Two men arrested over alleged NFT "Rug Pull" Scam

On March 24, two men, Ethan Nguyen and Andre Llacuna were charged with fraud and money laundering, according to a release by the United states department of justice (DoJ). The duo did a "rug and pull" scheme on an NFT project called "Frosties."

They took away the money people invested in the project and immediately shut it down. They then transferred the funds to other wallets for a run.
The prosecution was able to nail them by following the trails on their email addresses, government IDs, phone numbers, and the Coinbase exchange.


The United States prosecution has charged two men with money laundering and fraud following a Non-fungible token (NFT) "rug pull" scheme. The names of these men are - Ethan Nguyen and Andre Llacuna. These two earned about $1.1 million from selling NFTs based on cartoon characters called "Frosties." Unfortunately, these two shut down the project immediately and made transfers of the funds to several cryptocurrency wallets.

According to the complaint filed against them, the IRS-CI (Internal Revenue Service Criminal Investigation) and the HSI (Homeland Security Investigations) have been investigating the Frosties project since January. This was after receiving the complaint about the scam.


The Frosties Project

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The Frosties Project had about 8,888 NFT collections, which sold out within an hour of the public launch. The NFTs were sold at an Ethereum equivalent of $130.

According to Protocol, the project's creators abandoned it, leaving the buyers to earn only a few dollars from reselling the collection. As a result, enthusiasts in the market gave up hope of getting any reward from the project, including 3D avatars of the Frosties game. However, the alleged culprits have been arrested in Los Angeles, California.


Upon receiving the above message, the community operators of Frosties remained strong-willed on the plan to create a follow-up series called "Embers." Project Embers was planned to launch in March. The plan for Embers was to create a way forward - generating an income of about $50,000 which would be given to charity, and a wallet controlled by the community to hold the funds. Unfortunately, although the Red Cross confirmed that the donation was received, the promise of having a community-controlled wallet looked like a scam.


The investigators on the case matched the data on Nguyen and Llacuna discord accounts, IP addresses, email addresses, and phone numbers with other accounts on the Coinbase exchange. In addition, the accounts on Coinbase were linked to a Citibank card and a government ID.

This evidence paved the way for the law enforcement officers to track them down. The officers also traced the transfers the pair made to launder money. It was on this evidence that they were charged for money laundering.

Rug Pull schemes in the crypto world are very common. However, there are far fewer criminal cases. Until recently, the legal identities of the team behind the big NFT series didn't reveal themselves. A fine example is the Bored Ape Yacht Club series. The founders used pseudonyms, even to date.

However, the Justice Department is very clear on its stand that Frosties is a scam. According to IRS-CI Special Agent-in-charge Thomas Fattorusso, NFTs are financial investments and thus should be treated as any other investment. He says, "You can't solicit funds for a business, abandon that business, and then abscond with the funds you received from investors." Nonetheless, if you're going to do it, don't admit it in Discord.


In Conclusion

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The NFT market boom in the previous year as it has drawn multi-million dollar sales of digital assets such as music, and art collectibles. This could be associated with the unique properties i.e certificates of authenticity that can’t be replicated.

In 2021, crypto worth $44 billion was sent to smart contracts linked to NFTs on the Ethereum blockchain, over $106 million the previous year, according to Chainalysis data.

This report has also drawn the attention of regulators like The U.S. Securities and Exchange Commission (SEC). The agency is inspecting creators of NFTs as well as the cryptocurrency exchanges where they trade to determine if any of the assets are crossing the line with their regulations.

Over the past several months, members of the SEC's enforcement unit have issued subpoenas demanding information about token offerings. This investigation aims to determine whether certain nonfungible tokens, digital assets are being used in the same way as traditional securities.
Under the Howey test framework, a 1946 U.S. Supreme Court decision,an asset generally falls under the agency’s remit when it involves investors kicking in money to fund a company with the intention of profiting from the efforts of the organization’s leadership. -bloomberg

Hence most NFTs falls under the jurisdiction of the SEC, said SEC’s most crypto-friendly commissioner, Hester Peirce. AlthoughMany NFT and crypto enthusiast may criticize the involvement of the SEC, but their regulation in vital in curbing illegal actions such as rug pull schemes. According to coindesk, the case of Ethan Nguyen and Andre Llacuna, is an early example of U.S. law enforcement prosecuting an alleged NFT "rug pull."



Author: Gate.io Observer: M. Olatunji
* This article represents only the views of the observers and does not constitute any investment suggestions.
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