It's HYIP to be Square
A Bit…on the Horn
A scooter start-up named - somewhat aspirationally - Unicorn, has gone under. The problem? They took the money people sent them to buy scooters and did not spend it on scooters. Instead, they spent it on Facebook and Google advertising to get more people to buy scooters. Even that didn’t go well:
Unfortunately, the cost of the ads were just too expensive to build a sustainable business. And as the weather continued to get colder throughout the US and more scooters from other companies came on to the market, it became harder and harder to sell Unicorns, leading to a higher cost for ads and fewer customers.
These seem like things you put into a business plan when you are considering whether your start-up is a good idea. I imagine the CEO - a guy who has founded another successful tech start-up, by the way - standing at a white board and making a “pro and con” list where the “pros” include “VCs are throwing piles of cash at scooter start-ups right now” and the “cons” list is just a big shrug emoji.
As Matt Levine points out, refunding all of the customers would cost around $244,000, which is a lot, but surely someone in Silicon Valley can come up with that money. The CEO claims someone is going to:
“Since then we've been talking with some other folks and excitingly, we may be able to get something back to our customers,” Evans told FOX Business on Tuesday. “This is my only job right now. We're really trying to turn this into a net positive for everyone, as unlikely as it sounds.”
When you’re saying you’re sorry a lot and referencing “other folks” it doesn’t build a ton of confidence. I won’t speculate on how losing $699 can become a net positive for ripped-off customers, either. Are they going to get…scooters from another company? What is the best possible result here?
I don’t know that this becomes a story if it doesn’t involve a fairly high profile person in the tech industry - lots of companies promise products they never deliver. Typically there are legal remedies for victims of these schemes, though people rarely recover their money. The standard lessons of this newsletter apply - don’t buy products you see advertised online without doing more research, and definitely don’t pre-order them.
Quadriga
I have thus far mostly avoided writing about cryptocurrency and blockchain in this newsletter, because frankly it is an easy target. New scams and frauds pop up almost daily in the world of digital currency, because it is flypaper for criminals.
Many hours of many movies and television shows are devoted to tales of money laundering. In 2009 the world was introduced to bitcoin, and like many other online innovations, it took the existing concepts of money laundering and global crime and turned them up to eleven.
Hopefully I do not have to explain bitcoin to any of you. I’d advise doing minimal research beyond a cursory Google search, because you will dive head first into a deep, dark part of the Internet and I can’t guarantee you’ll find your way out.
Quadriga was Canada’s largest crypto and bitcoin exchange until last year, when the founder Gerald Cotten died, and a quarter billion dollars’ worth of crypto died with him. Allegedly. For the last year, people in the law enforcement and cryptocurrency enthusiast community have been trying to unravel the details of his life and untimely death. Thus far, they haven’t been able to locate him or the missing funds, but the story of his life paints a truly bizarre picture, and introduced me to another dark, scammy corner of the Internet.
To make sense of why there is so much speculation around Cotten’s death, we look to his early years. And I do mean early. Cotten was a regular poster on web forums for…let’s call them investment vehicles called HYIPs. Cotten launched his first pyramid scheme in 2004, when he was 15 years old. It may seem utterly insane that there are web forums dedicated to Ponzi schemes, where people compete to defraud one another, but does anything really surprise you at this point?
Unlike Ponzi schemes, HYIPs do away almost entirely with the pretense that there is any sort of underlying investment. It’s essentially a game of musical chairs, except you’re sending and receiving actual money. As you’d expect, the creators of the HYIPs inevitably make off with the proceeds, and then a second game begins; they resurface on the forums and deflect criticism for long enough for the aggrieved parties to give up on their claims. Then, it begins again.
Fun fact, when I was Googling “HYIP” the top result is a “digital bank” that has gamed search algorithms to appear above Wikipedia with…a page that claims they’re not a HYIP.
During his HYIP years, Cotten joined forces with a person calling himself Michael Patryn, formerly named Omar Dhanani. He’d been arrested and deported from the US after serving prison time for using online marketplaces to launder money and sell stolen goods.
The two young men were active in the world of HYIPs and digital scams for years, until the birth of cryptocurrency brought them together for a new business venture - they were going to build a bitcoin exchange. Cotten’s clean criminal record made him the face of their partnership. At the time it was very difficult for Canadians to get money in and out of the crypto markets, and they founded Quadriga as a way to enable this. Actually Quadriga had been the name of a HYIP Cotten had been running, but had decided to close down when he launched his bitcoin exchange of the (nearly) same name.
The Vanity Fair story follows the many twists and turns of the growth of Quadriga, to the point where they were looking to take the company public, but the business started to unravel in 2018. Unable to find more investors, or take the company public, Cotten and Patryn split, and Cotten started moving large quantities of digital currency around, more than anyone realized at the time.
Cotten went on his honeymoon to India, contracted what a doctor said was extreme gastric distress, and died suddenly in the hospital. No one has yet proven whether the body allegedly buried in the Indian countryside is actually his. What people have been able to prove is that prior to his death he - or someone who knew his passwords - withdrew all the funds from Quadriga accounts, moved them elsewhere, and laundered the digital coins through other exchanges.
Is Cotten alive? Was this a HYIP that got out of hand when the Canadian crypto community granted it sudden legitimacy, and he was forced to try to run a real business? Did he die of a stomach bug in India or did he abscond with a quarter billion dollars? Why on earth does anyone invest in HYIPs, which are essentially marketed as scams to steal their money? I don’t know! The whole thing is crazy. People are crazy. I can’t explain it.
In Da BitClub
While we’re on the topic of crypto HYIPs, some folks were arrested this week for doing that. They ran a site called BitClub Network, which they advertised as “the most transparent company in the history of the world”. Their marketing campaign was certainly something:
“You’re not going to go start digging holes — the gold miners dig up the gold, they just give you your gold every single day,” one BitClub Network video says, according to federal court documents. “This is the same kind of thing.”
Sounds foolproof! Privately, they weren’t shy about what they were doing:
Mr. Goettsche told Mr. Balaci in January 2015 that “we are building this whole model on the backs of idiots.”
[…]
…in February 2015, Goettsche directed another conspirator to “bump up the daily mining earnings starting today by 60%,” to which his conspirator warned “that is not sustainable, that is ponzi teritori [sic] and fast cash-out ponzi . . . but sure.”
I think taking money to buy bitcoin mining equipment you never buy, and creating fictional earnings statements you never pay out on is pretty solidly in ponzi territori. Again! Don’t put this stuff in email! Someone may read them some day.
All of this sounds fairly typical, they were promising people that if they sent them money, they’d get a piece of the profits from their bitcoin mining operations. They issued fake earnings statements, and paid some of the proceeds out to people.
They collected $722 million in cash and cryptocurrency, according to the government.
Marinate on that for a second.
Seven. Hundred. Twenty. Two. Million. Dollars.
Also, they managed to keep this thing running for five years somehow. People kept giving them money! The Internet is a wild place.
Short Cons
This Dipshit -
BBB - “More than 5 million people lost money to rental scams and 43% of online shoppers encountered a bogus listing, according to a recent survey by Apartment List.”
Buzzfeed News - “A Facebook contractor was paid thousands of dollars in bribes by a shady affiliate marketer to reactivate ad accounts that had been banned due to policy violations”
Buzzfeed News - “Facebook’s court filing alleges the defendants tricked users into installing their malware by bundling it with other programs. Once installed, the malware compromised a user’s Facebook account. The defendants allegedly used the accounts to run ads that often misused the images of celebrities to sell “counterfeit goods and diet pills.””
Tips and happy thoughts to scammerdarkly@gmail.com.