The owners of a cryptocurrency company have been sentenced to a combined 8 years in federal prison for tax evasion, U.S. Attorney for the Northern District of Texas, Chad E. Meacham, announced.
Bitqyck founders Bruce Bise, 61, and Samuel Mendez, 65, were charged with tax evasion in August 2021. Mr Bise pleaded guilty on September 9, 2021 and was sentenced on March 7, 2022 to 50 months federal prison; Mr. Mendez pleaded guilty on October 12, 2021 and was sentenced this afternoon to 50 months in prison. U.S. District Judge Jane J. Boyle sentenced the men jointly and severally to $1.6 million each.
According to the plea documents, Mr. Bise and Mr. Mendez admitted that Bitqyck raised approximately $24 million from more than 13,000 investors. Instead of fulfilling their promises to these investors, the defendants used the Bitqyck funds for their personal expenses, including casino trips, cars, luxury furnishings, art, and rent.
“Crypto players are required to pay their fair share of taxes, just like everyone else,” U.S. Attorney Chad Meacham said. “Not only did these defendants shirk their tax obligations, they lied to investors and got away with their millions. Anyone else considering such a scheme should know that the Department of Justice and its law enforcement partners have a watchful eye on the cryptocurrency space, and we will not let criminal behavior slide.
“These criminals have committed this scheme to completely deceive and defraud stakeholders and the tax-paying public by deceiving cryptocurrency investors,” said Special Agent in Charge Christopher J. Altemus Jr., Dallas Field Office. “The IRS-Criminal Investigation Dallas Field Office is proud to be part of the team bringing them to justice and will continue to prosecute those who unjustly enrich themselves by not paying their taxes.”
In marketing materials, the pair promoted the company’s cryptocurrency, Bitqy, as a way for “those people who missed out on Bitcoin” to get rich. They held their Initial Coin Offering, or ICO, in 2016. (An ICO is a process in which a company tries to raise capital by selling a new cryptocurrency, which investors can buy in the hope that the value of the cryptocurrency will increase.) In an attempt to legitimize Bitqy tokens — and avoid scrutiny for the sale of unregistered securities — the company called the cryptocurrency a “deserved gift” that rewarded consumers for certain Internet purchases.
A white paper published on the Bitqyck website promised investors that each Bitqy token comes with 1/10and one part of the ordinary shares of Bitqyck. Mr. Bise and Mr. Mendez, however, admitted that they never actually distributed shares to tokenholders or incorporated the shares into the Ethereum Smart contract. The only ordinary shares issued by Bitqyck were to Bise and Mendez, who collectively owned 100% of the ordinary shares of Bitqyck.
About nine months after the launch of Bitqy, Mr. Bise and Mr. Mendez began trading another token, BitqyM, at an arbitrary price of $1. They claimed that buying the token allowed investors to join “Bitcoin mining operations,” paying to power a Bitqyck Bitcoin mining facility in Washington state. In fact, Mr. Bise and Mr. Mendez admitted in plea documents, no such mining facility ever existed. Unbeknownst to the investors, the defendants entered into a contract with a foreign third-party company to mine the Bitcoin they promised investors.
(Bitcoin mining involves solving complex mathematical problems to verify transactions on a public ledger, known as Blockchain. The problems require computing power, which in turn requires a significant amount of electricity .)
Mr. Bise and Mr. Mendez took advantage of Bitqyck by diverting the company’s earnings for their personal use at the expense of their shareholders. From 2016 to 2018, Mr. Bise and Mr. Mendez raised approximately $4.68 million and $4.48 million, respectively.
“By misrepresenting unregistered securities to investors who were lured by the allure of holding shares of interest in a new and exciting market, defendants took advantage of unsuspecting individuals and defrauded them of millions of dollars,” said Ryan L. Korner, Special Agent. responsible for the IRS-CI field office in Los Angeles. “Today’s sentencing has brought justice not only to cryptocurrency investors, but also to honest, hard-working American taxpayers who choose to pay their fair share of income taxes, rather than get rich in evading their responsibilities to pay taxes, because Mr. Bise and Mr. Mendez did.
Taxpayers engaged in virtual currency transactions are required by law to report such transactions on their tax returns. For 2016 and 2017, Mr. Bise underreported his income to the IRS, resulting in a tax loss of $371,278. For that same period, Mr. Mendez also underreported his income to the IRS, resulting in a tax loss of $311,155. In 2018, Bitqyck failed to file any corporate tax returns despite bringing in over $3.5 million to investors. The total joint and several tax loss to the United States government between Mr. Bise and Mr. Mendez is more than $1.6 million.
The defendants’ guilty pleas followed a civil settlement with the Securities & Exchange Commission (SEC), in which Bitqyck agreed to pay an $8.3 million fine to resolve allegations that it defrauded investors and operated an unregistered digital asset exchange. As part of this settlement, Mr. Bise and Mr. Mendez agreed to pay restitution and penalties of $890,254 and $850,022, respectively.
The Internal Revenue Services Criminal Investigation Divisions in Dallas and Los Angeles conducted the investigation. Assistant U.S. Attorney Sid Mody is pursuing the case.