Many Forex scams hit a broad range of investors, but sometimes a scam targets a marginalized community. This was the case with CryptoFX, a crypto and foreign exchange scam that cost over 40,000 investors over $300 million collectively. Many of those investors were part of the Latino community.
Background
CryptoFX was founded in 2020, and operated from May of that year through October 2022. It has been known by a number of other names, including:
- CryptoFX Academy
- CryptoFX Learning Academy
- CFX Lifestyle Academy
- CFX Academy
- CFX
The firm recruited investors via meetings in person and word-of-mouth referrals. The scam piggybacked off of a combination of both cryptocurrency and Forex trading hypes that thrived during the COVID-19 pandemic.
How the CryptoFX scam worked
Mauricio Chavez and Giorgio Benvenuto were the main principals in the CryptoFX case, but the SEC charged 17 individuals in total, who resided in Texas, Louisiana, California, Florida, and Illinois.
Gurbir S. Grewal, Director of the SEC's Division of Enforcement, said:
We allege that CryptoFX was a $300 million Ponzi scheme that targeted Latino investors with promises of financial freedom and life-altering wealth from 'risk free' and 'guaranteed' crypto and foreign exchange investments. In the end, the only thing that CryptoFX guaranteed was a trail of thousands upon thousands of victims stretching across ten states and two foreign countries. A scheme of that size requires lots of participants, and as today's action demonstrates, we will pursue charges against not just the principal architects of these massive schemes, but all those who further their fraud by unlawfully soliciting victims.
When a particular community is targeted for a scam like this, that is known as an "affinity scam." The reason affinity scams are effective is because they hijack and exploit the existing trust within specific groups.
The CryptoFX affinity scam was structured as a Ponzi scheme. Here is how the Ponzi scheme worked.
- The scammers told the investors that they could bring them returns ranging from 15% to 100%.
- The investors transferred funds to the scammers.
- The firm paid "returns" to some of the investors from the pool of money they had collected from the investors.
The scammers paid themselves commissions and bonuses out of the same pool of funds, and used the money to finance personal purchases.
According to an SEC press release:
Chavez used more than 90% of investor funds to pay fake returns to investors, support his lifestyle, and purchase and develop real estate that he and Benvenuto controlled. For his part, Benvenuto allegedly solicited a large investor into the scheme and diverted investor funds to himself and a company that he and Chavez owned, CBT Group, LLC. In total, the SEC alleges that Chavez and Benvenuto made approximately $2.7 million in Ponzi payments while diverting almost $8 million for their own use, including nearly $1.5 million that Chavez spent on cars, credit card payments, jewelry, adult entertainment, and a house in his wife's name.
This is a very typical Ponzi scheme. It's not a sustainable structure over the long run, as one will eventually run out of funds to keep paying the investors. But in the short term, it's a quick and effective way to swindle customers for millions of dollars.
There was also a multi-level marketing (MLM) component to the CryptoFX scam, which the company referred to as its "referral program." Investors who successfully recruited others into the scam would earn a referral bonus.
This, together with the scammers themselves being Latino, is one of the reasons why the Latino community ended up getting targeted through this scam. Investors would reach out to their friends and family, many of whom were also Latino.
To make matters worse, the Latino community is underprivileged to begin with. Latino men and women alike earn significantly less than white workers in the US, and many face long-term financial struggles.
So, this is a group that was easy to exploit through both trust and desperation. Members of the community found it easy to believe family and friends who recommended they join CryptoFX. Many probably were experiencing financial hardship and desperate for a way to bring in more money. CryptoFX presented itself as the solution. But all it did was drain over 40,000 people of their money.
How the CryptoFX scammers were caught
Over time, investors started to realize they were being scammed, and started filing reports with government agencies such as the US Securities and Exchange Commission (SEC) and the Department of Financial Protection & Innovation (DFPI) in California. There were dozens of complaints filed. These complaints led to an investigation, followed by charges.
In September 2022, a court ordered CryptoFX to cease its activities. The emergency action the SEC took that month also charged the two main principals, Mauricio Chavez and Giorgio Benvenuto. The defendants' assets were frozen.
Even after that, defendants Gabriel and Dulce Ochoa kept soliciting investments. Ochoa also tried to compel two investors to withdraw their complaints by stating that if they rescinded the complaints, the company would be able to recover their lost funds. Meanwhile, defendant Maria Saravia apparently lied outright to investors, claiming the lawsuit by the SEC was fake.
DFPI issued a desist-and-refrain order against CryptoFX and two promoters, ordering it to stop soliciting investments in California on January 26, 2023.
The SEC charged 17 individuals in the CryptoFX case on March 14, 2024. Below is a breakdown.
