Former Cred Leaders Plead Guilty in $150 Million Crypto Fraud Scheme

Two former top executives of failed crypto lender Cred Inc. pleaded guilty Tuesday to federal charges of conspiracy to commit wire fraud in a scandal that cost customers more than $150 million crypto cost, and the consequences are far-reaching.

A disastrous deception

Daniel Schatt, co-founder and former CEO of Cred, and Joseph Podulka, its former CFO, admitted in a federal court in San Francisco that they intentionally misled customers about the company’s financial health and lending practices in 2020. U.S. District Judge William Alsup noted that the executives collectively presented an inconsistent and unreasonably positive, and therefore misleading, picture of their company. In their defense, they acknowledged that they shared only positive information while deliberately concealing negative information in order to incentivize customers to deposit their crypto assets with Cred.

Cred filed for bankruptcy in October 2020, with customers filing more than 6.000 claims worth over $140 million.

The run-up to the downfall

Cred's decline effectively began during the March 2020 flash crash, when the value of Bitcoin plummeted as much as 40%, causing $750 million in liquidations in a single day, just as the COVID-19 pandemic was taking hold. Cred executives were desperately trying to keep their business afloat by attracting new customer funds and deterring escape requests.

Schatt explained in court that the crash posed a huge threat to Cred, as they were unable to meet their margin calls. However, Cred’s response to the market situation was only the beginning of their downfall. The situation worsened further when Cred faced a $40 million deficit due to unpaid loans, mainly from MoKredit, their main lender. This company was co-founded by Cred’s co-founder, Lu Hua, and provided “unsecured microloans to Chinese gamers,” according to government data.

Cred reportedly invested approximately 80% of its client assets in MoKredit, making the company’s solvency entirely dependent on the borrower’s ability to repay. Despite the high risk, MoKredit was Cred’s primary source of income, generating almost all of the interest income for its client revenues. However, MoKredit’s repeated failures were never disclosed to Cred’s clients.

Your curiosity may now be further piqued, especially when I report that Chief Capital Officer James Alexander, who was also involved in the case, is accused of embezzling approximately $2 million worth of Bitcoin.

The verdict and its consequences

Prosecutors have recommended up to 72 months in prison for Schatt and 62 months for Podulka. The hearing is scheduled for August 26. We live in tense times, where the consequences of this kind of misconduct will reverberate in the crypto world for a long time to come.

Frequently Asked Questions

What is the reason for the charges against the former Cred executives?
The former executives pleaded guilty to intentionally misleading customers about the company's financial health, leading to a loss of up to $150 million in crypto for their customers.

What was MoKredit's role in Cred's downfall?
Cred invested virtually all of its customer assets in MoKredit, making its financial stability dependent on repayments from this lender, which ultimately defaulted.

What are the possible punishments for the accused?
Prosecutors have recommended prison sentences of up to 72 months for Daniel Schatt and 62 months for Joseph Podulka, with a hearing scheduled for Aug. 26.