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(Bloomberg) – Stefan Qin was only 19 when he claimed to have the secret to cryptocurrency trading.
With youthful confidence, Qin, a self-proclaimed Australian math prodigy, dropped out of college in 2016 to set up a hedge fund in New York City that he called Virgil Capital. He told potential clients that he had developed an algorithm called Tenjin to monitor cryptocurrency exchanges around the world in order to catch price fluctuations. Just over a year after its launch, it boasted that the fund had returned 500%, a claim that produced a flurry of new money from investors.
He got so full of money that Qin signed a lease in September 2019 for a $ 23,000-per-month apartment in 50 West, a 64-story luxury condo building in the Financial District with stunning views of the bottom of Manhattan as well as a swimming pool, a sauna. , hammam, whirlpool and golf simulator.
In reality, federal prosecutors said, the operation was a lie, essentially a Ponzi scheme that stole around $ 90 million from more than 100 investors to help pay for Qin’s lavish lifestyle and personal investments in high risk bets such as initial coin offers. At one point, in the face of customers’ demands for their money, he repeatedly blamed “mismanagement of cash flow” and “loan sharks in China” for his problems. Last week, Qin, now 24 and expressing remorse, pleaded guilty in federal court in Manhattan to a single count of securities fraud.
“I knew what I was doing was wrong and illegal,” he told US District Judge Valerie E. Caproni, who could sentence him to more than 15 years in prison. “I deeply regret my actions and will spend the rest of my life atoning for what I have done. I am deeply sorry for the harm my selfish behavior has done to my investors who trusted me, my employees and my family.
Greedy investors
The case echoes similar cryptocurrency frauds, such as the BitConnect one, promising people double and triple-digit returns and costing investors billions. Ponzi schemes like this show how investors keen to profit from a hot market can easily be led astray by promises of large returns. The Canadian QuadrigaCX stock exchange collapsed in 2019 as a result of fraud, causing at least $ 125 million in losses for 76,000 investors.
As regulatory oversight of the cryptocurrency industry tightens, the industry is teeming with inexperienced participants. A number of the roughly 800 crypto funds around the world are run by people with no knowledge of Wall Street or finance, including students and recent graduates who started funds a few years ago.
The path of Qin also started in college. He had been a math genius who planned to become a physicist, he told a website, DigFin, in a profile published in December, just a week before regulators joined him. He described himself on his LinkedIn page as a “quant with a deep interest and understanding of blockchain technology.”
In 2016, he was accepted into a High Potential Entrepreneur Program at the University of New South Wales in Sydney with a proposal to use blockchain technology to accelerate foreign exchange transactions. He also attended Minerva Schools, a predominantly online college based in San Francisco, from August 2016 to December 2017, the school confirmed.
Crypto bug
He caught the crypto bug after an internship at a company in China, he told DigFin. Its task had been to build a platform between two sites, one in China and the other in the United States, to allow the company to arbitrate cryptocurrencies.
Convinced that he had stumbled upon a company, Qin moved to New York to found Virgil Capital. His strategy, he told investors, would be to exploit the tendency of cryptocurrencies to trade at different prices on different exchanges. It would be “market neutral,” meaning that company funds would not be exposed to price movements.
And unlike other hedge funds, he told DigFin, Virgil would not charge a management fee, only taking fees based on the company’s performance. “We never try to make easy money,” Qin said.
Per his story, Virgil got off to a quick start, claiming a 500% return in 2017, which attracted more investors eager to participate. One marketing brochure showed a monthly return of 10% – or 2,811% over a three-year period ending in August 2019, according to legal documents.
His assets received an additional shake after the Wall Street Journal profiled him in a February 2018 story that touted his skills in cryptocurrency arbitrage. Virgil “has seen substantial growth as new investors flocked to the fund,” prosecutors said.
Missing assets
The first cracks appeared last summer. Some investors were “increasingly distraught” by missing assets and incomplete transfers, former investor relations manager Melissa Fox Murphy said in a court statement. (She left the company in December.) Complaints have increased.
“It is now mid-December and my MILLIONS OF DOLLARS MUST NOT BE SEEN,” wrote one investor, whose name was withheld in court documents. “It’s a shame the way you treat one of your first and biggest investors.”
Around the same time, nine investors with $ 3.5 million in funds requested redemptions from Virgil Sigma Fund LP, the company’s flagship, according to prosecutors. But there was no money to transfer. Qin had emptied the Sigma fund of its assets. The fund balances were fabricated.
Instead of trading in 39 exchanges around the world, as he claimed, Qin spent investor money on personal expenses and to invest in other high-risk, undisclosed investments, including initial offers of coins, prosecutors said.
So Qin tried to stall. Rather, he convinced investors to shift their interests into his VQR Multistrategy Fund, another cryptocurrency fund he created in February 2020 that used various trading strategies – and still held assets.
‘Usurers’
He also sought to withdraw $ 1.7 million from the VQR fund, but that raised suspicion from the leader, Antonio Hallak. In a phone call Hallak recorded in December, Qin said he needed the money to pay off the “loan sharks in China” he borrowed to start his business, according to court documents filed in an action. lawsuit filed by the Securities and Exchange Commission. He said the loan sharks “could do anything to collect the debt” and that he had a “liquidity problem” that prevented him from paying them back.
“To be honest with you, I just had bad cash flow management,” Qin told Hallak. “I have no money right now, man. It’s so sad.”
When the trader hesitated to withdraw, Qin attempted to take over the reins of VQR’s accounts. But now the SEC was involved. He obtained cryptocurrency exchanges to suspend VQR’s remaining assets and, a week later, filed a lawsuit.
Asset recovery
In the end, Qin had drained virtually all of the money that was in the Sigma Fund. A court-appointed receiver who oversees the fund is seeking to recover investors’ assets, said Nicholas Biase, spokesperson for U.S. Manhattan attorney Audrey Strauss. About $ 24 million in assets in the VQR fund have been frozen and are expected to be available to disperse, he said.
Stefan He Qin drained almost all of the assets from the $ 90 million cryptocurrency fund he owned, stealing money from investors, spending it on indulgences and speculative personal investments, and lying to investors about the fund performance and what it had done with their money, ”Strauss said in a statement.
In South Korea, when he learned about the investigation, Qin agreed to return to the United States, prosecutors said. He surrendered to authorities on February 4, pleaded guilty the same day before Caproni, and was released on $ 50,000 bail pending his conviction, scheduled for May 20. While the maximum legal sentence provides for 20 years in prison, as part of a plea deal, prosecutors agreed that he should spend from 151 to 188 months behind bars under federal guidelines for determining the penalty and a fine of up to $ 350,000.
This fate is a far cry from the career his parents envisioned for him – a physicist, he told DigFin. “They weren’t very happy when I told them I left college to do this crypto thing. Who knows, maybe one day I’ll finish my degree. But what I really want is to trade cryptocurrencies. “
The case is US v. Qin, 21-cr-75, US District Court, Southern District of New York (Manhattan)
(Updates with prosecutor’s commentary and case caption)
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