2 Founders of $32 Million Centra Virtual Currency Project Are Arrested

SAN FRANCISCO — Federal authorities have arrested two founders of a virtual currency that raised $32 million from investors last year and won an endorsement from boxer Floyd Mayweather.

The co-founders of the Centra virtual currency, Sam Sharma and Robert Farkas, were arrested on Sunday, a day before the Securities and Exchange Commission released a complaint against the men and announced that it was halting the project.

Centra raised $32 million last summer and fall in a so-called initial coin offering, a method of fundraising in which companies sell custom virtual currencies. The Centra team said at the time that the Centra token would give investors access to a new virtual currency exchange and a virtual currency debit card that would operate on the Visa and Mastercard networks.

The SEC said in its complaint that the Centra team had never received approval from Visa and Mastercard and had misled investors on several other counts. The SEC said that several of the executives listed on the Centra website were fictitious.

Most of the claims in the SEC complaint were detailed in an article in The New York Times about Centra in October.

A co-director of the SEC’s enforcement division, Stephanie Avakian, said in a statement that the Centra co-founders had “sold investors on the promise of new digital technologies by using a sophisticated marketing campaign to spin a web of lies about their supposed partnerships with legitimate businesses.”

Lawyers for Sharma and Farkas did not respond to emails seeking comment Monday evening. The authorities did not charge a third man who had been listed as a Centra co-founder, Raymond Trapani.

Initial coin offerings, or ICOs, emerged suddenly last year to become one of the most popular ways for startups to raise money, with investors pouring more than $6 billion into such offerings. But ICOs operate in a regulatory gray area, and that has drawn a swift blowback from authorities around the world.

The SEC is said to have sent subpoenas to dozens of ICO projects, and has already sought to halt a handful of such projects.

The Centra founders appear to have been the first people arrested because of a coin offering. In addition to the SEC complaint, the United States attorney for the Southern District of New York brought criminal charges against Sharma and Farkas — including conspiracy to commit securities fraud, securities fraud, conspiracy to commit wire fraud and wire fraud.

Farkas had a flight reservation to leave the country on Sunday but was arrested before he could board the plane, according to the SEC complaint.

The complaint alleges that the men “engaged in an illegal unregistered securities offering and, in connection with the offering, engaged in fraudulent conduct and made material misstatements and omissions designed to deceive investors in connection with the offer and sale of securities in the Centra ICO.”

SEC Chairman Jay Clayton has said that most tokens offered through coin offerings should be categorized as securities and registered with regulators, which few have done.

Sharma announced that he was leaving Centra after the Times article was published last fall, but the company has continued its operations and said this week that it would release the “Centra Roadmap 3.0” at a conference in South Korea.

After the arrests were announced Monday, the price of Centra’s token on virtual currency exchanges crashed and the administrators of a Centra chat room on the Telegram messaging app expressed confusion.

“The admins have no more info then you,” an administrator named Tomo wrote to the other users.