2 Men Arrested, Charged With Rug Pull: What The Court Case Means For NFTs

The U.S. Justice Department has formally charged two people with money laundering and fraud related to a “rug pull” that occurred with the launch of a non-fungible token collection.

What Happened: The Justice Department is charging Ethan Nguyen (aka Frostie) and Andre Llacuna (aka heyandre) with conspiracy to commit wire fraud and conspiracy to commit money laundering.

The charges come from the duo’s launch of Frosties, a NFT collection that raised millions of dollars.

Frosties minted at a price of 0.04 Ethereum ETH/USD. After the collection of 8,888 NFTs minted out, the duo transferred the cryptocurrency to various wallets they controlled.

This came after promising members of the Frosties community that several items would be completed with the money raised. The items mentioned included giveaways, early access to a game and passes to upcoming Frosties seasons.

“Where there is money to be made, fraudsters will look for ways to steal it,” U.S. Attorney Damian Williams said. “As we allege, Mr. Nguyen and Mr. Llacuna promised investors the benefits of the Frosties NFTS, but when sold out, they pulled the rug out from under their victims, almost immediately shutting down the website and transferring the money.”

The Justice Department also said the duo were working on launching a second NFT collection called Embers that could generate $1.5 million in proceeds. Embers was scheduled to launch on March 26, 2022 and the Justice Department said it saw similarities to Frosties and believed it would be another rug pull.

The two charges against Nguyen and Llacuna each carry a maximum sentence of 20 years in prison if they are convicted. 

Related Link: What Is An NFT? 

Why It’s Important: NFTs have soared in popularity over the last year.

“NFTs represent a new era for financial investments, but the same rules apply to an investment in an NFT or a real estate development,” IRS-CI Special Agent Thomas Fattorusso said. “You can’t solicit funds for a business opportunity, abandon that business and abscond with money investors provided you.”

Many of the investigators involved point to the NFT market attracting interest from scam artists. The increased amount of anonymous artists and founders of projects is mentioned as hiding “behind online identities.”

This marks the first major arrest in the NFT market and could lead to additional projects being put under the microscope.

Several projects were minted out in 2021, only to see the founders abandon the project and take the proceeds with them.

The charges and warnings from the Justice Department could serve as a reminder that some projects have anonymous founders with nothing to lose and also point to the importance of investors doing research in projects and not investing more than one can afford to lose.

This example of a rug pull and an increasing number of scams in the market could lead to Coinbase Global Inc COIN partnering with public identities launching new NFTs or existing projects that have proven themselves when they launch their NFT marketplace.

OpenSea has struggled in keeping up with all of the existing NFT projects and has been slow to verify collections, which has led to another scam of creating fake collections and duping NFT collectors.

The first case from the Justice Department could be one of many and could serve as a warning to weed out some potential rug pulls.