US DOJ Rules Crypto Manipulation as ‘Securities Fraud’ for the First Time Ever in HYDRO Case
The DOJ has joined the SEC in classifying a cryptocurrency as a security.
- The DOJ convicts two individuals for using “wash trades” and “spoof trades” to inflate prices.
- This case marks the first time a federal jury classified a cryptocurrency as a security, establishing price manipulation as securities fraud.
- The DOJ joins the SEC’s multiple cases wherein cryptocurrencies were classified as unsecured securities.
The United States Department of Justice (DOJ) has convicted two individuals of securities fraud in manipulating a cryptocurrency’s price. They were accused of conspiring to defraud investors by purchasing Hydrogen Technology’s $HYDRO cryptocurrency and using deceptive practices to artificially inflate its market value.
The DOJ sentenced Shane Hampton to two years and eleven months in prison, while Michael Kane, the CEO and co-founder, received a sentence of three years and nine months in prison.
“In this case, for the first time, a jury in a federal criminal trial found that a cryptocurrency was a security and that manipulating cryptocurrency prices was securities fraud.” — Nicole M. Argentieri, Assistant Attorney General
The case is notable because the jury classified the cryptocurrency as a “security,” thereby establishing that manipulating its price constitutes securities fraud.
HYDRO Price Manipulation
Kane engaged Moonwalkers Trading Limited, a South Africa-based firm, to manipulate the price of $HYDRO using trading bots. Between October 2018 and April 2019, the defendants and their co-conspirators executed approximately $7 million in “wash trades” and $300 million in “spoof trades” to artificially inflate the cryptocurrency’s market value.
The DOJ stated that retail investors were deceived into purchasing $HYDRO at artificially inflated prices. Kane, Hampton, and their co-conspirators reportedly made approximately $2 million in profits over ten months through this fraudulent scheme, according to Bitcoinist.
The case against Kane and Hampton was strengthened when co-conspirators Andrew Chorlian and Tyler Ostern pleaded guilty to conspiracy charges in May 2023, admitting their roles in the fraudulent scheme.
How the Case Plays Into the SEC’s Narrative
In 2023, the SEC classified several cryptocurrencies as unregistered securities in its case against Coinbase. Among these were Solana’s $SOL, Cardano’s $ADA, Polygon’s $MATIC, and Filecoin’s $FIL, according to The Defiant.
This narrative has been echoed in the SEC’s actions against Ripple Labs, Telegram’s Gram, Kik Interactive, and others. However, this marks the first time the DOJ has classified HYDRO as a security, setting a new precedent in cryptocurrency regulation.
The DOJ’s decision to classify $HYDRO as a security comes shortly after the SEC scaled back its investigation into whether Ethereum is a security. This development coincides with the approval of several 19b-4 filings and the anticipated approval of S-1 registration statements.
