The Securities and Exchange Commission announced this week it imposed an asset freeze against Virgil Capital LLC concerning alleged securities fraud involving the Virgil Sigma Fund LP, its flagship cryptocurrency trading fund.
The SEC’s complaint alleges that Stefan Qin, who owns and controls New York City-based Virgil Capital and its affiliated companies, has defrauded investors in the Sigma Fund since at least 2018 by making material misrepresentations about the fund’s strategy, assets and financial condition. The Sigma Fund is a limited partnership pooled investment fund. In a Form ADV filed in March, the fund’s listed assets were $92.4 million.
According to the SEC, the Sigma Fund’s offering materials state that it employs a proprietary, algorithmic-based arbitrage strategy to trade cryptocurrencies or digital assets on liquid platforms around the world, primarily using a market-neutral strategy. Qin, who founded the fund four years ago when he was 19, claimed the fund uses more than 40 digital asset trading platforms around the world, and has achieved positive returns in every month except one.
Specifically, the SEC pointed to a Virgil Capital marketing brochure for the Sigma Fund that listed monthly performance figures from August 2016 through August 2019 showing positive monthly returns for 36 of the 37 months since inception, including one monthly return of 48.7%. It also showed an average monthly return of 10% over that period compared to 11% for Bitcoin, but Virgil Capital claimed that Bitcoin was more volatile and had 16 negative monthly returns versus just one for the Sigma Fund. It further stated that Bitcoin’s cumulative return over the same period was about 1500% versus 2811% for the Sigma Fund.
In its complaint, the SEC states that Qin and his entities don’t maintain financial books and records for the Sigma Fund, and that Virgil Capital hasn’t obtained audited financial statements for the Sigma Fund for at least two years. The complaint also said Qin admitted to an employee at one of his entities that he “significantly departed from the Sigma Fund’s stated investment strategy in the past” by investing fund assets in initial coin offerings and in “circular” investments where the Sigma Fund invested in a third-party fund and the third-party fund invested in the Sigma Fund.
The complaint alleges that Qin and the entities he controls misled investors to believe their money was used solely for cryptocurrency trading based on a proprietary algorithm, while Qin and the entities used investment proceeds for personal purposes or for other undisclosed high-risk investments.
The SEC also states that since at least July 2020, Qin and Virgil Capital told investors seeking redemptions from the Sigma Fund that their interests would be transferred to the VQR Multistrategy Fund LP, which is controlled by Qin but has separate management and operations. This fund is advertised as investing in cryptocurrencies and other digital assets, with digital assets valued at roughly $25 million.
The SEC’s complaint alleges that no funds were transferred and the redemption requests remain outstanding. It further alleges that Qin is actively attempting to misappropriate assets from the VQR Fund and to raise new investments in the Sigma Fund.
Thus, the SEC said, it was compelled to obtain an order imposing an asset freeze and other emergency relief against Virgil Capital.
“This emergency action is an important step to protect investor assets and prevent further harm,” Kristina Littman, chief of the SEC Enforcement Division’s Cyber Unit, said in a statement. “Qin allegedly made false promises to lure investors and then continued his deception to conceal his misuse of investor funds.”
The regulator’s complaint, which was filed in the Southern District of New York last week, charges Qin, Virgil Capital and four related entities controlled by Qin with violations of the antifraud provisions of the federal securities laws, and seeks permanent injunctions, including conduct-based injunctions, disgorgement with prejudgment interest and civil penalties.
Qin is a citizen and resident of Australia and a part-time resident of New York City. The SEC said he is currently believed to be in Seoul, South Korea.
Qin’s LinkedIn page lists him as managing partner of Virgil Capital, and he describes himself as a quant with a deep interest and understanding in blockchain technology. “I’m using this knowledge to build the next generation of financial services,” he says on the site. Qin didn’t respond to an email request for a comment.