Ex-Cred execs receive combined 88-month prison term after $140m collapse

Two former executives from defunct crypto lender Cred LLC have been sentenced to a combined 88 months in federal prison for their roles in a wire fraud conspiracy.

Summary

• Cred’s ex-CEO and CFO get 88 months for defrauding 6,000+ customers of $140m
• Executives misled clients after COVID-19 crash exposed Cred’s risky strategy
• Cred’s bankruptcy left over $1b in losses by today’s crypto valuations

The conspiracy left over 6,000 customers with more than $140 million in losses.

Senior U.S. District Judge William Alsup sentenced co-founder and former CEO Daniel Schatt to 52 months behind bars. Former CFO Joseph Podulka received a 36-month term.

Cred executives pleaded guilty in May

Both defendants pleaded guilty in May to wire fraud conspiracy charges stemming from their deceptive business practices at the San Francisco-based cryptocurrency lending platform.

The sentences cap a lengthy legal battle that began with Cred’s November 2020 bankruptcy filing.

Using current cryptocurrency valuations from August, the government estimates customer losses exceed $1 billion. This makes this one of the costliest crypto lending failures to date.

Cred operated as a cryptocurrency financial services provider and offered dollar loans against crypto collateral and accepted customer deposits in exchange for promised yield payments.

The company’s business model relied heavily on partnerships with overseas entities that prosecutors say customers were largely unaware of.

The fraud conspiracy took root in March 2020 when COVID-19 market turmoil triggered a Bitcoin price crash.

This event exposed fatal flaws in Cred’s risk management strategy and set the stage for the executives’ subsequent deceptive conduct.

COVID Crash Exposed Cred’s Risky Business Model

The March 2020 crypto market crash badly affected Cred’s operations. Within days of Bitcoin’s (BTC) price collapse, the company learned from its hedging partner that it was financially underwater and needed to liquidate all trading positions immediately.

The hedging relationship, which was meant to protect Cred from cryptocurrency price volatility, abruptly ended. This left the company with no protection against future market swings and exposed customers to risks they weren’t informed about.

Compounding these problems, Cred discovered that a Chinese company it relied on for generating customer yields could not repay tens of millions of dollars. Instead of disclosing these mounting financial problems, Schatt and Podulka actively misled customers about the company’s health.

During a public “Ask Management Anything” session on March 18, 2020, Schatt assured customers that Cred was “operating normally” despite being aware of the severe financial distress.

Both executives will also serve three years of supervised release and pay a fine of $25,000.