US Regulator Sues Crypto Hedge Fund Founder — $25 Million in Digital Assets to Be Frozen

The U.S. Securities and Exchange Commission has filed a lawsuit against a cryptocurrency hedge fund founder for fraud. The regulator is seeking an emergency order freezing $25 million in digital assets held by a crypto hedge fund he controls.

Crypto Hedge Fund Founder Sued in the US

The U.S. Securities and Exchange Commission (SEC) has sued a crypto hedge fund founder in Manhattan federal court. The regulator alleges that Stefan Qin, a 23-year-old Australian, defrauded investors in his $92.4 million cryptocurrency arbitrage fund, according to Tuesday’s court filing.

Qin founded New York-based Virgil Capital and four other entities. He allegedly fabricated records, failed to redeem $3.5 million for investors, and tried to withdraw $1.7 million of investor funds to pay off Chinese loan sharks, the SEC said. According to Reuters:

The SEC has asked U.S. Judge Lorna Schofield for an emergency order freezing $25 million in digital assets held by another Qin-controlled fund.

The SEC explained that Qin controls two cryptocurrency funds: the Virgil Sigma Fund and the VQR Multistrategy Fund.

He “claims to trade for the Sigma Fund by taking a market-neutral ‘arbitrage approach to the cryptocurrency market,’ utilizing ‘a proprietary algorithmic trading system that continually scans for price differences between cryptocurrency markets,'” the SEC noted. Qin further claimed that his trading algorithm can “generate better returns than an investment in bitcoin.”

The Sigma Fund documentation provided to investors claimed that the fund “held millions of dollars worth of digital assets at 39 trading platforms, including three of the largest U.S.-based platforms,” the SEC wrote, emphasizing:

In reality, the Sigma Fund held no assets at any of those U.S.-based platforms, and the purported platform account balances were fabricated.

Moreover, the SEC explained that the crypto hedge fund founder told investors wanting to redeem investments totaling $3.5 million in the middle of this year that their funds would be moved to the VQR Multistrategy Fund. However, in reality, the funds were not transferred.

In December, Qin asked VQR head trader Antonio Hallak to help him withdraw $1.7 million from that hedge fund, according to a declaration by Hallak filed in the case. Qin claimed he had a “liquidity issue” and needed to repay a loan that he had taken out “from lenders he feared in China,” the SEC detailed. After Hallak informed him that he could not use the investors’ capital in the VQR Fund, Qin threatened to “fire everyone if necessary” to make the full withdrawal.

“Bank records show that several large wire transfers totaling approximately $2.5 million have been received by the Sigma Fund since June 2020,” the SEC continued. “Approximately $1.3 million of the $2.5 million was transferred by Qin first to a foreign bank account in the Sigma Fund’s name and then transferred immediately to a U.S. bank account in Qin’s name.”

The SEC has asked the court to permanently restrain Qin and his companies from participating in “the issuance, purchase, offer, or sale of any security,” as well as order them to “disgorge their ill-gotten gains according to proof, plus prejudgment interest” and pay civil penalties.