Crypto Critics' Corner

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Episode 125 – How to Steal Almost $100 Million: Prime Trust goes Bust

How to Steal Almost $100 Million: Prime Trust goes Bust – Crypto Critics' Corner

Today Bennett and Cas discuss Prime Trust (again) after the Nevada-based trust company admitted that previous C-suite executives had made numerous mistakes and mishandled over $80 million in cash and cryptocurrencies.

Cas Piancey and Bennett Tomlin discuss the bankruptcy of Prime Trust, one of cryptocurrency’s most important payment providers.

This episode was recorded on July 27th, 2023.

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English Transcript:

00:00:05:04 - 00:00:11:05
Cas Piancey
Welcome back, everyone. I am Cas Piancey. I'm joined, as usual, by my partner in crime, Mr. Bennett Tomlin. How are you today?

00:00:11:17 - 00:00:13:08
Bennett Tomlin
I'm doing pretty good. How are you, Cas?

00:00:13:08 - 00:00:41:05
Cas Piancey
Good. It's been a weird few days, even despite the weekend. Yeah, a lot of a lot of weird news breaking. I guess that's just always cryptocurrency, which is good. We're in the news business anyway, so today we're talking about a topic that we've previously discussed throughout other episodes. I don't think we ever directly had an episode only about this, but today we're talking about Prime Trust again because there's been some new news kind of allegations dropping, understanding of what's going on behind the scenes.

00:00:41:05 - 00:01:07:14
Cas Piancey
If anyone's unfamiliar. Prime Trust is a Nevada based trust that was associated with cryptocurrency. They were bank. They were essentially the bank where bank is not the right word, but it is the word I'm going to use here. But they were banking a bunch of cryptocurrency exchanges and clients and and all of this. And basically it's been discovered and confirmed that they lost a ton of money, almost $100 million, which is just kind of incredible.

00:01:07:15 - 00:01:12:14
Cas Piancey
Take it away. Bennett. What's happening here? How did they lose this money? What is what are the ramifications of that?

00:01:12:15 - 00:01:47:10
Bennett Tomlin
Yeah, So as you mentioned, we've talked about prime trusts before. I think most recently in episode 121 with Jonathan Ritter and Patrick Tan of Chain Argos. But what we got most recently is the first day declaration in the bankruptcy by the current interim CEO, Jor Law, and it reveals a few things that have been previously hinted at but puts numbers on them and really kind of points towards serious management and operational issues with Prime Trust, which, as you said, was like the payment processor for many of these cryptocurrency companies.

00:01:47:16 - 00:02:13:21
Bennett Tomlin
Binance's USD to USD. All the two coins, there was tons of companies that were using Prime trust as their backing. And so what the declaration revealed was I think first what was most shocking to me was that they had invested customer funds into Terra and they ended up losing about 6 million in customer deposits and 2 million in corporate funds when Terra went to zero.

00:02:13:23 - 00:02:29:00
Bennett Tomlin
We've talked about Terra on this podcast before. It was a Ponzi scheme that was inevitably going to zero. And so it's pretty shocking to hear about a genuinely well-respected trust company putting customer funds directly into a Ponzi scheme.

00:02:29:04 - 00:02:31:13
Cas Piancey
I don't know if we can call it well-respected in the.

00:02:31:13 - 00:02:32:05
Bennett Tomlin
Industry.

00:02:32:08 - 00:02:35:17
Cas Piancey
Even then. I mean, what does that even mean given our industry?

00:02:35:17 - 00:02:47:00
Bennett Tomlin
I think. But I think that's kind of the point here. That's the point of FTX. That's the point of Alameda Research. That's the point. The Prime Trust is the most respected whatevers are doing the same shit is the least respected whatevers.

00:02:47:02 - 00:03:09:29
Cas Piancey
I do want to and I want to kind of pause you here for a second. So obviously, as you mentioned, we've talked about it. It's a Ponzi scheme. That's what Terra and Luna were just for a little bit more background on that. It was a stablecoin ecosystem. Basically, you had this coin with no value whatsoever except that assigned to it by the market and they used that coin to create a stablecoin and you can guess how that went.

