Court sentences HYDRO execs in landmark crypto securities convictions

Former Hydrogen Technology top executives Shane Hampton and Michael Kane will spend around three years in prison. The US Department of Justice announced their convictions in a press release for their roles in defrauding investors and manipulating the price of HYDRO.

Also read: SEC wins $2.8M in a lawsuit against Hydrogen Technology

HYDRO was the native crypto of Hydrogen Technology where Michael Ross Kane served as CEO. Shane Hampton, 32, was sentenced to two years and 11 months in prison while Michael Kane, 39, could spend three years and nine months behind bars.

How HYDRO execs committed the crimes 

The pair earned approximately $2 million in profits by using a trading bot to place fake orders and manipulate the price of HYDRO. This case marks the first time a cryptocurrency is dubbed a security in a federal criminal trial, and the defendants were convicted of securities fraud and wire fraud.

Also read: SEC issues new warning to investors on crypto securities fraud

In September 2022, the Securities and Exchange Commission (SEC) charged Kane and Tyler Ostern, the CEO of Moonwalkers Trading Limited, on charges of fraud and manipulation. According to recent court documents, Kane and Hampton executed $7 million in “wash trades” and over $300 million in “spoof trades.”

Principal Deputy Assistant Attorney General Nicole M. Argentieri, head of the Justice Department’s Criminal Division said, “In this case, for the first time, a jury in a federal criminal trial found that a cryptocurrency was a security and that manipulating cryptocurrency prices was securities fraud.”

Absolute nonsense coming from @GaryGensler today.

And this slander about “all crypto execs going to jail” from the man who completely missed FTX (and actually cozied up to SBF), and wasn’t even invited to the DOJ announcement about Binance.

If he was really “working for the… https://t.co/c3ynB5Gncl

— Brad Garlinghouse (@bgarlinghouse) June 25, 2024

Also read: Terraform Labs agrees to pay SEC $4.5 billion in fraud case

Kane pleaded guilty to one count of manipulation in November 2023. Hampton was found guilty in February 2023 on similar counts of securities and wire fraud. Two other people involved in the scheme, Andrew Chorlian and Tyler Ostern, admitted to similar crimes in May 2023 and were sentenced.

What is securities fraud?

All forms of investor misrepresentations and manipulations come under securities fraud under the SEC. However, to enforce securities laws, the transaction has to be considered an investment contract. 

The SEC has labelled BUSD as an “unregistered security”, and is suing its issuer, Paxos.

But how on earth is a STABLECOIN considered a security, when it clearly doesn’t meet the Howey Test criteria.

No one has ever had “the expectation of profit” when buying $BUSD. pic.twitter.com/QXOlDUyvc3

— Miles Deutscher (@milesdeutscher) February 13, 2023

While the SEC has argued that most cryptocurrencies fall under the agency’s regulations, there is a lack of legal clarity. The agency has often cited the Howey Test to categorize certain crypto sales as unregistered investment contracts. For instance, the ongoing Ripple vs. SEC court is a trial in this category.

Cryptopolitan reporting by Shraddha Sharma