Image: Frosties

An alleged “multi-million-dollar scheme” to defraud purchasers of non-fungible tokens (“NFTs”) from a collection that was released in January has prompted action by the U.S. Department of Justice. In a criminal complaint that was filed with the U.S. District Court for the Southern District of New York and unsealed on Thursday, the U.S. government charges Ethan Nguyen and Andre Llacuna – the 20-year-old creators of the “Frosties” NFTs – with conspiracy to commit wire fraud and conspiracy to commit money laundering in connection with what is being touted as the first U.S. federal criminal case involving the class of digital assets whose popularity exploded last year. 

“Rather than providing the benefits advertised to Frosties NFT purchasers,” Nguyen and Llacuna, who were arrested in Los Angeles, “transferred the [$1.1 million in] cryptocurrency proceeds of the scheme to various cryptocurrency wallets under their control,” the DOJ stated in its complaint and a corresponding release on Thursday. Among the promises that the two defendants made to purchasers of the NFTs were that they would “receive certain benefits, including giveaways and access to a metaverse game.” And while “at least two of the three [NFT] purchasers who visited the Frosties website and purchased one or more Frosties did so based on, among other things, the advertised Frosties Benefits,” the DOJ argues that “in reality, there were no such benefits.

After all 8,888 of the Frosties NFTs, which were offered up for approximately 0.04 ETH (which at the time of the Frosties NFT sale, was equivalent to approximately $123 to $136), sold out following a public sale on January 9, 2022, the DOJ alleges that “certain Frosties purchasers observed the suspicious transfer of all the Frosties proceeds,” approximately 356.56  ETH ($1.1  million), from the Frosties Wallet Address-1 to a separate crypto wallet. 

This transfer – which was publicly viewable, as “each cryptocurrency transaction is publicly recorded on the blockchain” – coincided with “the deactivation of the Frosties website and certain social media accounts that had been active promoting and discussing the Frosties NFT sale.” The government asserts that this amounts to a “rug pull,” which means that “the Frosties project creators had ended the NFT project prematurely and taken the purchasers’ money.”  (A s the term suggests, a “rug pull” refers to a scenario where the creator of an NFT and/or gaming project solicits investments and then abruptly abandons a project and fraudulently retains the project investors’ funds.)

Prior to their arrests on Thursday, the DOJ stated that Nguyen and Llacuna were preparing to launch the sale of a second set of NFTs advertised as “Embers,” which was anticipated to generate approximately $1.5 million in cryptocurrency proceeds. 

Both Nguyen and Llacuna have been charged with one count of commit wire fraud, in violation of 18 U.S.C. § 1349, which carries a maximum sentence of 20 years in prison; and one count of conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h), which also carries a maximum sentence of 20 years in prison.

The case is United States v. Nguyen and Llacuna