00:03:09:29 - 00:03:29:20
Cas Piancey
It didn't go well. If you're somehow unfamiliar with it, I assume everybody listening is familiar with it. But regardless, the point I want to swing back to here is that you said $6 million in customer funds were utilized and lost on this gamble. And let's call it what it is. It's a gamble. I'm curious because I'm just let me put it this way.

00:03:29:22 - 00:03:50:09
Cas Piancey
I have a brokerage account that actually a broker takes care of. That broker has a fiduciary duty to not do stuff like what you just mentioned. Right. And if they broach that fiduciary duty, not only do they ultimately, I would assume, oh, my money and like I'm going to be liable in court and I'm going to take them to court and all this stuff, they won't be able to work at a brokerage anymore.

00:03:50:09 - 00:04:01:02
Cas Piancey
Like there are serious ramifications for this stuff. But for a trust fund, like what happens, how is this possible? Like, aren't they breaching their fiduciary duties? Isn't there something wrong going on here?

00:04:01:07 - 00:04:27:29
Bennett Tomlin
Yes. It's almost certain that they were not in compliance with Nevada's regulations about what assets that they were supposed to be holding as this type of trust company. And we've talked about this 6 million in customer funds, and that's the smaller portion of their misappropriation of customer funds because they also had a separate multi-signature your wallet that they were using to custody cryptocurrencies.

00:04:28:01 - 00:05:04:22
Bennett Tomlin
And then they decided that they were no longer going to roll their own custody system and instead were going to move to Fireblocks, another crypto custody service provider doing multisig stuff. But Prime trust accidentally, incidentally, unintentionally, whatever, directed some customers to continue depositing into the old Multi-signature wallet and at some point they lost the hardware wallets and the seeds for it and ended up using approximately $76 million in customer funds to buy more Ethereum to cover requested withdrawals.

00:05:04:27 - 00:05:07:08
Cas Piancey
How are they able to use customer funds to do any.

00:05:07:08 - 00:05:33:19
Bennett Tomlin
Of And this is the important point, and it's something we've talked about before. Many financial regulators are not well resourced enough to do regular enforcement and checks of compliance with was. This is true for state level trust companies for money transmitter licenses across the nations and even for like at a certain level, like state chartered banks and things like that, there can be serious gaps in oversight.

00:05:33:21 - 00:05:35:09
Bennett Tomlin
And so I think not just.

00:05:35:09 - 00:05:54:24
Cas Piancey
State chartered banks, by the way, Federal Reserve regulated banks and other banks that are under the guidance of major regulators that people like us expect to have a pulse on what's going on and what's going wrong. And I think even if we just look at the major bank failures we've seen this year, clearly regulators are not up to the task.

00:05:54:25 - 00:06:19:00
Bennett Tomlin
Yes. And so that's a big part of it. A lot of it depends. And basically, these regulators say you as the directors of or whatever, of this corporation signed something saying you're upholding all these regulations. And that's kind of the extent of it is my impression in a lot of places. And like even in the example of Prime Trust, it was eventually discovered that they still that they didn't have enough.

00:06:19:00 - 00:06:47:23
Bennett Tomlin
Ethereum In December 2021, by the then management team, but it wasn't revealed to the board of directors until August of 2022. And that period there is when this management team allegedly, I guess, was mis appropriating customer funds in order to cover this massive shortfall of cryptocurrency and their that during that period they were in violation of Nevada's responsibilities like that's what they say in the Declaration.

00:06:47:25 - 00:07:16:00
Bennett Tomlin
But the board of directors didn't know it was a secret that was kept hidden. And when the Board of directors did find out they fired the existing C-suite, elevated new people to sea level positions. And then they said they reported it to regulators in September of 2022. And that's where we get into like prime trust, tried to raise like a see, we see that Nevada was aware of to try to kind of close that gap from existing shareholders and weren't able to get the money and a bunch of stuff like that.

00:07:16:02 - 00:07:24:06
Bennett Tomlin
But yeah the regulators were not aware for almost a year that Prime trust was in breach.

00:07:24:09 - 00:07:42:18
Cas Piancey
I mean, that's wild. And also even from what you're describing, it just sounds like not a lot of responsibility for their actions being taken. It sounds like a lot of passing the buck on to whoever they can. But it also sounds like regulators haven't even caught up to that part of the of the story yet. Like who's going to go to jail for this?

