Sure they cost only pennies, but the hope is these stocks will become worth a lot more. (Photo: iStock)

The criminal world is a tangled web of interconnected thieves and cons. And sometimes to catch one, you have to grab onto a thread and pull, which is why this story begins not in the world of crypto, but in that of penny stocks before it leads to a famously failed cryptocurrency exchange in Canada.

On an unseasonably warm winter’s day in Boston, Roger “Rocket” Knox stood before a judge in a federal courtroom and pleaded guilty to a massive $165 million pump-and-dump scheme. The date was Jan. 13.

For nearly three years, starting in June 2015, Knox—a British citizen, who split his time between France and Switzerland—ran a Swiss asset management firm called Silverton, later renamed Wintercap. The company sold penny stocks at artificially inflated prices while allowing a group of nominee—fake—shareholders to collect the proceeds.

Knox provided his offshore share-selling services to dozens of individuals involving at least 50 different penny stocks, all the while skirting federal securities laws. He raked in money by taking a 6% commission on every sale.

Penny stocks, also known as microcap or over-the-counter stocks, are common shares of small public companies that initially trade at low prices. The hope is they can become highly lucrative holdings. They are also generally illiquid. This makes it easy for whales, or single entities holding large amounts of those stocks, to manipulate the price. We see this a lot in cryptocurrency markets.

Knox didn’t pull off his scheme alone, however. He had several co-conspirators, among them, the SEC alleges, Michael Gastauer, a German citizen, who helped Knox funnel his millions in ill-gotten gains through a complex web of bank accounts set up to disguise the source and nature of the funds. Specifically, Gastauer ran a payment processor known as WB21, since rebranded as Black Banx.

Many a bitcoiner will recognize WB21 as the black hole they allegedly sent their bitcoin to. (WB21 also accepts cryptocurrency, touting itself as a “virtual bank.”) It was also the black hole that QuadrigaCX, that sunken ship of a cryptocurrency exchange in Canada, allegedly sent $9.2 million to—and still can’t get back. (More on this later.)

Two peas in a pod

Gastauer and Knox were both named in a U.S. Securities and Exchange Commission civil suit filed on Oct. 2, 2018. According to the complaint, Gastauer enabled Knox to secretly transfer large sums of money out of brokerage accounts to himself and to “control persons”—i.e., corporate insiders, who were illegally dumping their large holdings onto the retail markets.

Gastauer did this by establishing a number of U.S.-based entities and bank accounts to receive and distribute the proceeds of Wintercap’s stock sales, according to the suit. He also repeatedly lied to banks “to make it seem as if he—not Knox—was the beneficiary of millions of dollars of stock sales, thereby distancing Knox from the money and essentially laundering the proceeds of the scheme,” the SEC said.

After setting up “WB21 US Inc” in 2015, Gastauer opened several bank accounts, according to the SEC. He told financial institutions that “WB21 US Inc” was a software company, with Apple and Google as suppliers, the agency alleged. Over time, it added, he set up more than 20 bank accounts in the U.S., which he used to facilitate Knox’s fraud.

In addition to WB21 US Inc., Gastauer also set up three other Delaware entities named in the complaint—Silverton SA Inc., WB21 NA Inc., and C Capital Corp. While WB21 US Inc and Silverton SA Inc have mailing address in Palo Alto, the other two are in New York City. (C Capital Corp. is not to be confused with Crypto Capital Corp., a Panamanian company that processed funds for multiple large cryptocurrency exchanges, including Bitfinex.)

Gastauer’s alleged laundering services were crucial in allowing Knox’s associates to do things like purchase a $1.6-million house in British Columbia and a $524,000 condo at a nearby ski resort. These assets were linked to the fraud and sought by the courts for seizure, according to an August 2019 report in the Vancouver Sun.

Three weeks after the SEC filed its suit against Knox and—allegedly, a key word here—Gastauer’s elaborate scheme came to a screeching halt when Judge Richard Stearns of the District Court of Massachusetts ordered an asset freeze on more than 100 accounts in 33 banks around the globe believed to be connected to the pair.

The SEC charged Knox with fraud and acting as an unregistered broker-dealer. And it charged Gastauer with aiding and abetting the fraudulent sale of millions in penny stocks.

