In brief
- Cred’s former CEO and CFO Daniel Schatt and Joseph Podulka face up to 72 months in prison after guilty pleas.
- The firm collapsed after Bitcoin crashed and a Chinese partner failed to repay a $40M loan.
- Customers filed over 6,000 claims worth more than $140M in bankruptcy proceedings.
Two former top executives of failed crypto lender Cred Inc. pleaded guilty Tuesday to federal charges of wire fraud conspiracy in a case that ultimately cost customers up to $150 million in crypto.
Daniel Schatt, Cred’s co-founder and former CEO, and Joseph Podulka, its former CFO, admitted in a San Francisco federal court that they knowingly misled customers about the company’s financial health and lending practices in 2020.
Schatt, Podulka, and others at Cred “acted together with the common goal of presenting an incomplete, unreasonably positive and thus misleading portrayal” of the business, U.S. District Judge William Alsup said in court, according to coverage of the proceedings from Law360.
The executives acknowledged that they “selectively present positive information while failing to disclose negative news” to encourage 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.
Decrypt has reached out for comments to representatives from both sides and will update this article should they respond.
Liquidity crisis, flash crash
Cred’s downfall began during the March 2020 flash crash when Bitcoin plummeted 40%, liquidating $750 million in a day at the onset of the COVID-19 pandemic.
At the time, Cred executives reportedly tried to sustain their business by attracting new customer funds and discouraging redemption requests.
“Bitcoin took a precipitous fall, creating a risk for Cred,” Schatt said in court. As a result, Cred was unable to meet its margin calls, Schatt confirmed, nodding to Judge Alup.
But the crypto market crash and Cred’s response to it only marked the beginning of the company’s demise.
It worsened when Cred suffered a $40 million shortfall from unpaid loans, primarily from MoKredit, its primary borrower.
MoKredit was founded by Cred’s co-founder, Lu Hua. The platform issued “unsecured microloans to Chinese gamers,” per a press release from the DOJ.
Cred reportedly funneled roughly 80% of its customer assets into MoKredit, effectively tying its solvency to the borrower’s ability to repay.
Despite its high risk, MoKredit was Cred’s main revenue source, generating “virtually all of the interest payments” for customer yields, according to an unsealed indictment on Schatt.
The company “did not disclose those repeated failures” from MoKredit to its customers, Judge Alsup said, adding that Cred went on with this strategy despite knowing “about MoKredit’s debt and failure to repay.”
Court documents revealed the company suffered additional blows when its Chief Capital Officer James Alexander allegedly “absconded” with Bitcoin worth about $2 million at the time.
A separate indictment for Alexander was unsealed last year. Schatt also acknowledged that Cred fell victim to a “sham” that cost it 800 BTC valued at over $9 million.
Prosecutors recommended sentences of up to 72 months for Schatt and 62 months for Podulka.
A sentencing hearing is slated for August 26.
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