00:07:42:22 - 00:08:04:27
Bennett Tomlin
Well, that's that's an interesting question, you see, because we've been talking about previous management here kind of in the abstract, and they're not in the abstract. They're real human beings, like Scott Purcell, who was the chief executive officer of Prime Trust during this period, also during much of this period until they spun it out, Prime Trust had a subsidiary called Bank.

00:08:05:02 - 00:08:07:16
Bennett Tomlin
Bank is also now bankrupt.

00:08:07:19 - 00:08:10:02
Cas Piancey
And is this also and Q.

00:08:10:06 - 00:08:42:13
Bennett Tomlin
Yes, and was also led by Scott Purcell Banks current executive team alleges in their bankruptcy proceedings that Scott Purcell stole all of their corporate IP, their communications, their client records in order to go start Fortress Trust. Another cryptocurrency company, another cryptocurrency trust company, which as of today is still operating and is being used by Lake Swan in a variety of other clients in the cryptocurrency space.

00:08:42:15 - 00:08:58:06
Bennett Tomlin
And there are serious allegations both in the Prime Trust bankruptcy in the Nevada cease and desist order and in the bank bankruptcy against the current executives of that firm, which is still actively servicing clients in the industry.

00:08:58:08 - 00:09:20:25
Cas Piancey
Is wild too, right? Like Fortress Trust's Nevada based trust started by this guy still in operation. I can go to the website right now web3, blah blah blah blah blah. Compliance. All this shit. I mean, if this guy really stole this money, which granted, we don't know, right? But if he did or he helped too, it's kind of crazy that and I'm on their site.

00:09:20:25 - 00:09:53:25
Cas Piancey
Here we go. Trusted by Circle, Solana Swann, Google Cloud, Checkout.com Like why are these companies trust Fireblocks? There's Fireblocks again. Like, why are these companies trusting this guy? And is this a matter of what we've seen before, what you and I are quite familiar with, which is like crypto Capital Corp being being everyone knowing, I think it was Jesse Powell, the CEO of Kraken, had previously said that like everyone was aware that crypto capital Corp was dirty, but everyone used it still because they had no other options.

00:09:54:01 - 00:10:04:20
Cas Piancey
And I wonder if we look at something like this where you go, well, this guy frickin supposedly, allegedly scammed a bunch of people. Why are these companies going right back to him after they found this out?

00:10:04:23 - 00:10:11:21
Bennett Tomlin
Well, yeah, I think it's like you alleges alleged right there. They don't have a lot of other options.

00:10:11:27 - 00:10:36:22
Cas Piancey
Yeah, And this is I also want to bring up how similar this sounds to a Quadriga, another early cryptocurrency exchange that you and I were keen to explore back in the day. The difference here being these guys misplaced money stole from customers, too, to make up for the misplaced cryptocurrencies, which happened at Quadriga as well, and then made a bunch of bad bets which also happened at Quadriga.

00:10:36:27 - 00:11:07:15
Cas Piancey
The only difference here is that the CEO and the people involved are still alive. And Gerald Cotton, maybe he's still alive, but as far as we know, he's dead and he at least has disappeared. And so we don't have anything as juicy as that with this prime trust story yet. But this is kind of crazy, right? Like the idea that, as you said, one of the larger, more trusted names in the cryptocurrency industry has this happen and then just restarts the scam like not obviously not the people currently at Prime Trust.

00:11:07:15 - 00:11:19:09
Cas Piancey
To be clear, the people who formerly were at Prime, but their ability to restart this thing and just continue. I mean, we see this over and over and over again. There are no consequences for so many of these scammers. Yeah.

00:11:19:10 - 00:11:52:22
Bennett Tomlin
And so you asked who's going to go to jail? My answer is if anyone's going to jail, it is the former C-level executive suite who were involved in the cover up of this loss of funds, in this misappropriation of customer assets and what's going to be really inconvenient for much of the cryptocurrency industry if that were to occur, and assuming these allegations are true, is that it would mean that a bunch of them had continued to work with these people after all of this and presumably are still working with Fortress today.