The SEC filed a complaint against the following individuals for violating the securities-registration, antifraud, and broker-registration provisions of federal securities laws:
- Gabriel Ochoa
- Dulce Ochoa
- Maria Saravia
- Gloria Castaneda
- Ismael Zarco Sanchez
- Roberto Zavala
Additionally, the complaint charges the following individuals with violating the provisions for broker-registration and securities-registration:
- Gabriel Arguelles
- Hector Aquino
- Orlin Wilifredo Turcios Castro
- Carmen De La Cruz
- Elizabeth Escoto
- Reyna Guiffaro
- Marco Antonio Lemus
- Juan Puac
- Luis Serrano
- Julio Taffinder
- Claudia Velazquez
Gabriel Ochoa was also charged with violating the provisions for whistleblower protection.
Some of the scammers were more cooperative. Luis Serrano and Julio Taffinder, for example, agreed to pay more than $68,000 combined, while neither denying nor admitting to what the SEC alleged in its complaint. The amount listed includes civil penalties, disgorgement, and interest.
Judge Andrew S. Hanen appointed John Lewis, Jr. as Receiver on September 29, 2022. The homepage for the official Receiver website still states:
Our investigation is in the early stages, and we ask for patience as the Receiver and his team complete their initial assessment and secure the receivership assets.
The FAQ says:
At this time, it is unknown how much each investor will be able to be paid back.
A news page on the site has a collection of articles about the scam, but no updates on the Receiver's work.
Lessons we can learn from the CryptoFX case
Beware of unrealistic promises
CryptoFX allegedly "promised" it could deliver returns between 15% and 100% to investors.
No one can truthfully promise investors returns, because past performance does not guarantee future results. Yet scammers frequently claim there is no way for you to lose. If you run into that kind of language, it's a sign to run in the opposite direction.
One interesting thing about CryptoFX's claim is that they provided a wide range for the return estimates. Starting at 15% might have disarmed suspicion compared to a claim like "80% to 100%." So, watch out for tricks like that which can make offers sound more believable.
Your community can be compromised
We all like to think we can rely on our family, friends, neighbors, congregation members, and so forth, to steer us right. These people usually mean us well, but that doesn't mean every recommendation from a community member is smart or safe.
Be mindful, especially if a bunch of people in your community suddenly start claiming they've found the solution to everyone's financial woes. Use common sense, and try not to get swept up in emotion. If the key to riches was so simple that your neighbor, best friend, pastor, and cousin all are suddenly on their way to easy money, then you would expect everyone everywhere to be doing the same thing.
MLMs spread through networks of trust. You can trust your community without trusting every recommendation. The best way to protect yourself and your community is to stay wary for the possibility that they have been compromised by a scam.
If you do suspect this is happening, take some time to research what your community has gotten involved with. If you spot the telltale signs of a possible scam, report it to the authorities, and warn your friends and family. You might want to inform your local credit union or bank as well.
Desperation makes falling for a scam more likely
Many people express confusion when an intelligent person falls for a scam. But most victims of con artists are not lacking in intellectual capacity. What makes them vulnerable is typically something else. In the case of the Latino community, there were two chief factors:
- Structural inequality resulting in widespread financial struggles
- The emotional pain and desperation that comes from prolonged financial difficulties
When you are constantly living with the fear of not being able to afford your rent, medical treatments, or other basic needs, it can be exhausting. You naturally become extra alert for any solutions that might present themselves, because that is what survival demands of you.
So, when a scammer suggests you send them your money to trade cryptocurrency and foreign exchange markets, you've been primed to see it as an opportunity, rather than as a red flag. Be aware of this bias in your nervous system. If an offer comes along that seems uncommonly good, you don't have to dismiss it out of hand. But you should question it.
Scammers may have a false aura of legitimacy
CryptoFX worked hard to cultivate an aura of legitimacy. Networking through the Latino community was one way they did that. Another was allegedly offering educational classes in crypto and foreign exchange trading.
Educational resources theoretically empower people who make use of them. So, they encourage trust, because you think, "this company is giving me tools to succeed on my own. They're not making me dependent on them." But educational resources can still be part of a manipulative framework if they lower your guard.
Stop and think before investing your money
The best thing you can do to start protecting yourself from scams is to make it a habit to slow down before you invest your money.
No matter how exciting an opportunity appears, you should pause before you jump on it. Even when there are not a lot of warning signs, there are usually some. In the case of CryptoFX, you'd have noticed:
- Unreasonable promises of returns
- An overabundance of unrealistic excitement in your community
For you to be able to spot such signs, you may need to wait for your emotions to calm down a bit. You can also create a checklist of common Forex scam red flags to look for. This can help you catch things even if your emotions are still clouding your thinking.
One more thing you can do to protect yourself is to verify all the companies and individuals involved before you invest with any firm. In the US, you can look up entitles in the NFA BASIC system for Forex, or run an Investor.gov search for the stock market. Do not just take a company or individual's word for it when they say they are regulated. Check it for yourself directly with the regulators.
