Decentralized Finance (Defi) Scam Prosecutions
1. United States v. Frost & Okhotnikov (Forsage DeFi Scam, 2023)
Court: U.S. District Court, Oregon
Key Laws Invoked: Wire Fraud, Securities Fraud, Conspiracy to Commit Fraud
Facts:
Forsage was marketed as a decentralized, peer-to-peer smart contract investment program on Ethereum and Binance Smart Chain. The developers claimed investors would earn passive income through smart contracts. In reality, the system was a Ponzi and pyramid scheme, relying solely on funds from new participants to pay earlier investors.
Legal Issues:
Despite its decentralized label, the defendants controlled and promoted the system.
They misrepresented it as a legitimate blockchain investment product.
Prosecutors proved that smart contract-based fraud can still constitute wire fraud and securities fraud.
Judgment:
The court found the founders guilty of conspiracy to commit wire fraud and selling unregistered securities. Several promoters accepted plea deals.
The case established that DeFi systems are not immune from fraud laws if human actors intentionally manipulate or misrepresent financial mechanisms.
2. SEC v. Titanium Blockchain Infrastructure Services Inc. (TBIS), 2022
Court: U.S. District Court, Central District of California
Key Laws: Securities Act of 1933, Wire Fraud
Facts:
TBIS conducted an ICO claiming to offer a decentralized finance infrastructure that integrated cryptocurrencies with traditional banking. The CEO, Michael Stollaire, falsely claimed partnerships with companies like PayPal and Disney to raise over $21 million.
Legal Issue:
The fraudulent use of the term “decentralized” misled investors into believing the project was immune to manipulation.
The tokens were treated as unregistered securities, and the ICO was a DeFi investment scam.
Judgment:
The court held the ICO constituted securities fraud. Stollaire was ordered to pay restitution and banned from participating in future digital securities offerings.
The case showed that false claims of decentralization can amount to securities fraud.
3. United States v. Eisenberg (Mango Markets Exploit, 2023)
Court: U.S. District Court, Southern District of New York
Key Charges: Commodities Fraud, Market Manipulation
Facts:
Avraham Eisenberg manipulated price oracles on the Mango Markets DeFi platform, inflating the value of his holdings to borrow and withdraw over $110 million in assets.
He later claimed the exploit was a “legal” strategy based on open smart contracts.
Legal Issue:
The court found that exploiting a protocol’s code with intent to mislead or artificially affect market prices constitutes fraud and manipulation, even if done through smart contracts.
Judgment:
Eisenberg was convicted of commodity fraud and manipulation, marking a landmark in recognizing DeFi market manipulation as a federal crime.
4. SEC v. EmpiresX & Emerson Pires (2022)
Court: U.S. District Court, Southern District of Florida
Key Laws: Securities Fraud, Wire Fraud
Facts:
EmpiresX was a DeFi investment platform claiming to use an automated trading bot to generate profits for investors. In truth, the founders misappropriated over $100 million from users and paid out returns using new investors’ funds.
Legal Issue:
The “DeFi” label was used to evade registration and conceal Ponzi operations.
The platform falsely represented algorithmic, decentralized trading while decisions were made centrally.
Judgment:
Both founders were indicted for wire and securities fraud, facing long prison sentences. The court reaffirmed that decentralized claims cannot shield centralized misconduct.
5. United States v. Kumbhani (BitConnect Case, 2022)
Court: U.S. District Court, Southern District of California
Key Laws: Wire Fraud, Money Laundering, Securities Fraud
Facts:
BitConnect was one of the earliest massive DeFi-style lending scams, raising more than $2.4 billion by promising investors high returns through a proprietary trading bot.
Funds were moved through a decentralized lending platform, but returns were entirely fabricated.
Legal Issue:
Despite being hosted on decentralized ledgers, BitConnect was controlled by a small group, using new deposits to pay old investors.
Judgment:
Founder Satish Kumbhani was indicted for wire fraud, running an unlicensed money transmitting business, and conspiracy to commit international money laundering.
The case remains a precedent for identifying DeFi-based Ponzi schemes as federal crimes.
6. United States v. Liechtenstein & Morgan (Bitfinex Laundering via DeFi Platforms, 2022)
Court: U.S. District Court, D.C.
Key Charges: Money Laundering Conspiracy
Facts:
After the Bitfinex exchange hack, the defendants laundered 94,000 BTC (over $4 billion) using DeFi platforms, mixers, and decentralized swaps to disguise the origins of the funds.
Legal Issue:
Even though the laundering process used decentralized exchanges, intent to conceal criminal proceeds established money laundering under U.S. law.
Judgment:
Both defendants were found guilty of conspiracy to commit money laundering, proving that DeFi tools used for concealment can trigger traditional criminal liability.
7. CFTC v. Ooki DAO (2023)
Court: U.S. District Court, Northern District of California
Key Laws: Commodity Exchange Act, Unlawful Operation of a Trading Platform
Facts:
Ooki DAO operated a decentralized margin trading protocol allowing leveraged crypto trades. It failed to register as a futures commission merchant and had no AML/KYC controls.
The founders argued that because it was a DAO (Decentralized Autonomous Organization), no single entity could be held liable.
Legal Issue:
The court held that a DAO’s members can still be jointly liable if they participate in governance decisions violating the law.
Judgment:
Default judgment for the CFTC, imposing penalties and banning operations.
This case is critical for proving that DAOs can be prosecuted as unincorporated entities when they enable illegal DeFi trading.
8. SEC v. Hydrogen Technology Corp. (2023)
Court: U.S. District Court, Southern District of New York
Key Laws: Securities Fraud, Market Manipulation
Facts:
Hydrogen Technology created and distributed HYDRO tokens, which were traded using bots on decentralized exchanges to inflate trading volume and price.
Legal Issue:
The artificial creation of liquidity in a DeFi token market amounts to market manipulation and unregistered securities issuance.
Judgment:
The defendants were ordered to pay over $2.8 million in penalties and disgorgement, establishing accountability for token wash trading and false volume creation on DeFi markets.
✅ Summary of Legal Principles from These Cases
DeFi systems are not beyond law enforcement — fraud, wire fraud, and securities violations still apply.
Decentralization is not a defense if individuals control operations or mislead investors.
DAO members can be liable if governance results in unlawful activity.
Smart contract manipulation = fraud if done with deceptive intent.
False “decentralization” claims amount to securities misrepresentation.
DeFi tools used for laundering or concealment fall under money-laundering laws.
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