00:11:52:25 - 00:12:04:16
Bennett Tomlin
It's also funny that Fortress lists a bunch of people that are definitely like their vendors as like people using them, right? Like Google Cloud is not using Fortress Trust. Fortress Trust is definitely using Google Cloud, Right?

00:12:04:17 - 00:12:05:29
Cas Piancey
Oh, the classic partnership thing.

00:12:05:29 - 00:12:06:18
Bennett Tomlin
Exactly.

00:12:06:18 - 00:12:07:27
Cas Piancey
It's not really a partnership.

00:12:07:29 - 00:12:11:16
Bennett Tomlin
And like, I bet that's true for a couple of those companies down there.

00:12:11:16 - 00:12:27:06
Cas Piancey
This is every terrible cliche that we see in crypto, like over and over again. It's just every single one blatantly be exposed out in the open. And I'm like, just it's exhausting, you know, Like, this is so exhausting because it feels like we're not even reporting anything new. We got to put.

00:12:27:09 - 00:12:46:02
Bennett Tomlin
It in a little bit of a sense we're not right Like the Nevada cease and desist in the original bankruptcy declaration, both included that there was this shortfall related to this Multi-signature wallet. They lost access to what? And like we knew there was a massive shortfall in like fiat assets. And so we could kind of piece together what likely happened.

00:12:46:02 - 00:13:03:04
Bennett Tomlin
Rate customer assets were used to cover the crypto shortfall, but this is it in black and white being declared by the current CEO of the firm that millions and millions of dollars of customer funds were either gambled on Ponzi schemes or lost covering up the incompetence of the management team.

00:13:03:11 - 00:13:29:17
Cas Piancey
But there's already so many more questions that are unanswered, even even there, like the idea that Prime Trust did another funding round after try to try to accomplish another funding round after they knew they were in trouble and like Nevada being like, Yeah, go ahead, go for it. Despite also being aware that these guys were in trouble and apparently if they'd reported to regulators that they'd lost all this money and that customer funds had been utilized, why let them go forward with another funding round?

00:13:29:17 - 00:13:31:06
Cas Piancey
Like, why allow this? This is crazy.

00:13:31:06 - 00:13:42:16
Bennett Tomlin
Yeah, I think the idea was that it was a potentially profitable business, though the previous management team had managed to rack up quite a few months of consecutive losses.

00:13:42:18 - 00:13:46:05
Cas Piancey
Everything is potentially profitable. That doesn't fucking mean anything, I guess.

00:13:46:10 - 00:13:59:29
Bennett Tomlin
I guess the idea was if existing investors were willing to step up and cover it, that meant no customer funds were lost and what was at risk was potentially more investor capital and like from the regulator point of view, that seems like the best case scenario, right?

00:14:00:00 - 00:14:18:19
Cas Piancey
I guess so. I really don't know. I don't know what like let me put it this way, I'll just go to the most basic terms here. If Charles Ponzi was in charge of the the Ponzi company and it was a blatant scam, and regulators are told by by once the CEO Charles Ponzi is outed as CEO, they get rid of him.

00:14:18:25 - 00:14:35:00
Cas Piancey
New new scammer comes on board. Sorry, not a scammer new person comes on board. Okay. And they say, oh, man, this Ponzi company is in big fucking trouble. I don't know what we're going to do to get out of this. We're going to raise more money, I guess. Why would the government say okay to that? It's just wild to me.

00:14:35:07 - 00:14:43:03
Cas Piancey
Like you, as you said, I guess the reasoning is maybe they're going to be able to pull out of this and everything's going to be okay. Why? Why is that a last resort?

00:14:43:03 - 00:14:56:09
Bennett Tomlin
Well, and I think I think the idea is even if they don't necessarily pull out of it, we'd rather Tiger Capital loses another hundred million dollars than the clients of Prime Trust. You know.

00:14:56:12 - 00:15:16:26
Cas Piancey
Not to be on the capitalist venture capitalist side here or anything. But like, that's just so dirty. It just sounds dirty, right? Even if I fuck, I hate Tiger. I hate Tiger Global and I hate I hate Apollo Capital or whatever. Like, I hate BlackRock, too. You know, I'm right there with you guys, but but like being like, let's make them foot the bill as opposed to these smaller clients.

