FBI: Japheth Dillman allegedly scammed friends and investors in a crypto fraud scheme

Japheth Dillman established a reputation in the game industry as a financial leader, serving as a cofounder of the game accelerator YetiZen.

But lately, that reputation is in jeopardy. On April 27, the U.S. Attorney in San Francisco, the FBI and the Internal Revenue Service said they arrested Dillman in connection with an alleged scheme to defraud victims into investing in a cryptocurrency trading fund. On top of that, Dillman has been accused (Facebook link) of failing to pay a $50,000 bill from circus performers for a personal birthday party that Dillman threw for a friend, according to The Dahlias, who said he hired them for a performance.

The authorities said that the 44-year-old San Francisco resident is charged with defrauding people who invested in a fund, Block Bits Fund I, LP, that he ran with his general partner David Mata, 42, of Spokane, Washington. Dillman did not comment on the allegations related to the FBI charges, except to say he was cooperating with the ongoing investigation, and he has not entered a plea yet.

“I have not been found guilty, there hasn’t been a trial yet. I am scheduled to go in for my first interview with the investigators next month to go over evidence,” Dillman said. “They have yet to even interview me.”

The federal fraud case

Dillman allegedly told potential investors that Block Bits Fund was developing a novel autotrader that would automatically complete cryptocurrency arbitrage trades on different exchanges. Dillman told potential investors that Block Bits Fund would profit from exploiting the price differences between different cryptocurrencies being sold on various exchanges.

According to Dillman, investor funds would be used to develop and operate the autotrader, which he told investors was functioning and already returning profits. The complaint further alleges that, together with Mata, Dillman raised approximately $960,000 from investors by misrepresenting the status and functionality of the technology underlying the autotrader and by making false representations regarding the manner investor funds were being used, authorities said.

The misrepresentations Dillman allegedly made are described in the complaint. For example, Dillman represented to multiple investors in June and July 2017 that the autotrader was already functioning and returning a substantial profit to Block Bits Fund. In fact, according to the complaint, there was no functioning autotrader at the time, and any claims regarding the autotrader’s ability to generate profits were false.

According to the complaint, Block Bits Fund was never able to develop a functioning autotrader at any point in its existence. Further, in August 2017, Dillman represented to investors in an email that the arbitrage autotrader was being tested and that it would be deployed for automated trades within a week. The complaint alleges that these representations were false. According to the complaint, there was no prospect that the autotrader could be developed and deployed within one week of the date of the email, as development of the autotrader had not yet begun.

In addition, the complaint describes how Dillman allegedly misrepresented how investor funds were being used by representing that funds were being placed in “cold storage” where they would return high rates of profit for investors.

“Cold storage” refers to a way of storing cryptocurrency that is supposedly safe and not exposed to risky investments. Dillman informed investors on multiple occasions that Block Bits Fund had reached “cold storage” deals with third parties whereby investor funds would be placed in cold storage for a period of time and receive a significant profit at the end of the storage period.

However, rather than place the investor funds in cold storage for safekeeping, Dillman and Mata instead diverted the funds and used them to invest in risky, cryptocurrency-related ventures, none of which involved cold storage or were related to the stated purpose of Block Bits Fund. Dillman said that one of the reasons that investors were not paid is because a third-party “cold storage” firm did not pay Block Bits Fund the amount that it was obligated to pay.

Moreover, the complaint alleges Dillman and Mata sent misleading updates and profit reports to investors representing that their funds were being stored securely when, in fact, they were invested in risky ventures. According to the complaint, all of the investments failed and investors lost a substantial portion of their funds.

In sum, the complaint alleges Block Bits investors lost approximately $508,000 due to Dillman’s scheme. Dillman is charged with one count of wire fraud, in violation of 18 U.S.C. § 1343. Mata also is charged with one count of wire fraud in a separate document, based on a filing. If convicted, Dillman and Mata face a maximum statutory prison sentence of 20 years.

In addition, the charge carries a maximum $250,000 fine and three years of supervised release. However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. § 3553.

A criminal complaint contains mere allegations, and the defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

The case is being prosecuted by the Corporate and Securities Fraud Section of the U.S. Attorney’s Office for the Northern District of California. The U.S. Attorney’s Office appreciates the assistance of the San Francisco Regional Office of the Securities and Exchange Commission.

Dillman’s friends

Dillman was able to raise the money for the fund in part because he knew people in the game industry.

He was the cofounder of YetiZen, an incubator for games in San Francisco in 2011. YetiZen was one of few entities that invested regularly in game companies in those days, and Dillman became well known in the game industry. He spoke at a couple of our GamesBeat Summit events. But the incubator didn’t have huge hits, and it shut down in 2016.

