SANTA ANA, California – Two Orange County men were each sentenced to federal prison terms today for tricking more than 2,000 investors into buying a cryptocurrency that allegedly gave exclusive access to a profitable trading program, and then most of the $1.9 million raised to put in their own pockets.
Jeremy David McAlpine, 26, of Fountain Valley, was sentenced to 36 months in prison by US District Judge Cormac J. Carney. In a separate hearing today, Judge Carney sentenced Zachary Michael Matar, 29, of Huntington Beach, to 30 months in federal prison. Judge Carney scheduled a September 26th redress procedure in this case.
McAlpine and Matar each pleaded guilty to one count of securities fraud in August 2021.
In 2017, McAlpine and Matar formed Dropil Inc., a Belize-based company operating out of Fountain Valley. Dropil created and managed investments in digital assets, including a cryptocurrency called DROPs, developed by McAlpine and Matar. McAlpine and Matar were also primarily responsible for the development of Dropil’s digital asset trading program, an automated trading bot called “Dex” that could only be used with DROPs.
McAlpine and Matar tricked investors into buying DROPs by making false claims about DROPs, the functionality and profitability of Dex, and the number of investors and investment volume in DROPs that have allegedly already been achieved and allegedly improved – through the operation of supply and Demand – the value of DROPs. Dex is said to offer an “expertly managed portfolio balancing algorithm”. [that] manages the risk,” according to information published on Dropil’s website. The DROP tokens are designed to “ensure privacy while providing added value and exclusivity.” Dropil further promised that trading Dex would generate profits distributed as additional DROP tokens every 15 days.
From late 2017, McAlpine and Matar began offering and selling DROPS unregistered on Dropil’s website. In January 2018, the defendants launched an Initial Coin Offering (ICO) for the sale of DROPs, again through Dropil’s website, which lasted until March 2017. Neither McAlpine, Matar nor Dropil was registered with the Securities and Exchange Commission (SEC) as a broker or dealer.
To encourage investors to buy DROPs, McAlpine and Matar made a series of misrepresentations to investors to promote the cryptocurrency’s supposed success in a “white paper” posted on Dropil’s website and Twitter account . Among other false claims, the white paper claimed that trading Dex would yield average annual returns of between 24% and 63% depending on the “risk profile” chosen by the investor.
In response to SEC subpoenas, the defendants fabricated fake profitability reports of Dex that gave the false appearance that Dex was operational and profitable. Defendants also fabricated an investor chart for the SEC purporting to show that Dropil had successfully raised $54 million from 34,000 domestic and foreign investors. In fact, the ICO raised less than $2 million from fewer than 2,500 investors. McAlpine also submitted a false affidavit to the SEC regarding the funds raised in the ICO as well as Dex and its allegedly profitable trading activities.
In total, the defendants received approximately $1,896,657 from 2,472 investors through the sale of approximately 629 million DROPs. As promised, McAlpine and Matar used the money invested to fund payouts to themselves and their employees.
In sentencing notes, prosecutors argued that the “defendants’ “crimes were serious and worrying: they caused significant financial damage to an extremely large number of victims and required efforts to derail law enforcement’s attempts to detect and address wrongdoing.”
As part of the resolution of a separate civil case filed by the SEC, Dropil Inc., McAlpine and Matar entered into permanent injunctions in July 2021 barring further fraudulent conduct and prohibiting them from directly or indirectly participating in the offering, buying or selling of digital securities.
The FBI was investigating this matter.
Assistant United States Attorney Ranee A. Katzenstein, head of the Major Frauds Section, prosecuted this case.