Crypto founders appeal landmark securities fraud convictions at 11th Circuit

Michael Kane and Shane Hampton, convicted in 2024 for manipulating Hydro token prices, are challenging the first federal ruling classifying cryptocurrency as a security.

Hydro token manipulation case tests limits of federal securities law

Two cryptocurrency creators asked a federal appeals court on Friday to overturn their convictions in a case that, for the first time, labeled a cryptocurrency a security under U.S. law — and its manipulation as securities fraud.

Courthouse News Service reports that Michael Kane, former CEO of Hydrogen Technology, and Shane Hampton, the company's head of engineering, argued before an 11th Circuit three-judge panel in Miami that the federal government had misapplied securities law to their Hydro cryptocurrency token.

According to prosecutors, Kane and Hampton used automated bots to execute more than $300 million in "spoof trades" designed to artificially inflate the Hydro token's price and attract investors. The scheme ran for roughly 10 months across 2017 and 2018, generating nearly $3 million in profits.

A federal jury convicted both men in February 2024 of conspiracy to commit securities price manipulation and conspiracy to commit wire fraud. Hampton was sentenced to two years and 11 months in prison; Kane received three years and nine months.

"For the first time, a jury in a federal criminal trial found that a cryptocurrency was a security, and that manipulating cryptocurrency prices was securities fraud," Justice Department criminal division chief Nicole Argentieri said after the verdicts.

Defense argues tokens are not investment contracts

Hampton's attorney, Freddy Funes, told the appellate panel that the sale of Hydro tokens did not constitute an investment contract subject to federal securities laws. A critical element of a security, he argued, is that investment returns depend on the promoter's management of funds — not merely on investor speculation.

U.S. Circuit Judge Nancy Abudu, a Biden appointee, pushed back directly.

"You don't have just investor speculation," she said. "You have comments from a co-conspirator telling potential investors, 'You're going to make good money back and you're going to see some returns on your investment.'"

Funes maintained that nothing in the trial record showed token holders had any objectively reasonable expectation of profit based on the company's efforts.

To illustrate his position, Funes drew an analogy to buying a Lionel Messi jersey — a reference to the World Cup matches currently being hosted in Miami.

"I think in 20 years, the market is going to increase, and somebody is going to want to buy that Messi jersey for a lot more than what it's worth today," he told the judges. "There's no question that that's an investment on my part. But the value of that jersey, just like a value of a token here, is completely not dependent on the efforts of others."

When the panel appeared unmoved, Funes offered a second analogy, comparing Hydro tokens to Beanie Babies.

"If I have a Beanie Baby store and I'm like, 'I want to market these things, it's going to be amazing. You buy a Beanie Baby and we're going to take this to the top of the world' — I don't think anybody would say just because I'm making those statements that this is some sort of investment," he said.

U.S. Circuit Judge Britt Grant, a Trump appointee, was skeptical. "Why are people buying these then?" she asked. "What do you think this is if not an investment?"

Funes acknowledged the token could be viewed as an investment, but argued it did not qualify as a security because its value was not tied to anyone else's managerial efforts.

Government: jury correctly found token was an investment contract

Justice Department attorney David Lieberman defended the verdict, telling the court the jury had ample basis to conclude that Hydro token buyers expected future returns based on the company's own development work.

"A reasonable jury could easily conclude that the folks who purchased these tokens expected that any future profit or returns that they might see would have been based on the efforts of the company to develop the token," Lieberman said.

He added that even if Hydrogen Technology never intended to build a usable product, creating the impression among investors that such a product was coming was sufficient under the law.

Kane's attorney offers arcade token analogy

Robert O'Donnell, attorney for Kane, argued along different lines — contending the Hydro token was created for a functional purpose, not the expectation of profit, which he said rules out another key element of the securities definition.

O'Donnell explained that the token was originally distributed to developers building application programming interfaces, or APIs, on the platform.

"Hydro is the token that you use to play the game, like an arcade token," O'Donnell said. "There may be a secondary market for an arcade token, but the essential quality is allowing your entry into the arcade."

Grant interrupted, noting that Kane had entered a guilty plea — a fact that complicates any factual challenge on appeal.

"It seems hard post-plea to get engaged in all these kind of factual evaluations," the judge said.

Lieberman agreed in rebuttal: "At least with respect to the indictment challenge, we think that that claim starts and ends with the unconditional guilty plea."

U.S. Circuit Judge Barbara Lagoa, also a Trump appointee, joined Grant and Abudu on the panel. The three judges did not indicate when they expect to issue a ruling.

Source: Courthouse News Service