Yet another former Forbes 30 Under 30 member is facing criminal charges

One of my favorite trends is the Forbes 30 under 30 → criminal investigation pipeline. Former members of this illustrious cohort include Obinwanne Okeke (Forbes 30 under 30 class of 2016), who is currently serving 10 years in prison for internet fraud that included scamming hopeless romantics and the elderly; Charlie Javice, who “falsely and dramatically” inflated the number of users on her college financial planning platform, Frank, before selling it to JPMorgan for $175 million; Sam Bankman-Fried for, you know, the whole multi-billion dollar FTX scandal; and Elizabeth Holmes, who, though she never made the list, headlined a Forbes 30 Under 30 summit, so I’ll give her an honorable mention.

On July 30th, the congregation gained a new member, BitClout’s founder Nadar Al-Naji.

You may remember, during the peak crypto mania of 2021, that BitClout launched as a cryptocurrency-backed social media platform. Basically, users could award money to posts that they liked, and they could buy and sell “creator coins” whose values would, supposedly, fluctuate based on the creator’s reputation. In hindsight, this “business” obviously made no sense, but it was 2021, decentralization was a hot word, and, of course, Al-Naji raised $200 million from Andreessen Horowitz (a16z), Sequoia, Social Capital, TQ Ventures, Coinbase Ventures, Winklevoss Capital, Polychain Capital, Pantera Capital, and Arrington Capital. Other investors include Blockchange Ventures, Distributed Global, Blockchain.com Ventures, Hack Ventures, and Reddit co-founder Alexis Ohanian.

Enter, legal problems: Al-Naji was recently arrested and charged, per a DOJ announcement last week. According to a court filing from the SEC, Al-Naji lied to investors about the “decentralized” nature of his crypto project, offered and sold unregistered securities, and withdrew millions of dollars in proceeds from the sales of BitClout’s native token, BTCLT, for personal use. The secret to Al-Naji’s master plan? BitClout users could deposit money on the platform, but they couldn’t withdraw it, the filing alleges.

I would like to share a few highlights from that court filing (emphasis ours):

According to documents prepared by Al-Naji in conjunction with the BitClout project, the price of BTCLT would automatically double for every million BTCLT sold directly from the BitClout platform, with Al-Naji reserving two million BTCLT for himself as the project’s founder.

Al-Naji explained that purchasing BTCLT through the BitClout platform involved a “totally decentralized” so-called “atomic swap” whereby investors would deposit the crypto asset bitcoin into BitClout’s treasury wallet and receive BTCLT in exchange.

This exchange, however, only operated in one direction, meaning that BTCLT investors could not exchange their tokens back into bitcoin or fiat currency (e.g., U.S. dollars) via the BitClout platform. This fact was not explained in the BitClout White Paper…

In total, the BitClout treasury wallet amassed more than $257 million in bitcoin from investors from the beginning of Al-Naji’s unregistered offers and sales of BTCLT during the period of November 2020 to the present…

Despite the one-way setup described above that made it possible to buy—but not sell—BTLCT on the BitClout platform, Al-Naji nonetheless assured investors that he always intended to have BTCLT made available for trading (or “listed”) on crypto asset trading platforms following BitClout’s public launch, so that those early investors could monetize their investments…

Around the time of BitClout’s public launch in March 2021, Al-Naji explicitly and publicly assured investors—using his Diamondhands pseudonym—that neither he nor others involved in the BitClout project would use funds in the treasury wallet to pay themselves any salaries because, instead, his and BitClout’s employees’ financial incentives were tied to the success of BTCLT itself.

These representations were false, as Al-Naji knew or recklessly disregarded. Contrary to his assurances, Al-Naji used significant sums of money raised from investors to enrich himself and others close to him. This included the rental of a six-bedroom mansion in Beverly Hills, payment of personal credit card bills, and extravagant gifts of cash (totaling at least $2.9 million) to family members, including Relief Defendants Buse Desticioglu Al-Naji (his wife) and Joumana Case Bahouth Al-Naji (his mother)...

Based on what the SEC said, it sounds like Al-Naji’s pitch to investors was, basically, this:

• You can deposit money on BitClout to invest in “creators”

• You can’t withdraw money from BitClout (yet)

• You’ll be able to trade your BTCLT on trading platforms at some point, just trust me, bro!

• Don’t worry, I’m not going to use this money on personal expenses. Just trust me, bro!

And, because it was 2021, VCs lined up to invest $200 million, and Al-Naji sold a total of $257 million of BTCLT between primary venture investors and secondary sales on the BitClout platform. But my favorite part of this whole scam, which shouldn’t have raised any red flags, was that he launched BitClout behind the pseudonymous name “Diamondhands,” to “further the illusion that BTCLT was autonomous and had no one, identifiable issuer.” And then we have this justification, which is, *chef’s kiss* perfect:

To one crypto asset industry participant and prospective investor, Al-Naji explained his reasoning and attempts to avoid regulatory scrutiny as follows: 

“My impression is that even being ‘fake’ decentralized generally confuses regulators and deters them from going after you. In the case of the SEC it gives you a strong argument [with respect to] Howey, but more broadly when you break the mold of ‘a company with money in a bank,’ the case becomes riskier in terms of litigation, which makes it less likely some career public servant will make it their mission to take you down.”

If someone is literally telling prospective investors that they are intentionally confusing regulators with false labels on their new venture, you really shouldn’t be too surprised when they do, eventually, face regulatory scrutiny! To me, the biggest loser of this debacle is Sequoia.

The venture firm was already embarrassed for fawning over crypto’s most-infamous fraudster for playing League of Legends during their fundraising call, as noted in their now-deleted (but luckily archived on the internet’s wayback machine) profile of the founder. Combining the FTX miss with their ill-wrought investment in a founder who told investors that he was intentionally confusing regulators and issuing non-sellable coins isn’t a great look!