Two NFT Developers Charged in $400K ‘Rug Pull’ Scheme

In a landmark case highlighting the risks of digital asset scams. One NFT developer has been found guilty and another has pleaded guilty in a U.S. court for conspiracy to commit wire fraud and money laundering. The charges stem from an NFT “rug pull” worth nearly $400,000. Involving the sale of three collections on the Solana blockchain: “Undead Apes,” “Undead Lady Apes,” and “Undead Tombstone.”

The projects, launched in 2022, initially sold NFTs for $5 each, quickly generating $135,000 in sales. However, as hype around the projects grew, the developers, 21-year-old Berman Jerry Nowlin Jr. and 25-year-old Devin Alan Rhoden, capitalized on the growing interest. Ultimately collecting close to $400,000 from hundreds of investors. At its peak, an Undead Apes NFT reached a trading price of $360.

False Promises and ‘Rug Pull’ Tactics

The Department of Justice (DOJ) stated that the developers lured investors with misleading promises. Including claims of partnerships with prominent businesses, substantial project reinvestment, and added utilities for NFT holders. Just a month after the launch, the developers abandoned their project. Shutting down communications by deleting the associated Discord and Twitter accounts—actions the DOJ identified as classic signs of a “rug pull.”

A rug pull, as defined by the DOJ, is “a cryptocurrency investment fraud scheme where developers abandon a project, take investor funds, and leave investors with a worthless asset.”

Concealing Their Trail with Crypto Mixing and Chain-Hopping

To evade detection, the developers employed techniques to hide their activities. They used the now-banned Tornado Cash crypto mixer to obscure fund transfers, a process known as “chain-hopping,” which involves moving assets across multiple blockchains—in this case, between Solana and Ethereum. After converting the funds to Ethereum. Nowlin further obscured the trail by swapping the cryptocurrency for U.S. dollars. Which he then deposited into his bank account.

Legal Proceedings and Sentencing

Following these revelations, Nowlin was found guilty on charges of conspiracy to commit wire fraud and money laundering, with a potential prison sentence of up to five years. His sentencing is scheduled for January 2025. Rhoden, a Floridian co-conspirator, pleaded guilty to the same charges in May 2024 and is set to be sentenced later this month.

This case serves as a stark reminder of the importance of investor vigilance in the evolving world of digital assets. Where promises of quick profits can often mask fraudulent schemes. The DOJ’s action against these developers underlines its commitment to prosecuting crypto-related fraud. As regulatory authorities continue to build safeguards in response to these scams.