Interestingly, the complaint also named Gastauer’s father Raimund Gastauer and another relative, Simone Gastauer-Foehr, as relief defendants. Essentially, that means that even though they held funds for WB21, they weren’t accused of any wrongdoing in this complaint. Gastauer allegedly transferred more than $4 million of Wintercap stock sale proceeds to their accounts for “no particular reason or legitimate purpose,” the SEC wrote.

Kadhim Shubber wrote in the Financial Times at the time, “WB21 was not an innovative new bank, claimed the SEC, it was a vehicle for a massive fraud.”

A federal indictment also followed the suit, and the U.S Attorney’s Office for the District of Massachusetts arrested Knox on October 3, 2018.

As a result, Knox pleaded guilty to securities fraud and conspiracy to commit securities fraud before U.S. District Court Judge Nathaniel Gorton last week. Sentencing is scheduled for April 23.

Crypto connections

Gastauer has deep connections to the cryptocurrency world as well. His “virtual bank” WB21 began accepting bitcoin in June 2016, relying on BitPay, a popular payment processor in the cryptocurrency world, to convert the digital money into fiat, according to a press release at the time. However, many of those who sent WB21 their bitcoin, allegedly never saw their funds again, according to scores of customer complaints on consumer review website TrustPilot, Twitter, and elsewhere.

WB21 also had links to QuadrigaCX. Since the Canadian exchange went belly up nearly a year ago after its founder Gerald Cotten’s weird and untimely death, accountants and lawyers have been scrambling to track down the roughly $160 million in missing fiat and crypto owed to creditors. To date, they have only found about $25 million worth.

Roughly $9 million of the still-missing funds allegedly wound up in the pockets of WB21. QuadrigaCX briefly worked with WB21 in 2018, at a time when it was having trouble with other payment processors

WB21 denies the claims. It told Ernst and Young, the exchange’s court appointed monitor, that it was only holding $11.77 CAD and $5.53 USD of QuadrigaCX’s money. But, EY stated in court documents that WB21 “provided no further information or documentation to support its claims and the basis for such nominal amounts.”

It is important to stress that, as of yet, there have been no criminal charges or convictions related to WB21. The SEC charges mentioned in this article are only allegations at this stage. Claims that WB21 is holding QuadrigaCX money are, likewise, allegations.

A spokesperson from WB21, referring to themselves in an email as “Media Team,” noted that, telling Modern Consensus that “WB21 Pte. Ltd. (WB21 Singapore) and its agents have never been subject to criminal charges.” WB21 also said it “has never been subject to any investigations or federal lawsuits” related to the QuadrigaCX matter.

As for the social media complaints, WB21 blamed those on compliance issues. “Like many players in the banking and payments industry, we are enforcing anti-money laundering and compliance controls which may result in restricting some clients and their transactions,” the spokesperson said. (WB21 is not an actual bank, even though it calls itself one.)

That said, many of those complaining about WB21 and calling it out as a scam said the company had simply stopped responding to them.

I've been waiting for a WB21 reply since October 24th, 2018. 299 days and counting! https://t.co/uclr6MsULH — Juan F. Bolaños (@criptoEstratega) August 14, 2019

Colorful past

It is also worth noting that Gastauer has apparently become tangled up in more than one shady enterprise, inside the cryptocurrency world and out.

“Gastauer’s past is filled with embezzlement, unauthorized purchases of weapons, tax fraud, and forgery,” Gruenderszene wrote in a November 2016 report, detailing his colorful past.

According to the German outlet, In 2010, Gastauer received an 18-month suspended sentence from a Swiss court for commercial fraud and counterfeiting. Around the same time, Sportingbet, a British gambling company sued him for allegedly stealing millions of pounds. He had set up a payments processor, that company claimed, but kept the payments. In 2011, the British High Court ruled against Gastauer, the Financial Times reported.

Knox’s guilty plea last week is important in that it supports many of the allegations the SEC made about Gastauer. As OTC Market Research, a firm that has researched Knox and his elaborate scam extensively, put it “One bust can often trickle down into multiple busts over time as discovery is made and as investigations expand.”

(Updated on Jan. 26 at 7:15 a.m. to add details on how much of Wintercap funds Gastauer allegedly transferred to his relatives.)