Former Cred LLC Executives Sentenced for Wire Fraud
In a significant development for the cryptocurrency sector, the former leadership of the now-defunct Cred LLC has been sentenced to a combined total of 88 months in federal prison due to their involvement in a wire fraud scheme that resulted in extensive losses for customers. This scheme, which misled over 6,000 clients, culminated in a staggering financial impact exceeding $140 million.
Sentencing Details
Senior U.S. District Judge William Alsup delivered a 52-month prison sentence to Daniel Schatt, the co-founder and ex-CEO, while Joseph Podulka, the former CFO, received a 36-month term. Both men had previously pleaded guilty in May to charges related to their role in the fraudulent activities tied to the San Francisco-based cryptocurrency lending operation. Their sentencing concludes a protracted legal saga that began with Cred filing for bankruptcy in November 2020.
Impact on Customers and the Cryptocurrency Market
As the cryptocurrency markets surged in 2021, subsequent evaluations show customer losses could surpass $1 billion, marking this event as one of the most significant failures in crypto lending history. Cred specialized in offering loans backed by cryptocurrency collateral and promised customers returns on deposits, yet its business model was heavily reliant on foreign partnerships, many of which clients were not fully aware of.
Origins of the Fraud
The seeds of this fraud were planted in March 2020 when the COVID-19 pandemic triggered a drastic decline in Bitcoin’s price, revealing serious weaknesses in Cred’s risk management and propelling the executives toward dishonest practices. After the crash, Cred learned from a hedging partner that it had incurred substantial losses, compelling the need for immediate liquidations. This ended its hedging relationship pitilessly and left the company vulnerable to market volatility, directly endangering its customers without their knowledge.
Misleading Communications
Adding to the turmoil was the failure of a Chinese entity that Cred depended on to generate yields for its customers, which meant the company was facing untenable financial difficulties. Rather than informing customers of these dire circumstances, Schatt and Podulka continued to assure clients of the company’s stability, engaging in misleading communications, including a public forum where Schatt claimed Cred was “operating normally”.
Consequences of the Fraud
In addition to their prison sentences, the court has mandated both executives to serve three years of supervised release and to pay a fine amounting to $25,000.
