SEC Sues BitFunder Operator as DOJ Brings Parallel Criminal Case

The Securities and Exchange Commission sued BitFunder founder Jon E. Montroll on February 21, 2018, alleging that he operated an unregistered securities exchange, misappropriated customer bitcoins and concealed a cyberattack that stole more than 6,000 BTC. The Justice Department simultaneously announced that Montroll had been taken into federal custody on separate charges of perjury and obstruction of justice arising from the SEC investigation.

The coordinated civil and criminal actions mattered beyond a defunct trading website. They demonstrated how federal authorities were applying established securities-registration, antifraud and investigative-integrity rules to businesses built around bitcoin. Calling an instrument a virtual “share,” settling trades in BTC or operating through an online platform did not, in the agencies’ stated view, remove the activity from those rules.

All accusations described here were allegations on February 21, 2018. Montroll and BitFunder had not been found liable in the SEC case, and the criminal charges did not establish guilt.

What the SEC alleged

The SEC’s complaint, filed in the Southern District of New York on February 21, described BitFunder as an online platform where users could create, offer, buy and sell virtual shares in cryptocurrency-related enterprises. Bitcoin was the platform’s only accepted payment medium. The complaint said more than 6,500 users registered between December 2012 and November 2013, with approximately 3,000 active accounts, and that the platform executed about 88,500 initial-offering and secondary-market transactions.

According to the complaint, customers deposited bitcoin through a wallet maintained by Montroll’s WeExchange service. The SEC alleged that Montroll controlled the commingled wallet and withdrew customer funds for personal and business expenses without disclosure.

The filing also addressed “Ukyo Notes,” instruments Montroll offered on BitFunder beginning July 18, 2013. The SEC characterized the notes as unregistered securities. It alleged that purchasers were promised daily interest of 0.05% while some proceeds were used for expenses and to replace previously misappropriated bitcoin.

A concealed platform deficit

The SEC alleged that attackers exploited BitFunder between July 28 and August 27, 2013, stealing more than 6,000 BTC. Its complaint valued the stolen coins at approximately $775,075 when the theft occurred, without identifying a particular exchange, pricing timestamp or conversion methodology.

Rather than disclose the attack, the SEC alleged, Montroll continued accepting deposits, collecting fees and selling Ukyo Notes while using new deposits to meet withdrawal requests. The complaint said BitFunder remained under a hidden bitcoin deficit until it closed on November 14, 2013.

Those allegations connected three risks that were often discussed separately in early cryptocurrency markets: exchange registration, custody of customer assets and disclosure after a security failure. The case presented them as one integrated investor-protection problem. A platform could simultaneously provide a trading venue, control pooled assets and issue its own investment instrument, concentrating conflicts and operational risk in one operator.

The parallel criminal proceeding

The Southern District of New York alleged that Montroll later gave false sworn testimony and submitted misleading documentation during the SEC investigation. Prosecutors charged him with two counts of perjury and one count of obstruction of justice.

The Justice Department said a balance statement supplied to investigators purported to show 6,679.78 BTC available for BitFunder users on October 13, 2013. Prosecutors alleged that contemporaneous chat logs and transaction records showed the statement was fabricated and that the wallet actually held thousands fewer bitcoins. The criminal case concerned the alleged interference with an investigation, not every securities-law allegation in the SEC complaint.

What the record established on February 21

The verified development was the filing of two federal complaints and Montroll’s arrest, not a final judgment. The SEC sought injunctions, disgorgement, interest and civil penalties; prosecutors stated that Montroll was presumed innocent unless proven guilty.

The SEC’s current litigation-release page carries a later March 23, 2018 heading, but its case caption and the stamped federal complaint identify February 21, 2018 as the filing date. The contemporaneous SEC press release and Justice Department announcement independently confirm that chronology. Later outcomes are intentionally excluded from this event-date account.