In 2016, Dillman moved on to Clevr, which was creating a social layer in virtual reality. The company raised $150,000 in funding from HTC Vive, the maker of VR hardware. But that company didn’t take off. And after that, Dillman turned his attention to cryptocurrency and teamed up with Mata to create Block Bits Fund.

Paul Trowe, currently the CEO of Herban, a cannabis company, invested in the Block Bits Fund. He was also the former CEO of Replay Games and Pulse Interactive. He also worked for Greenleaf Media, Atari, Gremlin Interactive, and Activision.

“I was part of the FBI investigation” that led to charges, said Trowe, in an interview with GamesBeat. Part of the fund’s purpose was to engage in arbitrage, where it could buy Bitcoin or other cryptocurrencies on one exchange and sell it for a higher amount on another exchange. More than $700,000 of the money raised for the fund came from Trowe and his friends, he said.

Dillman helped raised the money and Mata’s job was to program the trading features. Trowe waited for returns on the investment and information about the trading. But the return wasn’t what it was supposed to be. Trowe said he looked up the company’s accounting firms and that those firms said that the fund was not one of their clients.

“I got all the people that I had brought into the fund. I said, ‘Hey, listen we have to pull our money out because something fishy is going on here. I don’t feel right about it,” Trowe said.

During that time, Trowe said that Dillman was not responsive when he was asking for his money back.

The company eventually paid some of the people who asked for their money back, Trowe said. Trowe said he got his money back, but he also said some other people did not. The FBI did not respond to a request for further information on the case. Trowe said there were recordings of Dillman pitching investors on a video call. Trowe said the FBI informed him he was a victim in a fraud case and that the investigation had been closed.

Dillman said he had been working on a humanitarian effort as well.

The circus performance

Dillman was friends with Christine Lee, a circus performer who had previously worked in the game-related ad industry at companies including Rave Social, Immersv, Chartboost, Google and AdMob. She had known Dillman for 10 years and considered him a friend. He encouraged her when she decided to go full-time with her circus group, The Dahlias.

Lee said in an interview with GamesBeat that the pandemic took a toll on her circus performance business, and she was delighted to hear that Dillman wanted to hire her and her circus troupe, the Dahlias, for a special birthday party. They set up a performance and Dillman gave his verbal OK. The circus group performed at a birthday party in an elegant setting, the Buena Vista Winery in Sonoma, California, with Dillman and his friends in attendance.

But Lee said that Dillman had verbally agreed to pay for the performance. Dillman claimed he was sent an invoice for $19,080 for the performance and that later on the fee was increased. Lee said that Dillman owes $50,000. Nina Sawant, cofounder of the Dahlias, confirmed that in a video about the dispute.

“He stole from us,” Sawant said. “We need to let people know about this thing that happened and ask for help.”

The Dahlias are asking for help to make themselves financially whole.

“I’m actually still in shock,” Lee said. “I didn’t get the best feeling from him, but I didn’t think he was capable of this.”

Regarding the dispute with Lee, Dillman said the amount is in dispute “over a contract I never signed.” However, as Lee points out in her video, Dillman was clearly present at an event with circus performers and a special guest.

“I am in the process of settling that personal matter,” Dillman said in a message.

Lee said that Dillman gave a verbal yes to the contract, and the company moved forward with the performance based on that assurance. As for settling the fee owed, Lee said the process has gone on for a year.

Dillman had known Lee from her years in gaming, and he had even done dogsitting for her. Dillman had told Lee he was inspired by her physical fitness and circus performances, and he wanted to get into better shape himself. He had said he met a girl and wanted to throw a birthday party for her.

Dillman allegedly told Lee to triple the usual rates, give everyone tips and pay for their flights. At the party, Dillman said he wanted to give back to the community. Lee showed a Facebook message where Dillman said to triple the rates.

“It was unbelievable. Every performer was thinking this guy is like a god, like a tech god who cares about artists and creatives,” Lee said.

Lee said she was worried about Dillman’s reaction but she felt she had to warn others about the experience that she had working with him.

Dillman had offered her work at a difficult time. Lee said the circus business was hit hard by COVID-19 as public performances were no longer possible.

“Here’s this person literally taking money from people that have already lost so much,” she said. “It was this moment where the emotional side of it had the whole cast and crew were in tears at the end of the night when we were hugging it out and were finally on our way back. This is a sign of hope. The irony. I laugh now, but it’s pretty sickening.”

Originally appeared on: TheSpuzz