Utah crypto company files for bankruptcy amid federal fraud accusations

A trustee is requesting temporary control over SafeMoon’s operations and assets as executives await their day in court

(AP Andrew Harnik, File) The SEC and the United States have filed two fraud cases against Utah-based crypto company SafeMoon and its three executives. Utah-based CEO John Karony was arrested in Provo.

SafeMoon, a Utah-based cryptocurrency company that promised to take investors “to the moon,” is instead bracing for an earthly descent in federal court.

The company filed for bankruptcy late last week, court records show. Its three executives, including Utah CEO John Karony, face fraud criminal charges in New York District Court and separate fraud charges from the Securities and Exchange Commission.

A trustee for SafeMoon has asked a judge for temporary control over the business’ assets and operations in order to “wind down” operations and paying SafeMoon creditors, who are primarily former SafeMoon employees.

In a motion filed Sunday, trustee Ellen Ostrow proposed hiring former employees “as independent contractors to assist in the liquidation of the Debtor’s assets. Doing so, the motion says, would make liquidation more efficient and maximize SafeMoon’s assets.

A judge Monday granted that motion, expediting SafeMoon’s bankruptcy hearing on a “preliminary basis.” Ostrow argued in the motion that it is “crucial to the compensation of the employees to begin as soon as possible.”

The motion allows Ostrow to access SafeMoon’s assets to pay employees for work done until Jan. 3, when a follow-up hearing is scheduled. The preliminary motion lets Ostrow pay employees what they are owed, said Judge Joel T. Marker, chief judge of the U.S. Bankruptcy Court’s Utah district, but gives all parties time to address any concerns.

Ostrow argued in the motion that SafeMoon employees have “historical knowledge” of crypto assets that need to be converted to cash — and that without them, “there would be a loss of significant value to the detriment of the Debtor’s estate, since those former employees have valuable knowledge of the Debtor’s business.”

According to the Chapter 7 bankruptcy filing, SafeMoon has between $10 million and $50 million in assets, and owes between $100,000 and $500,000. The company has between 50 and 99 creditors, court records claim, and is uninsured.

Karony and his co-executives, SafeMoon Chief Technology Officer Thomas Smith and founder Kyle Nagy, have been charged with criminal securities fraud conspiracy and wire fraud conspiracy; the SEC has separately charged them with fraud and selling unregistered crypto securities. In court documents, the three are accused of lying to investors and cashing in on millions of dollars’ worth of assets that were supposed to be “locked.”

Karony almost was released on bail under certain conditions in November, but New York District Court Judge Eric Komitee reversed that decision, according to court transcripts. Komitee said the conditions set by Utah District court Judge Daphne Oberg were “insufficient,” but that he would reconsider a bond request “in the context of a more robust proposed bail.”

Karony was denied bail again Dec. 6 and ordered to be moved from Salt Lake City, where he was detained following his arrest, to New York, where he will face trial in the state’s Eastern District Court.

Shannon Sollitt is a Report for America corps member covering business accountability and sustainability for The Salt Lake Tribune. Your donation to match our RFA grant helps keep her writing stories like this one; please consider making a tax-deductible gift of any amount today by clicking here.