May 5, 2024 - SAN FRANCISCO – Last week, a federal grand jury charged Daniel Schatt, Joseph Podulka, and James Alexander with wire fraud conspiracy and related crimes in connection with their respective roles in an alleged scheme to defraud customers and investors in Cred, LLC (Cred) allegedly causing losses of customer cryptocurrency assets with a market value that may have exceeded $780 million. Cred, a San Francisco-based financial services firm that specialized in making investments in cryptocurrencies, filed for Chapter 11 bankruptcy on November 7, 2020. The charges against the defendants are set out in two separate indictments handed down by the grand jury earlier this week.

“The Northern District of California is home to many of the nation’s most innovative businesses,” said U.S. Attorney Ismail Ramsey. “Maintaining a market for continued prosperity requires rooting out those who use fraud as a substitute for success. This prosecution demonstrates our determination to keep our markets free of fraudsters and safe for investors.”

“The allegations against the defendants associated with Cred, LLC highlight a predatory, deceptive scheme defrauding potential victims of hundreds of millions of dollars of cryptocurrency at market value,” said IRS Criminal Investigation Acting Special Agent in Charge Mark Mosley. “The indictments levied demonstrate the investigative capabilities of IRS Criminal Investigation and our commitment to pursuing justice against financial criminals.”

The announcement was made by United States Attorney Ismail Ramsey, Federal Bureau of Investigation Special Agent in Charge Robert K. Tripp, and IRS Criminal Investigation Acting Special Agent in Charge Michael Mosley of the Oakland Field Office.

The first indictment (Schatt Indictment) charges Schatt, 53, of San Mateo, and Podulka, 51, of Palo Alto, with conspiracy, thirteen counts of wire fraud and money laundering. The second indictment (Alexander Indictment) recites many of the same allegations and charges Alexander, 54, of Sherman Oaks, with conspiracy, four counts of wire fraud and money laundering.

According to the indictments, Schatt was Cred’s co-owner and Chief Executive Officer, Podulka was Cred’s Chief Financial Officer, and Alexander was Cred’s Chief Capitol Officer. Cred was founded in 2018 by Schatt and another individual and provided financial services to holders of cryptocurrency and other assets. By late 2018, Cred’s business included two principal businesses: (1) offering loans in U.S. dollars to customers using customers’ cryptocurrency as collateral and (2) accepting deposits of cryptocurrency in exchange for a promise for a yield (interest payments) for that cryptocurrency.

The indictments allege that no later than March of 2020, the defendants began making false and fraudulent statements to customers and investors about Cred’s lending and investing practices. For example, the defendants represented to Cred’s customers and investors that Cred engaged only in “collateralized or guaranteed lending,” that Cred’s cryptocurrency investments were “hedged,” and that Cred maintained an “all weather approach” to investment to protect against volatility. Cred’s marketing materials asserted that the company was a “licensed lender with comprehensive insurance.” Further, after the “flash crash” in March of 2020, during which many cryptocurrencies were significantly devalued, defendants allegedly continued to represent to Cred’s customers and investors that Cred remained solvent and that the company maintained comprehensive insurance that assured Cred’s customers would be made whole. The indictments allege all these assurances and statements were false.

The indictments describe how the 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. 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. Indeed, shortly after the flash crash in March of 2020, Cred had lost its hedging partner, had learned that a significant creditor to whom Cred had loaned $40 million would be unable fulfill its promise to repay the loan, was being threatened with a lawsuit, and was effectively insolvent. The indictments describe the striking contrast between the reality of Cred’s financial situation by the end of March 2020 and the statements the defendants made to customers and investors at that time. On the one hand, on March 16, 2020, Cred’s General Counsel informed the defendants that “Cred may not be financially solvent and that defendants “must be careful at all times to be accurate in its statements to its creditors and to all stakeholders.” Nevertheless, rather than disclose to Cred’s customers and investors the reality of Cred’s finances, defendants allegedly attempted to keep the business afloat by bringing in new customer funds and by discouraging existing customers from seeking and obtaining redemptions from their investments. According to the indictment, at the time Cred collapsed and filed for bankruptcy, its customers suffered losses of cryptocurrency assets with a market value of $150 million at the time of the bankruptcy, and a “maximum market value of over $783 million since the date of the bankruptcy.”

The indictments describe how the defendants assured numerous victims to make or renew financial commitments to Cred even after the company’s effective insolvency.

With respect to Schatt and Podulka, the Schatt Indictment lists 13 transactions that occurred between April 14, 2020, and October 15, 2020, as the defendants continued to make repeated false and fraudulent assurances that Cred’s financial situation was sound. The indictment further describes how Schatt and Podulka failed to inform customers about significant losses sustained by the company until October of 2020, when a cryptocurrency exchange, then a customer of Cred, contacted Cred to inquire about its finances. During the two-hour call, the cryptocurrency exchange learned for the first time that Cred had no hedges, that its asset to liabilities ratio was off by tens of millions of dollars, and that Cred discovered it had lost over $8 million in February 2020 after Alexander was scammed by a fake customer earlier that year. According to the Schatt Indictment, Cred filed bankruptcy on November 7, 2020, and in a bankruptcy-related filing, Schatt misleadingly claimed that Cred’s financial difficulties were “primarily due to James Alexander’s “malfeasance,” including his appropriation of approximately 255 bitcoin on June 24, 2020,” and his alleged failure to do proper due diligence with respect to the February 2020 scam.

With respect to Alexander, the Alexander Indictment alleges that between May 15, 2020, and June 24, 2020, Alexander reassured a victim that the flash crash was “a good thing” for Cred and failed to disclose to another customer that Cred was having a solvency crisis. In addition, the Alexander Indictment lists two transactions in which victims transferred funds to Cred after receiving reassurances from Alexander that Cred’s financial situation was sound. The Alexander Indictment further describes how on or about June 24, 2020, the day Schatt fired him from his position in Cred, Alexander instructed a Cred employee to transfer approximately 225 bitcoin from a Cred account to one controlled by Alexander. The indictment alleges that in the months following his ouster, Alexander appropriated the bitcoin to his own use, including converting some of it to U.S. dollars, depositing the assets in his private bank account, and making personal expenditures.

In sum, the defendants are charged with the following crimes:

An indictment merely alleges that crimes have been committed, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt. In addition, any sentence following conviction would be imposed by the court only after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. § 3553.

Schatt and Podulka made their initial federal court appearance on May 2, 2024. They have been ordered to return to court on May 8, 2024, for further proceedings including the entry of a plea. Alexander’s initial federal court appearance has not yet been scheduled.

Assistant United States Attorneys Barbara J. Valliere and Adam A. Reeves are prosecuting these cases with the assistance of Beth Margen and Kathy Tat. These prosecutions are the result of an investigation by the FBI and the IRS Criminal Investigation.
Source: DOJ Release