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Former Bitcoin Insurance Advisor Accused of Securities Fraud

(@mpmcsweeney) | Published on February 24, 2016 at 18:55 BST
Feature

Justice

More than a year ago, an effort began to offer insurance products to companies in the bitcoin space – an intriguing idea at the time given the infancy of the industry and the inability of startups to secure this protection for user funds.

The initiative marked some key early successes – security startup BitGo and wallet service Xapo would go on to acquire insurance by way of those efforts – but at least one of those involved says demand for insurance, particularly bitcoin theft insurance, never fully materialized.

Now, a former president and founder of a business venture dedicated to promoting these insurance products to bitcoin companies is facing serious fraud allegations.

Court documents obtained by CoinDesk allege that Joseph Donnelly, founder and ex-president of Bitcoin Financial Group borrowed $300,000 from Raymond and Suzanne DeBiasa of New Jersey in 2008 to invest the money, but failed to repay the funds.

Instead, it is alleged, Donnelly, along with another individual named Ahuby Donnelly, diverted to funds for personal use – and as a means of funding for Bitcoin Financial Group in the venture’s infancy.

Allegations raised

Bitcoin Financial Group is named as one of the four defendants in the suit, along with the Donnellys and Dovetail Capital. The firm, led by Innovation Insurance Group founder Ty Sagalow, has denied any involvement with the alleged fraud.

Sagalow told CoinDesk that Joseph Donnelly left in December of last year to pursue other business activities after the venture failed to gain significant traction in the industry.

Further, he said that Donnelly never invested any of his own money into the bitcoin insurance venture, and has called the contention that Bitcoin Financial Group is somehow connected to the alleged crimes "unfounded".

When reached, attorney Jason Spiro, who is representing the plaintiffs in the US District Court for the District of New Jersey, reiterated the suit's claim that his clients were promised proceeds from the revenues of Bitcoin Financial Group.

He told CoinDesk:

"BitCoin Financial identified Joe Donnelly as its president and co-founder, Donnelly told investors they would be repaid out of BitCoin Financial deals, but tellingly BitCoin Financial has now removed all traces of Joe Donnelly."

Donnelly declined to comment for this story when reached.

Payments problems

The complaint details Donnelly's alleged investment activities prior to his time with Bitcoin Insurance Group.

According to the agreement outlined in the suit, the Donnellys were required to make monthly interest payments, equal to 12% annually, on top of the $300,000 loaned by the DeBiases.

Those payments, the complaint alleges, stopped arriving in the the fall of 2013, and despite an apparent agreement to pay back the funds in installments, the dispute was never resolved.

It was in the spring of last year, according to the complaint, that Joseph Donnelly told the plaintiffs the Dovetail venture was insolvent and that he was unable to pay them out of those assets. Yet he allegedly offered a solution: he could pay them back through the proceeds of Bitcoin Financial Group.

The filing states:

"As recently as April 2015, Mr Donnelly again asked the DeBiasas for more time to repay their investment, telling them that they would be repaid out of BitCoin Financial’s investment returns."

According to the complaint, Donnelly told the plaintiffs that "I’m a partner in a BitCoin company...if we get a couple dozen of these deals, then it’ll pay off (which I believe is in the cards)", according to the complaint.

Alleged misrepresentation

In addition to alleged securities fraud, the plaintiffs accused Donnelly of misrepresenting himself as a licensed insurance broker.

It is alleged that Donnelly’s apparent lack of licensure resulted in disciplinary action from a former employer, Lincoln Financial Group. According to LinkedIn, Donnelly worked as an agent for Lincoln between 2001 and 2010.

The filing states:

"Through their investigation into this fraud and based upon conversations with Mr Donnelly’s colleagues, the DeBiasas further learned that Mr Donnelly was not licensed by FINRA to originate [stranger-originated life insurance] policies. In addition, the DeBiasas learned that Lincoln Financial Group had investigated Mr Donnelly for his unlicensed insurance activities and that Lincoln Financial had revoked his permission to produce Lincoln Financial insurance policies."

Donnelly’s profile on the Bitcoin Financial Group website, previously removed but viewable via the Internet Archive Wayback Machine, states that he "holds his Life and Health insurance licenses as well as having completed FINRA Series 6, 7, 63 and 65 designations."

Sagalow told CoinDesk that Donnelly had previously indicated that he possessed a license to broker life insurance.

Image via Shutterstock

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