Cryptocurrency Hedge Fund CIO Pleads Guilty in Federal Court, Stealing Investor Money
Posted on 02/05/2021
Stefan He Qin, age 24, is the Founder of the Virgil Sigma Fund LP (“Virgil Sigma”) and the VQR Multistrategy Fund LP (“VQR”), a pair of cryptocurrency hedge funds in New York, New York, with over $100 million in investments. Stefan He Qin was charged with one count of securities fraud and pled guilty in Manhattan federal court. This charge carries a maximum term of 20 years in prison. For years, Stefan He Qin stole investor money from Virgil Sigma and, in December 2020, Stefan He Qin tried to steal investor money from VQR to pay back his investors in Virgil Sigma. Virgil Sigma and VQR, two multimillion-dollar cryptocurrency investment funds, were revealed to be slush funds for Qin to live his extravagant lifestyle.
LINK: https://www.justice.gov/usao-sdny/pr/founder-90-million-cryptocurrency-hedge-fund-charged-securities-fraud-and-pleads-guilty
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According to the Information and statements made in open court:
Background
STEFAN HE QIN is a 24-year-old Australian national. Between 2017 through 2020, QIN owned and controlled two cryptocurrency investment funds, Virgil Sigma and VQR, both of which were located in New York, New York. Since its creation, Virgil Sigma purported to employ a strategy to earn profits from arbitrage opportunities in the cryptocurrency market, specifically, by using a trading algorithm to take advantage of price differences for a number of cryptocurrencies, including Bitcoin and others, in approximately 40 different exchanges around the world, including three exchanges located in the United States. This strategy was touted by QIN to the investing public as “market-neutral,” meaning the fund was not exposed to any risk from the price of cryptocurrency moving up or down and therefore provided a relatively safe and liquid investment. QIN exercised day-to-day control over Virgil Sigma and was responsible for tracking the fund’s balances at different trading exchanges, designing the algorithms to implement arbitrage trading, and preparing monthly investor statements. QIN also regularly participated in calls with Virgil Sigma investors and other forms of public communication where he touted the growth and success of Virgil Sigma. Until recently, Virgil Sigma purported to have over $90 million under management from dozens of investors, including many in the United States. According to its public marketing materials, Virgil Sigma has been profitable in every month from August 2016 to the present, with the sole exception of March 2017.
In or about February 2020, QIN founded VQR. VQR employed a variety of trading strategies and was poised to make or lose money based on the fluctuations in the value of cryptocurrency and was not market neutral. QIN was the sole owner of VQR’s general partner, but was not involved in VQR’s day-to-day operations. Instead, VQR had its own trading staff, including a head trader (the “Head Trader”) and other investment professionals. Until recently, VQR had at least approximately $24 million under management from investors.
Qin’s Scheme to Steal Assets from Virgil Sigma
Since 2017, QIN engaged in a scheme to steal assets from Virgil Sigma and defraud its investors. Rather than investing the fund’s assets in a cryptocurrency arbitrage trading strategy as advertised, QIN embezzled investor capital from Virgil Sigma and used the funds for purposes other than the purported arbitrage trading strategy, including: (a) using a substantial portion of investor capital stolen from Virgil Sigma to pay for personal expenses such as food, services, and rent for a penthouse apartment in New York, New York; (b) using a substantial portion of investor capital from Virgil Sigma to make personal, often illiquid, investments in other entities that had nothing to do with cryptocurrencies (for example, in or about October 2018, QIN invested hundreds of thousands of dollars stolen from Virgil Sigma in a real estate investment); and (c) using a substantial portion of investor capital from Virgil Sigma to invest in crypto-assets that had nothing to do with the fund’s stated arbitrage strategy (or example, in or about 2018, QIN invested funds from Virgil Sigma in certain initial coin offerings, a speculative form of investing in new issues of cryptocurrency). As a result of these and other fraudulent activities, QIN dissipated nearly all of the investor capital in Virgil Sigma.
In the course of stealing assets from Virgil Sigma, QIN regularly lied to the fund’s investors about the value, location, and status of their investment capital. These lies included an array of investor and public communications, including:
(a) QIN prepared and disseminated monthly statements to investors purporting to record the value of their holdings in Virgil Sigma. The amounts recorded in these statements did not accurately reflect the results of cryptocurrency trading. Instead, the amounts were made up by QIN and did not disclose the dissipation of assets by QIN.
(b) QIN also periodically prepared marketing materials for the investing public, including summary reports known as “tear sheets” that fraudulently reported that Virgil Sigma was earning remarkable profits, often with double-digit returns in a single month, month after month. For example, in or about February and in or about April 2017, QIN falsely reported that Virgil Sigma had earned 48.7% and 35.5% returns, respectively.
(c) On an annual basis, QIN prepared spreadsheets that purported to show Virgil Sigma’s balances at the approximately 40 exchanges where Virgil Sigma purportedly traded in order to prepare tax forms for the fund’s investors, also known as schedule K-1s. As QIN well knew, however, these spreadsheets and the resulting schedule K-1s were false and substantially overstated Virgil Sigma’s balances and trading activity on the exchanges.
As a result of QIN’s lies about the activity and success of Virgil Sigma in these and other communications, QIN was able to steadily attract new capital to Virgil Sigma thereby (a) ensuring that he was able to pay off investors’ redemption requests, and (b) projecting to the public the appearance of continued growth. For example, after QIN and the purported success of his fund were profiled in the Wall Street Journal in or about February 2018, Virgil Sigma experienced substantial growth as new investors flocked to the fund.
Qin Attempts to Steal Assets from VQR to Pay Virgil Sigma Investors
In the summer of 2020, QIN was having difficulty meeting redemption requests from investors in Virgil Sigma. In order to access funds to make those redemptions, and in order to conceal his fraudulent activities described above, QIN attempted to steal investor capital from VQR to pay redemptions to Virgil Sigma investors. After a few Virgil Sigma investors requested redemptions that Virgil Sigma could not pay, QIN convinced those investors that rather than redeem the funds outright, the investors would agree to have the funds withdrawn from Virgil Sigma and transferred into an investment in VQR. After months passed and no funds were transferred to VQR, QIN falsely told these investors that he had requested the transfer of funds from Virgil Sigma, but that the transfer was delayed because of an intermediary bank. QIN showed some of these investors wire transfer requests in order to bolster the impression that QIN was in fact trying to transfer the funds from Virgil Sigma to VQR. Virgil Sigma’s bank could not, however, effectuate these wire transfers because QIN had dissipated all of Virgil Sigma’s assets.
In or about December 2020, faced with additional redemption requests that he could not meet, QIN demanded that the Head Trader at VQR wind down all trading positions at VQR and transfer a portion of the funds to QIN so that QIN could use that money to pay off these redemptions to Virgil Sigma investors. QIN issued the demand even though the Head Trader advised QIN that closing out VQR’s then-current trading positions, rather than holding those positions in accordance with VQR’s directional trading strategy, would result in losses to VQR’s investors. In the course of those conversations, QIN threatened that if the Head Trader did not sufficiently expedite that process, QIN, as the sole owner of VQR’s general partner, would need to take over control of all of VQR’s accounts in order to access the funds. At QIN’s direction, the Head Trader accordingly closed out VQR’s positions and turned over access to VQR’s trading accounts to QIN. QIN subsequently attempted to take control of VQR’s assets in order to enable QIN to meet certain Virgil Sigma investor redemption requests.
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