The U.S. Securities and Exchange Commission (SEC) has taken legal action against NovaTech, a cryptocurrency startup founded in 2019 by husband-and-wife duo Cynthia and Eddy Petion. The SEC alleges that NovaTech engaged in a multi-level marketing (MLM) scheme that fraudulently raised more than $650 million from over 200,000 investors, many of whom were part of the Haitian-American community.

The Allegations Against NovaTech

According to the SEC, NovaTech claimed to invest in profitable crypto and foreign exchange markets. However, the agency alleges that only a fraction of investor funds were actually used for trading purposes. The majority of the funds were diverted towards payments to existing investors and commissions for promoters, as well as personal gains by the Petions.

The Role of Promoters

The SEC has also named several NovaTech promoters as defendants in its securities anti-fraud suit, including Martin Zizi, Dapilinu Dunbar, James Corbett, Corrie Sampson, John Garofano, and Marsha Hadley. The agency alleges that these promoters unlawfully solicited victims by downplaying the red flags associated with NovaTech.

The Impact on Investors

When the company collapsed, most customers found themselves unable to make withdrawals due to the lack of transparency and accountability in NovaTech’s operations. Eric Werner, director of the SEC’s Fort Worth regional office, stated: "NovaTech and the Petions caused untold losses to tens of thousands of victims around the world… As we allege, MLM schemes of this size require promoters to fuel them, and today’s action demonstrates that we will hold accountable not just the principal architects of these massive schemes, but also promoters who spread their fraud by unlawfully soliciting victims."

The SEC’s Crackdown on Crypto Ventures

This lawsuit is the latest development in the SEC’s broader crackdown on legally dubious crypto ventures. In 2020, the SEC took Ripple, a blockchain developer and creator of the XRP cryptocurrency token, to court for allegedly raising more than $1.3 billion in an unregistered security offering. Just last month, the SEC charged BitClout founder Nader Al-Naji with fraud, stating that the proceeds from the startup’s crypto activities paid for Al-Naji’s LA mansion and gifts.

The SEC’s Division of Enforcement

In a recent address at the William & Mary Business Law Review, Gurbir Grewal, director of the SEC’s division of enforcement, stated that the agency has taken over 100 crypto-related actions over the past decade. This lawsuit is part of a broader effort by the SEC to protect investors and hold accountable those who engage in fraudulent activities within the crypto space.

The Consequences for NovaTech

The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains, and civil penalties against NovaTech and its promoters. Martin Zizi has already agreed to partially settle with the agency.

A Textbook Affinity Group Ponzi Scheme

Seth Goertz, partner at law firm Dorsey & Whitney and former assistant U.S. attorney with the Department of Justice, described the situation as "a textbook affinity group ponzi scheme." He added: "The size and scale of the scheme is noteworthy, though, and you always wonder whether it would have been possible if it was tied to traditional fiat currency, rather than cryptocurrency, which remains largely unregulated."

Conclusion

The SEC’s lawsuit against NovaTech highlights the need for greater regulation and oversight in the crypto space. As more individuals and institutions invest in cryptocurrencies, it is essential that regulators prioritize protecting investors and holding accountable those who engage in fraudulent activities.

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