Jeremy David McAlpine and Zachary Michael Matar were charged with one-count information with securities fraud for conning thousands of investors into purchasing a cryptocurrency that supposedly provided access to a profitable trading program and using most of the $1.8 million raised to enrich themselves.
Both defendants have agreed to plead guilty to the charge, according to plea agreements, and are expected to plead guilty in United States District Court in the coming weeks.
Dropil Inc., a Belize-based company operating out of Fountain Valley, was founded by McAlpine and Matar with the purpose of providing and managing crypto investments.
The defendants developed Dropil’s digital asset, called DROP tokens, as well as its digital asset trading program, an automated trading bot called “Dex.” Neither McAlpine, Matar nor Dropil was registered with the Securities and Exchange Commission (SEC) as a broker or dealer.
Investors acquired DROPs to gain access to the trading program, which promised that Dex’s trading would generate profits that would be distributed as additional DROP tokens every 15 days.
The unregistered offer and sale of DROPS began in late 2017, followed by an initial coin offering (ICO) in January 2018. Besides the numerous false claims regarding the profitability of Dex and its operationality, both defendants claimed the ICO raised $54 million from 34,000 investors both foreign and domestic.
The ICO actually raised less than $1.9 million from fewer than 2,500 investors through the sale of approximately 629 million DROPs. They used the funding to make disbursements to themselves and their associates.
McAlpine and Matar pleaded guilty to securities fraud charges and have agreed to permanent injunctions barring further fraudulent conduct and prohibiting them from directly or indirectly participating in the offer, purchase, or sale of digital securities, with disgorgement, prejudgment interest, and civil penalties to be determined by the court.
The Securities and Exchange Commission first sued the defendants in April 2020, along with Patrick O’Hara for selling DROP tokens, claiming that investor funds would be pooled to trade various digital assets by a “trading bot,” called Dex, using an algorithm designed and tested by Dropil, which would also distribute additional DROP tokens every 15 days.
Instead of using investor money to trade with Dex, Dropil diverted the funds raised to other projects and to the founders’ personal digital asset and bank accounts.