Documents Reveal Fraud Case Against Arcadia-Based Gemcoin

Last Monday afternoon, Sept. 28, 2015, the SEC raided Gemcoin’s Arcadia office. – Photo by Terry Miller

Government Securities Regulators Detail Case Against Gemcoin

By Joe Taglieri

Federal and state documents released last week detail the evolving fraud case against the purveyors of Gemcoin, an Arcadia-based cryptocurrency investment scheme endorsed by Council Member John Wuo that is said to have swindled a gamut U.S. and international investors.

Prior to its Sept. 29 raid on the offices of USFIA Inc., which marketed Gemcoin worldwide, the U.S. Securities and Exchange Commission filed a complaint Sept. 22 with the United States District Court’s Central District of California located in downtown Los Angeles.

Six days later judge Gary Klausner ordered an asset freeze of Chen’s 48 bank accounts and appointed the Thomas Seaman Co. as temporary receiver overseeing USFIA and a number of affiliated corporate entities.

The SEC’s ultimate goal is to make Gemcoin chief Steve Chen return alleged fraudulently acquired millions with interest, pay hefty fines, and ban him from the securities business.

“Our complaint sets out the remedies we are seeking: a permanent injunction against future violations of the securities laws, disgorgement of all ill-gotten gains, and civil penalties,” SEC attorney Donald Seales said via email.

“We allege that the defendants’ false claims of riches that investors would realize from USFIA’s amber mining activity never materialized,” Michele Wein Layne, director of the SEC’s Los Angeles branch, said in a statement. “In reality, as alleged in the complaint, the defendants were operating a fraudulent pyramid scheme that left many investors with nothing.”

On Oct. 1 the California Department of Business Oversight, which regulates the securities industry, followed the feds’ lead and issued a “desist and refrain order” to USFIA, Chen and USFIA executives Leonard Johnson and Weiwen “Wayne” Zhao.

Wuo was not named in the state order or federal court complaint. Since Arcadia Weekly’s late-June interview with the longstanding councilman, Wuo has stated publicly several times that his image in numerous Gemcoin marketing materials was used without his permission and claimed he “[doesn’t] know anything about Gemcoin.”

Wuo has also explained his presence at Gemcoin marketing events throughout the past year as “ceremonial” – that he was acting as a local official encouraging a local business’ success.

“All investment fraud is intolerable, but this Gemcoin scheme ranks high on the egregious scale,” DBO Commissioner Jan Lynn Owen said in a statement. “The perpetrators’ claims are outlandish and disturbing, and their unlawful conduct required quick action to help prevent further victimization.”

The state order effectively shuts down the Gemcoin operation and succinctly sums up the USFIA team’s allegedly fraudulent assertions:

–“Misrepresenting the endorsement, approval or registration of Gemcoin and USFIA’s Gemcoin auction house and exchange by local, state or national governments;

–“Misrepresenting that USFIA investors would be able to cash out or sell their investments within 60 days of purchasing their investment contracts;

–“Misrepresenting that the value of Gemcoin was ‘guaranteed,’ ‘secured’ and less subject to risk than other virtual currencies; and

–“Failing to disclose the risk … and the expense of obtaining regulatory approvals necessary to operate UFIA’s Gemcoin auction house and exchange.”

The federal court document contains numerous charges against Chen and 13 corporations affiliated with him including Alliance Financial Group and the US China Consultation Association, all of which are headquartered at 135 E. Live Oak Ave.

“Chen, through his various business entities, is operating nothing more than a pyramid scheme, where investors are encouraged to build out a network of downstream investors and are compensated on their ability to do so,” the complaint states. “The USFIA amber-mining investments that Chen and his related business entities sold to investors, with the prospect of receiving pre-IPO shares, as well the Gemcoin offering constitute securities under the federal securities laws.

“In offering and selling these securities to U.S. investors, Defendants, acting [knowingly], made material misrepresentations and omissions as to the value of those securities and uses of investors’ monies,” the document contends.

It further states that “in the face of growing investor unrest, and negative publicity in the press, Chen was interviewed by the Arcadia Police Department on September 15, 2015, regarding his operation of USFIA. Immediately after that interview, Chen attempted to wire $7.5 million out of USFIA’s bank account at Bank of America to a bank in … China. The wire was broken down into two parts, and $3.5 million was sent abroad, while the remainder is still held by the bank.”

The SEC can account for $32 million in USFIA cash assets – “$19 million came in the form of wires, made by individuals, primarily located in Asia, from foreign banks located in Asia,” according to the court filing. “Approximately $5.7 million came in the form of checks, the majority of which were drawn on U.S. banks.”