00:15:16:26 - 00:15:21:00
Cas Piancey
Like, I hear it. I also I'm like, that's dirty as shit. If that was actually the intention.

00:15:21:00 - 00:15:29:12
Bennett Tomlin
I think I think the idea is it was disclosed to investors that the business was in this state. It needed a new round of funding to continue operations.

00:15:29:12 - 00:15:33:13
Cas Piancey
It was going to and they still thought someone was going to foot the bill on this. Like, I mean, that's what I mean.

00:15:33:14 - 00:15:41:23
Bennett Tomlin
They got what, like 50% of their revenue closed before having to call it off. So they didn't get enough commitments. There weren't enough people who were willing to go for another run at them.

00:15:41:23 - 00:15:47:14
Cas Piancey
Oh, shit. I mean, no shit. Yeah, I like I just this is the whole thing is fucking dirty to me.

00:15:47:15 - 00:15:57:25
Bennett Tomlin
It's like and it's funny. It's funny because Prime Trust tries to blame some blame vague. They they're like, our investors would have been there if it weren't for, you know, liquidity issues.

00:15:57:27 - 00:16:02:08
Cas Piancey
You mean they don't have any money? Is that what you mean? Your clients who fucking got our money stolen.

00:16:02:09 - 00:16:13:17
Bennett Tomlin
Our to that that they would have been there if it weren't for, you know, other liquidity issues. I guess so maybe their investors had all their capital on FTX. I don't know.

00:16:13:19 - 00:16:30:26
Cas Piancey
Or in Terra Luna or in, you know, or in any number of other fucking things that have just gotten shit piled in the past year. I don't know. It's this is what I mean. When I say like, okay, it's different this time. It's different. I guess it feels like the same story over and over again. And we we got to talk to this.

00:16:30:26 - 00:16:49:12
Cas Piancey
I know this episode is coming out before the more fun episode in a few weeks that we got to interview someone. Very cool. And I think one of the things that he said was something along the lines of like, there's thousands of these coins. Most of them are scams. And you and like, even if you wanted to chase after these, like why?

00:16:49:13 - 00:17:13:02
Cas Piancey
Like there's no there's no enthralling story of every single scam coin writing about every single one. It's just not like it's in it's in no one's interest from the writer to the consumers to anyone. Like no one wants to write about the same scam over and over again. I think this is part of like, why, why, why? I struggled to allow us to even cover Terra and Luna until a few days before it collapsed was because I was like, okay, it's another Ponzi.

00:17:13:02 - 00:17:27:27
Cas Piancey
Just like all the other. Ponzi is like, who fucking cares? And the only reason that was an important one is because of all the money that it had accumulated, right? Like, I just. I just it's. You understand where I'm coming from. It's very frustrating. It feels like we're reporting the same story over and over again. It's frustrating. Yeah.

00:17:28:02 - 00:17:59:14
Bennett Tomlin
And like the last point, I think we really need to kind of hammer in here is that this is the same story. It's cryptocurrency executives steal from customers to gamble and cover up their own incompetence. And again, it's coming from one of what was supposed to be the like vanguard of legitimate cryptocurrency companies, like a serious provider of serious financial services to supposedly serious companies turns out to be making a series of very unserious decisions.

00:17:59:16 - 00:18:24:27
Bennett Tomlin
And it's a story we hit so often when we're discussing these cryptocurrency companies. You hear that this is the future, everything's super app, or that Alameda Research is going to be the single largest hedge fund in the world. Three Arrows Capital has correctly predicted the supercycle and is going to be like the defining whatever. And in all of these cases it is the most basic type of fraud it is.

00:18:24:27 - 00:18:29:09
Bennett Tomlin
The asshole steals from his customers to benefit himself.

00:18:29:09 - 00:18:58:18
Cas Piancey
And you can go back this this is not new in terms of only the past few years. There's not this. You go back to bitcoin talk forum days and it's the same thing. Right. And and I think this is the the hypocrisy of it that bothers us. Perhaps, maybe, maybe not you, maybe just me. But like, I think this is like serious in terms of how much it bothers me in particular is this idea that Bitcoin was founded on the concept of not trusting anybody with your finances, whether it's a bank or another person.

