Crypto Crime Cartel? John McAfee Indicted
Audrey Strauss, the United States Attorney for the Southern District of New York, and William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced today the unsealing of an Indictment charging JOHN DAVID MCAFEE, the founder of the McAfee antivirus software company, and JIMMY GALE WATSON JR., who served as an executive adviser of MCAFEE’s so-called cryptocurrency team (the “McAfee Team”), with conspiracy to commit commodities and securities fraud, conspiracy to commit securities and touting fraud, wire fraud conspiracy and substantive wire fraud, and money laundering conspiracy offenses stemming from two schemes relating to the fraudulent promotion to investors of cryptocurrencies qualifying under federal law as commodities or securities. WATSON, who was arrested last night in Texas, will be presented later today before a federal magistrate judge in the Northern District of Texas. MCAFEE is currently detained in Spain on separate criminal charges filed by the United States Department of Justice’s Tax Division.
Manhattan U.S. Attorney Audrey Strauss said: “As alleged, McAfee and Watson exploited a widely used social media platform and enthusiasm among investors in the emerging cryptocurrency market to make millions through lies and deception. The defendants allegedly used McAfee’s Twitter account to publish messages to hundreds of thousands of his Twitter followers touting various cryptocurrencies through false and misleading statements to conceal their true, self-interested motives. McAfee, Watson, and other members of McAfee’s cryptocurrency team allegedly raked in more than $13 million from investors they victimized with their fraudulent schemes. Investors should be wary of social media endorsements of investment opportunities.”
FBI Assistant Director William F. Sweeney Jr. said: “As alleged, McAfee and Watson used social media to perpetrate an age-old pump-and-dump scheme that earned them nearly two million dollars. Additionally, they allegedly used the same social media platform to promote the sale of digital tokens on behalf of ICO issuers without disclosing to investors the compensation they were receiving to tout these securities on behalf of the ICO. When engaging in illegal activity, simply finding new ways to carry out old tricks won’t produce different results. Investment fraud and money laundering schemes carry a strict penalty under federal law.”
According to the allegations in the charging documents unsealed today in Manhattan federal court, including the Indictment against JOHN DAVID MCAFEE and JIMMY GALE WATSON JR. and an earlier-filed criminal Complaint against MCAFEE:[1]
During the period from in or about December 2017 through in or about October 2018, JOHN DAVID MCAFEE and JIMMY GALE WATSON JR., and other members of the McAfee Team, perpetrated two fraudulent schemes relating to the promotion to investors of cryptocurrencies qualifying under federal law as commodities or securities.
The first scheme involved a fraudulent practice called “scalping,” which is sometimes referred to as a “pump and dump” scheme. This scalping scheme generally consisted of the following. First, MCAFEE, WATSON, and other McAfee Team members bought large quantities of publicly traded cryptocurrency altcoins, which qualified as commodities or securities, at inexpensive market prices with advance knowledge that MCAFEE planned to publicly endorse them via his widely followed Twitter account (the “Official McAfee Twitter Account”). Second, after these purchases, MCAFEE published false and misleading endorsement tweets via his Official McAfee Twitter Account recommending those altcoins to members of the investing public for investment in order to artificially inflate (or “pump” up) their market prices without disclosing that MCAFEE owned large quantities of the promoted altcoins, even though MCAFEE had given false assurances that he would disclose such information in various tweets and public statements during the scalping scheme. Third, MCAFEE, WATSON, and other McAfee Team members then sold (or “dumped”) their respective investment positions in the promoted altcoins into the temporary but significant short-term market price increases that MCAFEE’s deceptive tweets typically generated, often for significant profits. From in or about December 2017 through in or about January 2018, MCAFEE, WATSON, and other McAfee Team members collectively earned more than $2 million in illicit profits from their altcoin scalping activities while the long-term value of the recommended altcoins purchased by investors declined substantially as of a year after the promotional tweets. From in or about December 2017 through in or about October 2018, MCAFEE, WATSON, and other McAfee Team members engaged in various efforts to liquidate the digital asset proceeds of their scalping activities into United States currency.
In the second scheme, MCAFEE, WATSON, and other McAfee Team members also used MCAFEE’s Official McAfee Twitter Account to publicly tout fundraising events called “initial coin offerings” (“ICOs”) in which startup businesses (“ICO issuers”) issued and sold digital tokens qualifying as securities to the investing public, without disclosing and, in fact, concealing that the ICO issuers were compensating MCAFEE and his team for his promotional tweets with a substantial portion of the funds raised from ICO investors. As the United States Securities and Exchange Commission had publicly warned, and as MCAFEE and WATSON well knew, the federal securities laws required them to disclose any compensation paid by ICO issuers for touting securities offerings styled as ICOs. From approximately on or about December 20, 2017 through on or about February 10, 2018, MCAFEE, WATSON, and other McAfee Team members collectively earned more than $11 million in undisclosed compensation that they took steps to affirmatively hide from ICO investors. In each instance, MCAFEE and WATSON failed to disclose to ICO investors that the ICO Issuers were paying the McAfee Team a substantial portion of the funds raised from ICO investors for their touting efforts, despite knowing that they were required to disclose such compensation under federal securities laws. Furthermore, in several instances during this ICO touting scheme, MCAFEE and WATSON took active steps to conceal their secret compensation arrangements with ICO issuers from ICO investors, and MCAFEE made false and misleading statements and omissions to hide such deals from ICO investors. From approximately in or about December 2017 through in or about October 2018, MCAFEE, WATSON, and other McAfee Team members engaged in various efforts to liquidate the digital asset proceeds of their ICO touting activities into United States dollars.
During the period from in or about December 2017 through in or about October 2018, MCAFEE and WATSON caused another McAfee Team member to engage in banking transactions to launder proceeds of the fraudulent ICO touting scheme.
In separate parallel enforcement actions, the United States Securities and Exchange Commission (the “SEC”) and Commodity Futures Trading Commission (“CFTC”) have filed civil charges against MCAFEE and WATSON.
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MCAFEE, 75, and WATSON, 40, are United States citizens. Both of them are charged in a seven-count Indictment with one count of conspiracy to commit commodities and securities fraud, which carries a maximum potential sentence of five years in prison; one count of conspiracy to commit securities and touting fraud, which carries a maximum potential sentence of five years in prison; two counts of conspiracy to commit wire fraud and two counts of substantive wire fraud, each of which carries a maximum potential sentence of 20 years in prison; and one count of conspiracy to commit money laundering, which carries a maximum potential sentence of ten years in prison. In addition to potential prison sentences, each of these charges also carries potential financial penalties. The maximum potential prison sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentences to be imposed on the defendants will be determined by the judge.
Ms. Strauss praised the work of the FBI on the investigation of this case and thanked the SEC and CFTC, both of which conducted separate parallel investigations, for their assistance.
This case is being handled by this Office’s Securities and Commodities Fraud Task Force. Assistant United States Attorneys Samson Enzer and Elizabeth Hanft are in charge of the prosecution.
The allegations contained in the charging documents in this case are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
