SEC Freezes Crypto Hedge Fund Assets

The Securities and Exchange Commission (SEC) has charged New York-based crypto hedge fund Virgil Capital with securities fraud and frozen its assets.

The agency’s complaint stated that the fund’s founder, 23-year-old Stefan Qin, with engaging “in a deceptive course of conduct, using materially false and misleading statements to investors and others” and causing harm to two crypto funds – the Sigma fund and the VQR fund – marketed by his company. “This emergency action is an important step to protect investor assets and prevent further harm,” stated Kristina Littman, chief of the SEC Enforcement Division’s Cyber Unit.

Key Takeaways

  • The SEC has charged a crypto hedge fund with securities fraud and frozen its assets.
  • Virgil Capital was a prominent hedge fund that raked in investors and cash after the 2017 bull run in crypto.

According to the complaint, Qin made material misrepresentations regarding the fund to investors. For example, he claimed that the Sigma fund had invested millions of dollars across 39 trading platforms, including those in the United States, to take advantage of price arbitrage opportunities between exchanges operating in different jurisdictions.

However, the SEC claims that this was not the case. “In reality, the Sigma Fund held no assets at any of those U.S.-based platforms, and the purported platform account balances were fabricated,” the complaint states. Meanwhile, Qin used investor funds for personal purposes and for other “undisclosed high-risk investments.” He also disallowed investors from redeeming their balances, instead convincing them to transfer their balances from the Sigma fund to the VQR fund, thereby keeping their balances in the system. “The complaint alleges that no funds were transferred and the redemption requests remain outstanding,” the agency stated in a press release.

The SEC’s action against Virgil Capital occurs at a time of increased attention and mainstream spotlight on cryptocurrencies due to skyrocketing prices of major crypto assets. Several crypto hedge funds sprouted in the aftermath of a similar bull run back in 2018. Many folded in subsequent years after cryptocurrency markets swerved into a prolonged slump starting in late 2018.

Qin’s fund, which was founded in 2016, was covered in The Wall Street Journal and featured on CNBC. In the interview, he claimed to have proprietary algorithmic trading strategies that allowed his fund to “gobble up” price differences between exchanges “before anyone else gets there.”

According to an April report in online publication The Block, Virgil Capital had $100 million in assets under management. It had underperformed the broader Bitcoin market in the first two months of this year and was looking for investors to put on its waiting list for the two funds.