Fraud Alleged at Three Israeli ICOs That Raised $250M

A lawsuit filed on May 25 by employees of an Israeli venture capital fund alleges that three of Israel’s largest initial coin offerings of 2017 and 2018 were outright scams.

The three ICOs, launched by Sirin Labs, Stx Technologies Limited (Stox) and Leadcoin, collectively raised $250 million from investors around the world.

The plaintiffs claim that none of the three companies ever developed a product as they had promised investors. Instead, the plaintiffs allege, the defendants brazenly appropriated investors’ money for their own personal use.

An initial coin offering is a type of fundraising used by blockchain startups. The investor is presented with a short film about the startup, biographies of its founders, and a “white paper” explaining the technology and business plan in more detail. If the investor is impressed by the startup, he can buy tokens in its initial coin offering. These tokens often give him access to the product and if the product is successful, it is hoped, the tokens will rise in value on secondary exchanges.

The $16.1 million lawsuit was filed by Roee Brocial and Eran Okashi, former employees of the Singulariteam venture capital fund, against Moshe Hogeg, Adi Sheleg, Ido Sadeh Man, Yaron Shalem, Shmuel Asher Grizim, Avishai Ziv (Sonenriech), Singulariteam Holding II and Singulariteam Ltd.

Neither Hogeg nor any of the other defendants responded to The Times of Israel’s requests for comment. However, in statements to other media outlets, Hogeg has denied [Hebrew link] the allegations and said the lawsuit is an attempt by disgruntled employees to extort him.

Broncial and Okashi, who according to the complaint are on unpaid leave from Singulariteam due to the coronavirus pandemic, allege that the defendants fooled them into thinking that the Sirin Labs, Stox and Leadcoin ICOs were legitimate. As a consequence, they invested their own money and persuaded family and friends to invest in the three startups, and have suffered financial damages and psychological trauma as a result, they claim.

Okashi was an accountant for companies under the Singulariteam umbrella, while Broncial was officially employed by Sirin Labs but effectively served as a personal assistant to Singulariteam’s largest shareholder, Moshe Hogeg, the lawsuit alleges.

Hogeg, a startup entrepreneur who emerged from obscurity in the early 2010s, is best known for attracting celebrity investors to his startup ventures, including Mexican billionaire Carlos Slim, film star Leonardo Dicaprio and Kazakh oligarch Kenges Rakishev. Critics have described Hogeg as a “serial failed entrepreneur” who manages to attract investors through good PR and uncritical articles in the media. Hogeg is also the owner of the Beitar Jerusalem soccer team.

Hogeg has been sued multiple times by investors of various ventures who alleged he defrauded them. In most cases, Hogeg settled with the plaintiffs, who in turn signed a nondisclosure agreement.

Hogeg is a 70 percent shareholder of Singulariteam, while other defendants own smaller shares in the fund. Adi Sheleg owns 22.5 percent of Singulariteam, Ido Sadeh owns 5 percent, and Yaron Shalem owns 2.5 percent.

Shmuel Grizim, another defendant in the lawsuit, is the CEO of an Israeli company known as Webydo Systems as well as the CEO and founder of Leadcoin Ltd. Avishai Ziv, a sixth defendant, is the CEO of Singulariteam. He also ran a subsidiary of Singulariteam known as Alignment Consulting.

According to the plaintiffs, the defendants set up a series of blockchain-based companies that had almost no real activity and whose sole purpose was to defraud investors. The complaint focuses on three Singulariteam ventures: Sirin Labs, which raised $158 million in July 2017 for a secure smartphone; Stx Technologies Limited, which raised $34 million in August 2017 for a sports and current events prediction market; and Leadcoin, which raised $50 million in March 2018 for a “decentralized lead sharing network.”

The Stox ICO was endorsed by American boxer Floyd Mayweather in July 2017 on Instagram while Sirin Labs was promoted by soccer star Lionel Messi and supermodels Irina Shayk and Sara Sampaio.

“Soon after they raised money and sometimes while they were doing so, the defendants emptied the companies and left them without any substantial activity, leaving investors with huge losses,” the lawsuit alleged.

The complaint alleges that Singulariteam’s owners were attracted to the fact that cryptocurrencies were unregulated.

“The defendants understood the advantages and the potential inherent in raising money through initial coin offerings, especially the lack of oversight and regulation in this area,” the complaint stated.

The plaintiffs submitted a transcript of a recording of Steven Kruger, Singulariteam’s legal counsel, in which he told one of the plaintiffs that Moshe Hogeg had stolen from them and other investors and could end up in prison.

