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SafeMoon Execs Arrested for Fraud and Simultaneously Charged by SEC

The DOJ has arrested SafeMoon's CEO and CTO over an alleged $200 million investor fraud, with a third co-founder is still at large. The SEC has also filed civil charges for unregistered token sales, resulting in SafeMoon's market value crashing from $8 billion to $50 million.


The U.S. Department of Justice (DOJ) has apprehended two top executives of the once high-flying crypto firm SafeMoon. The DOJ has arrested CEO Braden John Karony and CTO Thomas Smith, while SafeMoon's creator Kyle Nagy is still currently at large. All three are accused of orchestrating a scheme that siphoned over $200 million from investor funds under the guise of 'locked' liquidity.

According to the DOJ, these funds were used by the executives to purchase luxury items, including a custom Porsche sports car and lavish real estate. U.S. Attorney Breon Peace, representing the Eastern District of New York, condemned the actions, stating, "As alleged, the defendants deliberately misled investors and diverted millions of dollars to fuel their greedy scheme and enrich themselves." The indictment quotes Smith in a conversation about luxury vehicle purchases with his tokens, as saying "BRO WE DID IT."

Kyle Nagy, also known as 'Safemoon Dev', Braden John Karony, also known as 'CPT_HODL_T_MUN', and Thomas Smith, also known as 'papa', face charges for securities fraud, wire fraud conspiracy, and money laundering. Smith notably used the diverted tokens to purchase a Porsche 911. The arrest of Karony occurred in Provo, Utah, while Smith was taken into custody in Bethlehem, New Hampshire. Authorities are still searching for Nagy.

SEC crackdown

In parallel, the Securities and Exchange Commission (SEC) has also charged the SafeMoon execs in a civil case, highlighting an alleged unregistered sale of SFM tokens as a core issue. The SEC has labeled the token a 'crypto asset security', with its creators failing to fulfil profitability promises made to investors. The SEC's scrutiny extended to the broader operations of SafeMoon, which was launched in March 2021 during a crypto market bull run. Despite promises of a locked liquidity pool and potential high returns, the SEC claims that "large portions of the liquidity pool were never locked," resulting in significant investor losses.

According to David Hirsch of the SEC's Crypto Assets and Cyber Unit, unregistered offerings often lack necessary legal disclosures and are prone to exploitation by scammers.

SafeMoon, which debuted in 2021, had vowed to lock users' staked funds in a liquidity pool, but the SEC contends that many of these funds were not secured as promised. In 2021, Smith told investors he held no SFM to avoid a conflict of interest with his role as a software engineer and CTO, a claim now under scrutiny due to the recent charges. The SEC alleges that the SafeMoon executives also engaged in market manipulation by using funds that were earmarked as 'locked' to purchase significant quantities of their own token, with the intent to drive up its market price artificially.

The SEC charges follow an $8.9 million exploit in March involving the cryptocurrency BNB. Blockchain analysis by Match Systems revealed that the stolen funds were being laundered through centralized exchanges (CEXs), which can make them harder to trace without law enforcement intervention compared to decentralized exchanges (DEXs).

Match Systems' investigation pointed to a vulnerability in SafeMoon's "Bridge Burn" function, which was exploited to siphon off 32 billion SFM tokens from its liquidity pool to a developer address, artificially inflating the token's value. The exploiter converted some SFM tokens into BNB at the elevated price, netting 27,380 BNB.

The vulnerability, absent in previous versions of the contract, was only introduced in an update on the day of the exploit, raising suspicions of insider involvement. The SEC's charges against SafeMoon and the three executives further suggest potential misconduct by SafeMoon's management around the hack, an issue that is now under legal scrutiny to determine the extent of intent or negligence.

As the news of the charges broke, SafeMoon's valuation plummeted to roughly $50 million, a stark decline from its previous market cap of over $8 billion. SafeMoon's token SFM plummeted by over 30% on November 1st and has been steadily declining since.

The SafeMoon case is a good demonstration of why regulators like the SEC are a welcome and necessary force to protect the general public from bad actors in the sector. However, it does not excuse the repeated "arbitrary and capricious" targeting of the crypto industry that has increased under the tenure of current chair, Gary Gensler.