US court orders crypto fraud accused to pay back $25-million over diverted funds to SA gold mines
A crypto fraud case playing out in the United States has surprise connections to South Africa — the accused in the matter ‘secretly’ pumped millions of dollars to gold mining operations in this country.
A business founder from Australia who told investors from the US and elsewhere that they were effectively funding new technology via a digital coin offering, instead channelled millions of dollars to gold mines in South Africa.
On 5 December 2023, the US District Court for the Northern District of California ordered that Craig Sproule and his companies are liable to disgorge — in other words, pay back illegally made money — around $25-million.
This equates to about R475-million.
The 5 December court order also said a previous judgment against Sproule and his companies meant that “the allegations of the complaint shall be accepted as and deemed true”.
A full picture of legal proceedings linked to Sproule emerges when piecing together details from various court papers and a US government press release about him.
According to a summary of allegations in the case dated January last year, Sproule, who is from Australia, founded the software company Metavine Inc in the US state of Delaware in 2013.
Five years later, in 2018, he established the subsidiaries Crowd Machine Inc and Crowd Machine SEZC.
Sproule, Metavine Inc and Crowd Machine Inc were listed as defendants in the US case.
‘Man behind the machine’
A profile under the handle @Crowd_Machine on X, the platform previously known as Twitter, said it was “important to know WHO you are investing in when you invest in a product” and described Sproule as “the man behind the Machine”.
— Crowd Machine (@Crowd_Machine) November 28, 2017
A website, craigsproule.com, also had details about him.
“Craig has more than 30 years of experience in the enterprise software industry and has held high-level technical and administrative roles at renowned firms and companies,” it said.
“Before founding Crowd Machine, Craig established Metavine in 2013, and a systems integration firm which provided compute platform services across a range of industries for 17 years…
“At Crowd Machine, Craig has introduced an inventive strategy for decentralising the lifecycle of applications and giving companies fast, robust, and effective integration.”
In January 2022 the US Securities and Exchange Commission (SEC) announced charges against Sproule, Metavine Inc and Crowd Machine Inc for “making materially false and misleading statements in connection with an unregistered offer and sale of digital asset securities”.
That month, Crowd Machine’s Facebook page reflected the SEC action.
A post said: “Without admitting or denying the SEC’s non-jurisdictional allegations, the Company and related parties (including Metavine, Inc. and Craig Sproule) have consented to entry of judgment against them, which the Court entered on Jan 11, 2022.”
A copy of that judgment, posted on Crowd Machine’s website, said Sproule, Metavine Inc and Crowd Machine Inc were restrained from violating sections of the Securities Exchange Act.
It also said the “defendants shall pay… disgorgement of ill-gotten gains”.
The January 2022 summary of allegations in the case explained more.
Misleading and fraudulent
It said that between January and April 2018, Sproule and the two other defendant companies “raised more than $33-million from hundreds of investors in the United States and abroad”.
This was “through a fraudulent and unregistered ‘initial coin offering’ or ‘ICO’ of digital asset securities, which they called ‘Crowd Machine Compute Tokens’ or ‘CMCTs’”.
Sproule and the companies had suggested the ICO proceeds would go towards funding “the development of a new technology — a ‘global decentralised’ peer-to-peer network, or ‘Crowd Computer’”.
The defendants claimed, according to the summary of allegations, that the new technology “would run their existing ‘no-code’ application-development software from a network of users’ own devices instead of traditional centralized servers.”
Once sold, CMCTs could then be used “to compensate device owners for the use of their surplus processing power, as well as to pay software developers for making available source code that users could compile into custom applications ‘with unparalleled speed’”.
The defendants — Sproule and the companies — had also created the impression that they would “market this new technology,” grow a “community” of CMCT holders and push up demand for the tokens, increasing its secondary market value on digital trading platforms.
But the summary of allegations described a very different situation unfolding, and it involved South Africa.
Millions to SA gold mining
“In reality, Defendants never operationalised the Crowd Computer, CMCT purchasers were never able to use the tokens within the Crowd Computer ecosystem, and the secondary market for CMCTs all but disappeared, along with any value that CMCTs might once have held for token holders,” the summary said.
“To make matters worse, Defendants materially misrepresented how it intended to use ICO proceeds… during the ICO, Defendants sent more than $5.8-million [about R110-million] to gold mining companies in South Africa, purportedly in the form of loans or in exchange for equity interests in these mining operations.
“To date, Defendants have recovered almost none of the $5.8-million they misappropriated, and the South African gold mining operations have returned no revenue.”
Read more in Daily Maverick: Gold a glittering exception among South Africa’s basket of commodities
The gold mining was also referenced in the 5 December court order.
It said that Sproule and the companies had never told investors that it planned to pay ICO proceeds to gold mining entities elsewhere — a factor which would have influenced whether investors wanted to get involved in the business dealings.
The order referenced “more than thirty separate wire transfers to South African gold-mining companies”.
‘Investors were misled’
According to a US Securities and Exchange Commission statement, issued when charges against Sproule and the companies were announced in January 2022, the defendants misled investors about how ICO proceeds were being used.
The statement added: “Without admitting or denying the allegations, Sproule and Crowd Machine have consented to judgments permanently enjoining them from violating these provisions and participating in future securities offerings, ordering undertakings to permanently disable the CMCT tokens and seek their removal from digital asset trading platforms…
“And as to Sproule, prohibiting him from serving as an officer or director of a public company, and ordering him to pay a $195,047 civil penalty.” DM