By Hank Russell
New York Attorney General Letitia James recently entered into a settlement agreement with Uphold HQ, Inc. for $5 million. James alleged in court documents that the New York-based cryptocurrency platform misled investors and promoted a fraudulent cryptocurrency investment scheme orchestrated by Cred, LLC and its CEO, Daniel Schatt. However, the crypto firm disputed some of James’ allegations.
An investigation by the Office of the Attorney General (OAG) found that Uphold misleadingly promoted and offered Cred’s investment product, CredEarn, to its customers, in violation of New York law. The investigation also found that Uphold reportedly advertised CredEarn as a reliable savings product, when in reality, Cred was making risky loans to borrowers in China with no credit histories.
From January 2019 through October 2020, Uphold — which offers users the ability to buy, sell, and trade digital assets — offered CredEarn on its platform and mobile app. CredEarn promised significant annual interest payments to customers who invested their cryptocurrency in the company.
In advertising CredEarn, according to the OAG, Uphold misleadingly promoted it as a safe, reliable savings product. In reality, the OAG alleged, Cred generated interest through risky microloans to video game players in China who had low monthly incomes, no credit histories, and no access to credit through traditional Chinese financial institutions.
In promoting CredEarn, said the OAG, Uphold also stated that Cred was covered by “comprehensive insurance,” but no insurance that would protect retail investors from investment losses of digital assets existed in the industry. The OAG’s investigation also found that Uphold was illegally promoting CredEarn without registering as either a broker or commodity broker-dealer.
But in a press release from Uphold obtained by Long Island Life & Politics, the company said James’ office “misrepresents key facts” in the agency’s press release also obtained by LILP. Uphold said it “categorically rejects any suggestion that it knowingly promoted Cred’s fraudulent scheme. To the contrary, Cred deliberately and repeatedly misled Uphold.” Additionally, Uphold pointed out that the company was “a victim of Cred’s deception,” which was “correctly found” by the U.S. Justice Department.
“The U.S. Department of Justice, in its criminal investigation of Cred, correctly found that Uphold was a victim of Cred and was not in any way to blame for that company’s actions,” Uphold CEO Simon McLoughlin said in a statement.
Starting in March 2020, Cred incurred significant losses due to its risky lending practices and mismanagement, and declared bankruptcy in November 2020, resulting in investor losses of millions of dollars.
When Cred collapsed in 2020, thousands of Uphold’s customers across the world who had invested in CredEarn lost millions of dollars, the OAG said. As a result of today’s settlement, Uphold will pay $5 million to harmed investors — more than five times the amount it earned in fees it collected — and change its policies to better protect users from third-party investment schemes.
However, Uphold said, once the company “became aware of Cred’s liquidity issues, it acted decisively to protect customers.” As a result, Uphold froze Cred’s access to its platform and prevented Cred from its products to Uphold’s customers. They also alleged that they told Cred to self-report its losses or else they would contact the regulators themselves. In addition, Uphold worked with federal regulators, resulting in prison time for Schatt and other Cred executives and orders to provide financial restitution for the victims.
“These facts fundamentally contradict any narrative suggesting passive or complicit behavior by Uphold,” the company stated. “Uphold remains focused on transparency, regulatory compliance, and protecting users.”
As a result of OAG’s investigation, Uphold will pay $5 million to customers who suffered losses. All payments Uphold receives from Cred’s bankruptcy proceedings, in which it is owed $545,189, will also be paid to customers who were harmed. Investors will receive an email from Uphold informing them that funds will be distributed to their accounts. Additionally, Uphold must maintain and improve its due diligence policies before partnering with or recommending a third-party investment product. As part of the settlement, Uphold will also register as a broker with the OAG.
“When crypto companies break the law and mislead investors, the consequences can be devastating to New Yorkers’ livelihoods,” James said. “Uphold promoted risky investments and misled its customers to believe they were safe. Investors should be able to trust the industry advice they receive, and my office will always work to ensure bad actors are held accountable for endangering their customers’ financial security.”
In response, McLoughlin said, “We are deeply disappointed by the New York Attorney General’s statement, which is profoundly inaccurate and misrepresents the facts of the case. Uphold acted with integrity throughout its relationship with Cred LLC, a third-party lending firm that ran into financial difficulties in 2020. As soon as Uphold became aware of the issues at Cred, we demanded that Cred notify its regulators, shut down access to the service, and acted to protect our customers immediately.”
Uphold stated, “Any statements in the OAG’s press release should not be read to suggest that Uphold acted knowingly or otherwise acted to intentionally deceive customers. Uphold expressly rejects those characterizations and did not agree to them or admit any liability in its settlement with the OAG.”