00:18:58:25 - 00:19:20:08
Cas Piancey
The whole point of Bitcoin is that it's this ability to not trust and and still move money. It doesn't mean that it's the most important financial asset ever. It doesn't mean that it is going to kind of make finance a completely different place forever. It just means that it's this very specific thing that does this very specific thing.

00:19:20:08 - 00:19:39:07
Cas Piancey
And the fact that immediately people were like, okay, so how can we create a bank that accepts Bitcoin or trades you for Bitcoin? It's like, okay, so we're we're skipping right past the most important part of this. And going right back to the whole point that Satoshi was Satoshi was like, fuck the banks essentially. And now we're like, okay, so but let's bring the banks into this and let's have our own banks.

00:19:39:13 - 00:20:03:12
Cas Piancey
And then when they fuck you over and they fuck the customer over because they're, they're supposed to be operating as banks, but they're even worse because they're unregulated. They don't abide by any laws. They're totally willing, as we've seen time and time again, to steal customer funds, which at least that's it doesn't happen. It being like complain all you want about your your local American big bank fine but at least they're not straight up just taking your funds and doing whatever the fuck they want with them.

00:20:03:12 - 00:20:22:17
Cas Piancey
Right. You still have access to them and I like this. Just it it's so hypocritical to what cryptocurrency is supposed to stand for to be like, okay, so now I'm going to bring this trust company in and that'll hold your money for you. And it can be profitable for everybody. And like, what are we doing? What is happening here?

00:20:22:17 - 00:20:42:26
Cas Piancey
What or the stablecoin with the Terra and the Luna and what are we doing? What is this? Why are we doing this? Is there a reason to do it? Is this innovative? Is it interesting? Is it changing the world? And the answer is no. The answer is no to all of for all the stuff I just mentioned, it is no, there could be defi protocols or decentralized exchanges or something.

00:20:42:26 - 00:20:55:23
Cas Piancey
You want to talk about something different? Fine. Maybe there's real world use case there and niche use cases there. But like a trust company helping cryptocurrency companies, there is no fucking innovation there. There's none. Yeah.

00:20:55:25 - 00:21:24:10
Bennett Tomlin
You're right, there's not. It turns out that a series of unregulated banks, bucket shops and loan sharks primarily incorporated in jurisdictions with extraordinary financial privacy laws, results in a bunch of their clients getting taken advantage of a thing that was known before they all started doing this. But this is why we also cover other financial frauds, is because these are the same.

00:21:24:10 - 00:21:26:27
Bennett Tomlin
It's the same. It's all this fucking thing.

00:21:27:00 - 00:21:42:07
Cas Piancey
Yeah, this is why we've we've talked about WorldCom, we've talked about Enron, we've talked about historical frauds. You got to get you got to break it up and have more interesting things. I also think, like intention is interesting. Like I do think that like SBF, I think his intentions were awful, but I also think he was like, Fuck, I need to cover this.

00:21:42:14 - 00:22:03:05
Cas Piancey
I got to leverage up so I can cover this and get my customers their money back. And he really believed that he could do it like that. Doesn't I think he should go to prison for decades, but I think the belief was really there. Like who knows what the fucking intention was that the prime trust with the C-suite, like I have no idea, but I doubt it was even something as simple as like, we just need to cover up and then we'll be okay.

00:22:03:05 - 00:22:24:20
Cas Piancey
Like you're a trust that I know it works. You're not an exchange. Even you're not a hedge fund like that is not how you should be operating. So it is a little bit different, but my gosh, it's tiring. On that note, I do want to announce that Cass Coin is getting into the trust industry, and this is an innovative alter alteration to the trust industry where we're going to have full control.

00:22:24:20 - 00:22:46:27
Cas Piancey
It's going to be Cass Coyne, Dow is going to be controlling Cass Coin trust. And of course this is all in all under the umbrella of Cass Coin Co-op, which is owned by Cass Coin Exchange. So it's not really it is a co-op, but it's not a co-op and you get ownership rights through the non ownership nft's that we will be giving away through Cass coin.

00:22:46:27 - 00:22:48:14
Cas Piancey
So make sure you sign up today.
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