Two Orange County men were charged Friday with conning thousands of investors into purchasing a cryptocurrency that purportedly provided exclusive access to a trading program that they falsely claimed was profitable, and then using most of the $1.8 million raised to enrich themselves.
Jeremy David McAlpine, 25, of Fountain Valley, and Zachary Michael Matar, 28, of Huntington Beach, are charged in a one-count information with securities fraud, according to the U.S. Attorney’s Office.
McAlpine and Matar have agreed to plead guilty to the charge, according to plea agreements that also were filed Friday. The defendants are expected to plead guilty in Los Angeles federal court in the coming weeks.
According to court documents, McAlpine and Matar founded Dropil Inc., a Belize-based company operating out of Fountain Valley, in 2017. Dropil provided and managed investments in digital assets such as cryptocurrency. The defendants primarily were responsible for the development of Dropil’s digital asset, called DROP tokens, as well as its digital asset trading program, an automated trading bot called “Dex.”
Purchasers of DROPs had access to Dex, which could only be used with DROP tokens. Neither McAlpine, Matar nor Dropil was registered with the U.S. Securities and Exchange Commission as a broker or dealer, federal prosecutors said.
Beginning in late 2017, McAlpine and Matar began an unregistered offer and sale of DROPS on Dropil’s website. In January 2018, the defendants launched an initial coin offering for the sale of DROPs, again through Dropil’s website, which continued through March 2017. To induce investors to purchase DROPs, McAlpine and Matar allegedly made a series of false statements, promoting the cryptocurrency’s supposed success.
Prosecutors allege the defendants also manufactured fake Dex profitability reports and made payments in the form of DROPs to Dex users, giving the false appearance that Dex was operational and profitable.
McAlpine and Matar also allegedly made false statements about the volume and dollar amount of DROPs sold both during and after the ICO, stating Dropil had successfully raised $54 million from 34,000 investors both foreign and domestic. In fact, the ICO raised less than $1.9 million from fewer than 2,500 investors, prosecutors said.
In total, the defendants obtained about $1,896,657 from 2,472 investors through the sale of about 629 million DROPs. But McAlpine and Matar did not use at least $1.6 million of the invested money as promised, using it instead to fund disbursements to themselves and their associates, federal prosecutors allege.
In conjunction with the announcement of the defendants’ agreement to plead guilty to securities fraud charges, the Securities and Exchange Commission announced that Dropil, McAlpine and Matar have agreed to permanent injunctions barring further alleged fraudulent conduct and prohibiting them from directly or indirectly participating in the offer, purchase or sale of digital securities.
The SEC, which filed the complaint in April 2020, said the duo and Dropil are also facing civil penalties to be determined by the court.