A Los Angeles entrepreneur who sought to merge the bitcoin culture with social media by letting people bet on the future reputation of celebrities and influencers has been arrested on a fraud charge.
Nader Al-Naji, 32, was arrested in Los Angeles on Saturday on a wire fraud charge filed against him in New York, and civil claims were brought against him by federal regulatory authorities on Tuesday.
He appeared in federal court on Monday in Los Angeles and was released on bail.
Authorities said Al-Naji lied to investors who poured hundreds of millions of dollars into his BitClout venture. They say he promised the money would only be spent on the business but instead steered millions of dollars to himself, his family and some of his company’s workers.
A lawyer for Al-Naji did not respond to an email seeking comment.
The Securities and Exchange Commission said in a civil complaint filed in Manhattan federal court that Al-Naji began designing BitClout in 2019 as a social media platform with an interface that promised to be a “new type of social network that mixes speculation and social media.”
The BitClout platform invited investors to monetize their social media profile and to invest in the profiles of others through “Creator Coins” whose value was “tied to the reputation of an individual” or their “standing in society,” the commission said.
It said each platform user was able to generate a coin by creating a profile while BitClout preloaded profiles for the “top 15,000 influencers from Twitter” onto the platform and had coins “minted” or created for them.
If any of the designated influencers joined the platform and claimed their profiles, they could receive a percentage of the coins associated with their profiles, the SEC said.
In promotional materials, BitClout said its coins were “a new type of asset class that is tied to the reputation of an individual, rather than to a company or commodity,” the regulator said.
“Thus, people who believe in someone’s potential can buy their coin and succeed with them financially when that person realizes their potential,” BitClout said in its promotional materials, according to the Securities and Exchange Commission.
From late 2020 through March 2021, Al-Naji solicited investments to fund BitClout’s development from venture capital funds and other prominent investors in the crypto-asset community, the commission said.
It said he told prospective investors that BitClout was a decentralized project with “no company behind it … just coins and code” and adopted the pseudonym “Diamondhands” to hide his leadership and control of the operation.
The Securities and Exchange Commission said he told one prospective investor: “My impression is that even being ‘fake’ decentralized generally confuses regulators and deters them from going after you.”
In all, BitClout generated $257 million for its treasury wallet from investors without registering, as required, with the Securities and Exchange Commission, the agency said.
Meanwhile, it said, BitClout spent “significant sums of investor funds on expenses that were entirely unrelated to the development of the BitClout platform” even though it had promised investors that would not happen.
The SEC said Al-Naji used more than $7 million of investor funds for personal expenditures like rental payments for a Beverly Hills mansion and extravagant cash gifts to family members.
It said Al-Naji also transferred investor funds to BitClout developers, programmers, and promoters, contrary to his public statements that he wouldn’t use investor proceeds to compensate himself or members of BitClout’s development team.
A Southern District of New York U.S. Attorney’s Office statement said one investor was defrauded of about $3 million after Al-Naji routed the investor’s funds “through multiple accounts for the ultimate benefit of himself and family members.”
The Los Angeles Daily News contributed to this story.
