District of California alleges that Block Bits was never able to develop a functioning autotrader at any point in its existence.
Dillman is further accused of falsely representing to investors that 40% of the funds were being securely placed in 'cold storage' and would return large profits without being exposed to risky investments. The complaint alleges that Dillman and Mata, co-founder and co-managing director of Block Bits Capital, did not place the funds in cold storage, but instead invested the money in risky, cryptocurrency-linked ventures that were unrelated to Block Bits Fund's stated purpose.
It is further alleged that both men sent misleading updates and profit reports to investors representing that their funds were being stored securely when, in fact, they were invested in risky ventures, all of which failed, losing investors approximately $508K.
Dillman was arrested on Wednesday and charged with one count of wire fraud. Mata is charged with one count of wire fraud in a separate complaint.
The Securities and Exchange Commission (SEC) has taken action against both men and is seeking injunctions, disgorgement of ill-gotten gains, with prejudgment interest, civil monetary penalties and other appropriate relief.