Former Cred Executives Indicted on Wire Fraud, Other Charges

Three
former
executives
with
bankrupt
crypto
lender
Cred
were
indicted
Thursday
on
charges
of
conspiracy
to
commit
wire
fraud,
wire
fraud
and
engaging
in
financial
transactions
for
illicit
purposes.

Daniel
Schatt,
a
Cred
co-founder
and
former
CEO,
Joseph
Podulka,
former
CFO,
and
James
Alexander,
the
former
chief
capital
officer,
were
indicted
by
the
U.S.
Attorney’s
Office
in
the
Northern
District
of
California.
Schatt
and
Podulka
were
arrested
and
made
their
initial
appearances
in
a
San
Francisco
court
earlier
in
the
day,
according
to
a
press
release
published
Friday.

Cred
filed
for
bankruptcy
in
November
2020,
estimating
its
liabilities
to
be
between
$100
million
and
$500
million
at
the
time,
but
saying
it
had
less
than
$100
million
in
estimated
assets.
At
the
time,
the
company
blamed
its
failure
on
“irregularities”
in
how
“specific
corporate
funds”
were
handled.
A
reorganization
plan
was
later
approved
by
a
federal
judge,
according
to
court
records.

Cred
was
among
the
first
of
a
slate
of
high-profile
crypto
lender
bankruptcies
–
preceding
2022’s
Celsius
and
Voyager
bankruptcies
by
around
two
years.

Similar
to
these
other
failed
companies,
Cred
offered
a
lending
program,
“CredEarn,”
that
accepted
deposits
from
investors
and
offered
market-leading
interest
rates
before
it
filed
for
bankruptcy
without
enough
money
to
pay
back
creditors.
Depositors
had
entrusted
more
than
$100
million
worth
of
crypto
with
Cred
by
the
time
it
collapsed.

“[T]he
defendants
lured
customers
to
make
investments
by
promising
to
return
a
significant
yield
on
cryptocurrency
investments—the
defendants
did
not
disclose,
however,
that
virtually
all
the
assets
to
pay
the
yield
were
generated
by
a
single
company
whose
business
was
to
make
unsecured
micro-loans
to
Chinese
gamers,”
the
U.S.
Department
of
Justice
said
in
a

press
release.

“Contrary
to
the
defendants’
assurances,
Cred
engaged
in
lending
that
was
neither
collateralized
nor
guaranteed.
Moreover,
Cred’s
hedging
strategy
did
not
protect
the
company’s
investments
against
volatility,”
the
statement
read.

“The
Cred
Liquidation
Trust
and
its
professionals
have
been
working
tirelessly
to
pursue
recoveries
for
creditors.
We
spent
a
lot
of
time
and
effort
cooperating
with
law
enforcement.
We
are
thankful
for
the
hard
work
and
diligence
by
the
DOJ
and
FBI,
which
resulted
in
indictments
of
the
key
executives
responsible
for
the
first
major
crypto
bankruptcy
case
in
the
United
States,”
said
attorneys
Darren
Azman
and
Joseph
Evans
with
McDermott
Will
&
Emery
LLP,
who
are
the
lead
counsel
for
the
Cred
Inc.
Liquidation
Trust.

In
its
2020
bankruptcy
filing,
Cred
put
most
of
the
blame
for
its
collapse
on
the
failure
of
an
outside
investment
manager,
Quantcoin,
with
whom
Cred
entrusted
800

BTC
–
worth
around
$10
million
at
the
time.
Later
on,
the
Cred
Liquidation
Trust
alleged
in
a
lawsuit
that
most
of
the
lost
customer
funds
had,
in
fact,
been
quietly
loaned
out
to
the
Chinese
micro-lender
MoKredit,
which
ultimately
failed
to
repay
its
debts.

MoKredit
made
most
of
its
money
from
unsecured
loans
to
Chinese
gamers,
and
its
relationship
with
Cred
–
along
with
the
fact
that
the
two
companies
shared
a
co-founder
–
was
not
properly
disclosed
to
Cred
creditors,
according
to
Friday’s
indictment.

The
Cred
Liquidation
Trust
has

separately
alleged
that
Cred
funneled
users
into
CredEarn
through
the
retail-oriented
crypto
exchange
Uphold,
which
at
one
point
counted
Cred
Founder
Dan
Schatt
as
a
board
member.
‘”Uphold
drove
thousands
of
retail
customers
to
lend
cryptocurrency
to
the
CredEarn
program
by
falsely
marketing
it
as
‘safe,’
‘secured,’
‘insured,’
and
‘fully
hedged,'”
the
suit
read.

According
to
the
suit,
which
was
dismissed
earlier
this
year,
CredEarn
was
initially
supposed
to
be
called
“UpholdEarn”
but
was
renamed
to
avoid
regulatory
risk.

“Uphold
knew
that
Cred
was
implementing
a
highly
risky
hedging
strategy,
and
that
there
was
regulatory
risk
associated
with
cryptocurrency
yield
earning
programs,”
read
the
suit.
“Rather
than
take
on
all
of
these
risks,
Uphold
and
Schatt
decided
to
shift
the
risks
away
from
Uphold
by
running
[‘Earn’]
through
Cred.”

Uphold
denied
the
claims
in
the
lawsuit
and
said
Schatt
was
removed
from
its
board
involuntarily.
Although
the
lawsuit
from
Cred’s
Liquidation
Trust
was
dismissed
(that
dismissal
was
upheld
on
appeal),
an
additional
class
action
suit
from
Cred’s
creditors
against
Uphold
is
still
pending.

Read
more:



Bad
Loans,
Bad
Bets,
Bad
Blood:
How
Crypto
Lender
Cred
Really
Went
Bankrupt