Now that Pirateat40 closed down his operatations thanks to all the fud that was going on and growing on the forum, I expect everyone that spreads this fud, accused and insulted Pirate and the people that supported him to apologize. Not only did Pirate brought us a great opportunity for investors (once in a lifetime actually), he did help stabilise and grow steadily bitcoin price, volume exchange, and thus contributed to the success of bitcoin. For that, Pirate, I want to thank you. You’ve done a wonderful work, and I hope you’re stay around here.
– Raphael Nicolle, founder of the Bitfinex exchange, just after Bitcoin
Savings & Trust collapsed
By 2012, as the Bitcoin subculture was heating up, high-yield investment programmes – i.e., Ponzi schemes – had begun manifesting in the bitcointalk.org “Lending” section. One user even literally called high-yield investment programmes a “Bitcoin Killer App”.
The most famous of these was Bitcoin Savings & Trust, opened in late 2011 by Trendon Shavers, a.k.a. Bitcointalk forum user Pirateat40 (named after the song “A Pirate Looks at Forty” by Jimmy Buffett). It offered interest of 7% weekly – or about 3300% annually – on investments over 25,000 BTC. Hands up anyone who can see a problem here …
Investment was strictly limited and accounts were much-coveted. Pirateat40 was a VIP Donor (50 BTC) to Bitcointalk; he built up a strong forum reputation and got other highly-rated people to resell his investment programme, offering “Pirate Pass-Through” bonds. Those who pointed out that this had all the really obvious signs of being a Ponzi scheme had much lower forum reputations, especially after saying this.
Pirateat40 claimed to be making his money from Bitcoin market arbitrage, including selling bitcoins in person or in large quantities. Others were not reassured; he had so many bitcoins in his scheme that others worried at the effect on Bitcoin itself when the scheme collapsed.
On 17 August 2012, basic arithmetic reasserted itself. Pirateat40 announced the closure of Bitcoin Savings & Trust. He said he had 500,000 BTC (about $5.6 million) in the fund as of its closure and that he would be returning it to
investors. Apart from some refunds to friends and long-time investors, this of course didn’t happen.
On 17 September, Pirateat40 announced on IRC that “the earliest estimated time that coins can begin moving is Friday, Oct 12th” (not that any coins actually moved on 12 October). He also declared that “Those looking to file a suit against me or BTCST will not be eligible for repayment” and “Threats are taken seriously by myself and my attorney. A few of you will find out how serious I mean.”71
Burnt investors tracked him down. They found his name, they found where he lived, they even found his business that had closed at the same time. They initially had some trouble convincing the authorities not only that this was really money, but that they had given it to some guy on an Internet forum called “Pirate” on the strength of him saying “sure, I’ll double your bitcoins, no worries.”
The SEC started investigations and depositions in late 2012. It turned out Shavers didn’t have a lawyer after all, and spilled the beans on his entire operation in deposition, including admitting to destroying evidence (server logs) that had specifically been subpoenaed. He did finally find a lawyer, who set up a Bitcoin donation address to fund the case since Shavers’ assets had been frozen.
The SEC filed a civil enforcement action against Shavers in July 2013. As well as running the scheme as a Ponzi, he had taken about 150,000 BTC to day trade on Bitcoinica and Mt. Gox, from which he took about $150,000 to spend personally. His lawyer’s entire defense was that bitcoins were not “money” under US law because they were not legal tender; the judge didn’t buy it, and Shavers was required in September 2014 to pay back $40.7 million. He was also prosecuted for criminal securities fraud for the Ponzi in November 2014, pled guilty in September 2015 and was sentenced to one and a half years in jail. The lawyer later maintained that the SEC only went after Shavers because they were upset they hadn’t caught Bernie Madoff in time, and not at all because Shavers stole millions of dollars from people.
The astounding thing is how successful such an obvious Ponzi had been. Pirateat40 held about 7% of all bitcoins in circulation at the time. Some Bitcoiners offered insurance against Bitcoin Savings & Trust failing, then put the insurance premiums into the scheme; or just didn’t pay up when it went down. Others offered investment schemes that were pass-throughs to Pirateat40’s scheme, while swearing up and down they weren’t.
