The explosion of cryptocurrency has created shiny, new ways to commit the same old fraud, according to the Securities and Exchange Commission (SEC). The agency is suing an operator of a multilevel marketing scheme who allegedly promised participants digital currency in exchange for their investments in the company.

The SEC's complaint alleges Daniel Pacheco, who headed up IPro Solutions LLC and IPro Network LLC, offered fraudulent, unregistered securities through his now-defunct Irvine, California companies. In a little over a year, Pacheco raised $26.5 million through IPro, according to the complaint. The scheme went bust last May when Pacheco was unable to pay out recruitment commissions after using investments to buy a $2.5 million home in Redlands, California, and a Rolls Royce, according to the SEC.

Investors who purchased “IPro packages” received instructional materials for running e-commerce businesses, compensation for recruiting fellow investors and points that could be converted into a digital asset called Pro Currency, according to the SEC. Described as an open-source, block-chain-based cryptocurrency, Pro Currency began trading on public digital asset exchanges in 2017. IPro users who pitched in a bit more money could rake in extra cash recruitment commissions and Pro Currency points. Pacheco has denied that investors received recruitment bonuses and were instead paid for package sales.

The SEC alleges that Pacheco, represented by Scott W. Wellman of Wellman & Warren LLP in Laguna Hills, California, used cryptocurrency to give his pyramid scheme a high-tech sheen. The complaint cites a 2017 investor presentation where Pacheco is quoted as saying, “Crypto right now is a new thing that people like. And from a marketing standpoint, it gives … a little bit of a sizzle that nobody else has.”

The SEC, represented by Gary Y. Leung and Peter Del Greco in the agency's Los Angeles regional office, is seeking permanent injunctions prohibiting Pacheco from future federal securities violations and a civil penalty for defrauding investors and failing to register securities with the agency. The complaint also requests relief with prejudgment interest for defendants who lost money in the scheme.

“We allege that Pacheco hid an old fraud under the guise of cutting-edge technology,” said Michele Wein Layne, director of the SEC's Los Angeles Regional Office. “He enticed investors by offering them the opportunity to speculate in cryptocurrency, when in fact he was simply operating a pyramid scheme.”

About half of the $26 million IPro generated was processed by Fintact Payment Solutions LLC, led by Matthew Lopez. Despite not having a state payment processor license, Fintact reportedly collected fees for IPro packages, paid cash recruitment awards, squared up other IPro costs and funneled remaining funds back into IPro accounts after taking a percentage.

According to the complaint, IPro filed a now-dismissed lawsuit against Fintact for withholding millions of dollars, a portion of which were allegedly transferred to three of Lopez's limited liability companies. The complaint states that Lopez transferred upwards of $200,000 in investor funds to his personal accounts, as well. The SEC claims that Lopez, represented by Kenneth Herzinger of Orrick, Herrington & Sutcliffe in San Francisco, does not have a right to retain these funds, since they were raised through an unregistered, fraudulent securities offering.

In a statement, Pacheco said that what started as legal action against Fintact had somehow morphed into an investigation of him. Pacheco said he has worked to educate the SEC on cryptocurrency and the multi-level marketing industry. “Unfortunately, the SEC apparently takes the position that all multi-level marketing companies are engaged in the offer and sale of a security,” said Pacheco as part of a lengthy statement passed along by his attorney. “This position is inappropriate as it puts an entire industry, as well as those of us who have worked tirelessly to succeed in this industry, at risk.”

Orrick's Herzinger did not immediately respond to a request for comment at the time of publication.