The document further notes, “It does not appear from USFIA’s bank records that it had any apparent revenues during the period in issue. Other amounts, both credited to and debited from USFIA’s primary account at the Bank of America, consisted of transactions with corporate entities controlled by Chen.”

USFIA’s main bank account funded the purchase of luxury items including cars and designer handbags, entertainment and travel expenses as well as cash withdrawals, documents show.

Chen and his agents also did not register any USFIA securities transactions with the SEC or CalDOB.

The federal court filing provides a long list of alleged falsehoods Chen and his agents told investors through USFIA-controlled websites and at marketing events:

–“Gemcoin is growing exponentially and there are millions of Gemcoin users around the world today;

–“Gemcoin’s value is backed by Alliance Financial Group’s mines around the world;

–“Gemcoin is issued by USFIA Currency Fund, ‘a multinational corporation’ in California that is owned, supported and backed by AFG;

–“AFG is involved in the processing of world class jewelry, [real estate investment trusts], biotech, information technology, and the aerospace industry;

–“AFG has more than $50 billion in assets worldwide and more than 2,000 business associates;

–“AFG owns the unique Copper Pectolite mines and Rhodochrosite mines in Argentina and El Valle mines in the Dominican Republic, where its 30,000 square foot mine produces [two-thirds] of the world’s high-quality amber;

–“The use of Gemcoin as a virtual currency has been legalized by the State of California;

–“Gemcoin is backed by $15 billion in assets and that there is ‘zero’ chance of devaluation because Gemcoins are backed by their equivalent in precious stones;

–“2,000 ATM platforms exist for converting Gemcoins into paper money; …

–“USFIA would open 3,000 coffee shops in the next three years;

–“USFIA owned 70% of the amber mines in the Dominican Republic;

–“Investors would receive amber equal in value to 30% of their investment principal, in addition to units in USFIA, in exchange for their investments;

–“Steve Chen founded China Unicom,” he was an undersecretary to China’s foreign minister, and Chen’s US China Consultation Association reported to the presidents of China and the United States;

–“Units in USFIA would increase exponentially every two months, such that 10,000 units would become 100,000 units in two months, and would double every two months after that.”

SEC attorneys Searles and Peter Del Greco laid out the anatomy of the alleged “fraudulent scheme.”

USFIA stakeholders received ownership “units” in the company, which investigators found cataloged as “points” on USFIA’s computer system.

“Chen represented that these units would be convertible to … common stock, on a 1:1 basis, when USFIA went public,” the court document states. “Chen also told investors that when USFIA went public, its common stock would not be worth less than $20 per share. …

“Investors also typically received an amount of amber, purportedly equal to 30% of their investment. USFIA did [send] the amber to investors, but upon obtaining appraisals … investors learned that the amber was practically worthless.”

The court document went on to detail USFIA’s “extensive bonus and award system” and investment options.

The company offered “‘packages’ ranging in amounts of $1,000, $2,000, $5,000, $10,000 and $30,000,” the attorneys explained. “Depending on the type of package purchased by a downstream investor, the recommending investor would receive a 10% ‘Recommendation Award,’ and an additional ‘binary’ reward based on sales … [by downstream] investors.”

Other incentives included “a ‘Recurring Bonus’ generated by different ‘generations’ of downstream investors, ranging from 5% to 20%,” the court document states. “USFIA’s materials also represented that investors would receive minimum monthly income” based on the number of teams of downstream investors a Gemcoin stakeholder managed.

USFIA marketing material also tempted investors with “a travel reward, a car reward (a BMW or Mercedes Benz), and a house reward (for a house at the Quail Ranch Golf Course),” according to the court filing.

The document additionally explains the September 2014 origin of Gemcoin and the digital currency’s role in the alleged pyramid ploy:

“Chen’s and USFIA’s investors were told that instead of receiving IPO shares in exchange for their units in USFIA, they would be required to convert their … points into ‘Gemcoins,’ some type of virtual currency which was to be issued by USFIA, and allegedly secured by USFIA’s amber mines. …

“Chen told investors that the conversion from USFIA units to Gemcoins was necessitated by change in U.S. government policy. According to Chen, this change also caused a delay in the promised USFIA IPO by about two years, but when USFIA finally went public investors would be able to use their Gemcoins to purchase USFIA stock.”

Judge Klausner is scheduled to rule by Oct. 13 on extending the injunction against Chen’s business as the case heads into the pretrial phase, Searles said.

Chen’s attorney Andy Beal did not respond to requests for comment.

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