Cryptocurrency startup Centra Tech, Inc. faces federal criminal and civil charges related to the company’s $32 million initial coin offering (ICO) in September. The Securities and Exchange Commission (SEC) arrested the three owners of Centra Tech under fraud charges, stating in their press release that “text messages among the defendants reveal their fraudulent intent.”

According to the SEC, the owners defrauded investors through bogus marketing claims using fake executive biographies and lying about non-existent relationships with major credit card companies. “We allege that the Centra co-founders went to great lengths to create the false impression that they had developed a viable, cutting-edge technology,” said Robert A. Cohen, Chief of the SEC Enforcement Division’s Cyber Unit. “Investors should exercise caution about investments in digital assets, especially when they are marketed with claims that seem too good to be true.”

The trio exchanged numerous text messages that revealed the fraudulent nature of the company. For example, after receiving a cease-and-desist letter from a major bank directing him to remove any reference to the bank from Centra’s marketing materials, one of the founders texted another, “[w]e gotta get that s[***] removed everywhere and blame freelancers lol.”

In another text, one co-founder asked another to “cook me up” a false document to get the bogus Centra Tokens listed on a cryptocurrency exchange, prompting the partner to reply, “don’t text me that s[***] lol. Delete.”

The SEC is seeking permanent injunctions and a return of Centra’s gains plus interest and penalties while the Justice Department’s release indicates that each of the men may face up to 20 years in prison for fraud.

Takeaway

This case reinforces the importance of capturing all electronic data.

Cryptocurrency fraud cases rely on proof of both the bad actions and the intent behind the actions; reinforcing the value and importance of capturing and archiving all electronic data. It’s also critical to supervise the firm’s communications to prevent regulatory violations and reputational risk. Monitoring electronic communications can be incredibly effective in surfacing early indicators of any fraudulent intent.

It is vital to your company’s security and reputation to archive all electronic communications data – including text messages. Partner with one archiving vendor that captures all electronic communications. Having a centralized archive to search for all your communication data is far more efficient and effective than separate solutions.

To help mitigate risk, firms should fully utilize their archiving platform and use the compliance tools to flag activities that may be illegal or fraudulent. For example, if employees’ conversations include phrases like, “don’t text me,” “delete this,” or “cook me up,” the message will be flagged for review as a potential violation.

Communication surveillance must sufficiently incorporate search terms unique to market securities fraud or misconduct risks. Lexicon policies can help test and verify that your firm’s supervisory procedures are reasonably designed to achieve compliance with applicable regulations.

Text messaging is among the most widely used electronic communication channels and regulators are frequently offering text messages as evidence, confirming that it is critical to begin supervising texts sent for business before it’s too late!