Saturday, May 21, 2022

Two men arrested for $1.1 million NFT ‘back pull’ scam

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US prosecutors have two men charged with fraud and money laundering over a cryptocurrency “back pull” scheme. Ethan Nguyen and Andre Llacuna reportedly made about $1.1 million by selling non-perishable tokens (or NFTs) based on cartoonish characters called “Frosties”. After selling the NFTs, they shut down the project and transferred the money to a series of separate crypto wallets, leaving the owners of Frosties with no promised rewards.

According to the indictment, the Internal Revenue Service, Criminal Investigation (IRS-CI) and Homeland Security Investigations (HSI) began investigating Frosties in January, shortly after receiving complaints about the scam. Frosties was a buzzing project that sold 8,888 NFTs — priced at the Ethereum equivalent of about $130 — within an hour of its public launch.

But as recorded by protocol, the makers gave up almost immediately. Buyers made only a few bucks trying to resell their NFTs, and they gave up hope for future promised rewards, including 3D versions of their avatars and a Frosties video game. (Some scammed community members nonetheless tried to revive the Frosties as a separate NFT lineup.) Now, the two men behind Frosties have been arrested in Los Angeles, California.

An alleged message from Ethan Nguyen to a moderator of the Frosties community.

The complaint includes an apparent apology and confession from Nguyen to the moderator of the Frosties Community Discord server. “I know this is shocking, but this project is coming to an end. It was never my intention to keep the project going, and I have no plans for anything in the future,” it reads. The post goes on to say that Nguyen sent the moderator what Ethereum “for your troubles” and recommends to delete their Discord account. “I want you to know I care. I appreciate you, even if you don’t appreciate me,” it concludes.

Frosties’ operators were apparently confident enough to plan a sequel series called “Embers,” which was set to launch later in March. Embers’ roadmap included a $50,000 charitable donation and a community-controlled purse that would hold a quarter of the initial sale funds — and while the Red Cross confirmed the donation, the latest pledge seems much more questionable.

But among other things, researchers have compared Nguyen and Llacuna’s Discord account information (including Nguyen’s IP address and Llacuna’s email address and phone number) with the associated accounts on Coinbase’s cryptocurrency exchange. The Coinbase accounts were linked to a Citibank credit card and government ID that allowed police to track the couple down. Investigators have also traced a series of wire transfers by which Nguyen and Llacuna allegedly tried to cover up where they were sending the Frosties funds, leading to the money laundering allegations.

An image of a series of goals for the Embers NFT as described in the story.

The planned Embers NFT roadmap.

Crypto “back pull” schemes are very common, but criminal cases remain much less numerous. For starters, the teams behind the NFT series often don’t reveal their legal identities – until recently, even the founders of the super expensive Bored Ape Yacht Club series remained pseudonymous. Second, the lucrative NFT series launches are a relatively recent phenomenon. And the legal status of NFTs in general can be murky.

But the Justice Department’s release is unequivocal about calling Frostie a scam. “NFTs represent a new era for financial investment, but the same rules apply to an investment in an NFT or a real estate development,” IRS-CI Special Agent-in-Charge Thomas Fattorusso said in a statement. “You can’t ask for money for a business opportunity, give up that company and go into hiding with money that investors have given you.” If you anyway to be if you’re going to do it, you probably shouldn’t admit it on Discord.

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