“So what if Moshe goes to jail?” Kruger allegedly said. “You basically have to suffer and Roi has to suffer because Moshe has basically stolen from you and stolen from everyone else and now you have to be nice to him so he doesn’t go to jail. The guy is not… he is not nice.”

Kruger died recently from complications following surgery.

According to the plaintiffs, the defendants used the money they raised on expensive real estate, including a $15,000-a-month penthouse in Tel Aviv’s W Tower that served, along with other apartments, as “bordellos for all intents and purposes.”

According to the complaint, the defendants signed fictitious loan agreements between the three blockchain companies and other companies owned by themselves or their business associates.

These allegedly included Microverse Ltd., owned by brothers Uriel and Daniel Peled, close associates of Hogeg; Alignment, headed by Avishai Ziv; and the Beitar Jerusalem soccer team, owned by Hogeg.

The Times of Israel sent an email to the Peled brothers’ company Orbs requesting a response, but did not hear back.

The plaintiffs allege that the defendants took €17,629,197 that had been invested in Stox and used it to invest in the ICO of Telegram.

According to the plaintiffs, 10 percent of the tokens issued for Leadcoin were sold by Grizim’s Webydo to a company called Ladera International S.A. for $10 million. Ladera International S.A. was owned by Yaniv Levi.

The plaintiffs claimed that they personally invested in the ICOs and encouraged their friends and families to do so. They had also been promised commissions for their marketing efforts that they allege they never received.

The plaintiffs further allege that about a month after Sirin’s ICO, the value of one of its tokens had risen to $3.80. The plaintiffs had wanted to sell their tokens but were prohibited from doing so, even as some of the defendants sold theirs.

The plaintiffs allege that they currently suffer from anxiety and depression due to their financial losses and due to the anger of family members who invested in the ICO.

“Because of his closeness to Hogeg,” the complaint alleges, “and because he served as his personal assistant, Brocial was exposed in the course of his work to shocking and blatantly unethical behavior on the part of Hogeg. As a result, Brocial continues to suffer from nightmares and anxiety.”

From binary options to ICOs

ICOs became wildly popular in 2017, with one former US regulator telling The Economist that year: “Regulators have never seen a new financial product explode with the speed and velocity [of ICOs].”

Several Israeli ICOs, including Sirin Labs, Bancor and Kin, were among the world’s top grossing such companies.

In Israel, the ICO craze occurred just as the Knesset outlawed the largely fraudulent binary options industry, which had employed thousands of Israelis, including many digital marketers.

The Times of Israel reported in December 2017 that digital marketers from the binary options industry were being encouraged to market ICOs.

At the time, Shmuel Hauser, then-chairman of the Israel Securities Authority, sounded the alarm about ICOs.

“We want to make sure that the world of cryptocurrencies does not turn into a mutation of the binary options industry, that it does not become a haven for scammers,” he said.

Hauser left his job a few weeks later and now works for eToro, an online trading company that sells cryptocurrencies, among other financial products.

The Times of Israel attended an event in December 2017 at which a representative of Hogeg’s company Traffic Lords enthused about the unregulated nature of the cryptocurrency industry.

“The advantage in affiliate marketing of cryptocurrencies and blockchain technologies is that it’s a blue ocean,” a representative of Traffic Lords said.

“It’s the Wild West. No one knows what is going on. Facebook aren’t blocking the ads yet. Google aren’t blocking the ads. You can do whatever you want.”

Facebook banned ICO ads at the end of January 2018, followed by Google, which banned the ads in March 2018. But by that time ICOs had earned many billions of dollars, to a great extent with the help of Google and Facebook. Google and Facebook’s targeted advertising capabilities allow advertisers to take advantage of data collected by Facebook and Google to home in on the people who will be most susceptible to their ads.

In December 2017, The Times of Israel raised the possibility with Hogeg that some ICOs might be fraudulent.

Hogeg rejected this notion and said he had a good relationship with then-finance minister Moshe Kahlon and other regulators.

“We work in partnership with Israel Securities Authority (ISA) to allow Israeli startups’ work and achievements to be regulated, and that’s why I initiated a meeting with Finance Minister Kahlon, in October to discuss the challenges the Startup Nation is facing in this space, and the potential of the Israeli blockchain community,” he said.

“Anyone who mistakenly thinks this is ‘easy money’ or fraud is up for a ruthless awakening: this is a community of highly intelligent and sharp individuals that are setting the wheels of the next tech and innovation era in motion.”