(Westlaw) A New York blockchain engineer for Game Coin LLC has agreed to settle fraud charges for his role in a scheme that defrauded investors in the company’s digital token, according to the Securities and Exchange Commission.
Securities and Exchange Commission v. Zhu, No. 25-cv-54, complaint filed (M.D. La. Jan. 16, 2025).
The SEC’s complaint against Eric Zhu, filed Jan. 16 in the U.S. District Court for the Middle District of Louisiana, says the Game Coin token, GME, was sold on a platform using liquidity pools, which are pools of crypto asset pairs that may be exchanged.
According to the SEC, a person who deposits a token pair into a liquidity pool receives liquidity provider tokens, Absent safeguards, the holders of LP tokens can, without warning, withdraw liquidity from a pool, sell significant amounts of crypto assets into the pool and cause losses to investors, the SEC said. This practice is known as a “rug pull.”
High stakes
According to the complaint, two unnamed individuals formed Game Coin in August 2021 in Baton Rouge, Louisiana, with the goal to develop a marketplace for amateur athletes’ digital trading cards.
The two founders planned to promote Game Coin using GME, which would be the only currency that could be used to purchase their digital trading cards, the complaint says. They distributed GME through decentralized exchange PancakeSwap. The pair also designed a smart contract function for the tokens that included a 10% fee for any GME transaction, the SEC says.
From June to November 2021, the two individuals aggressively marketed GME, publishing a white paper and promoting it on social media, the SEC says.
They hired an advertising firm for a national campaign and claimed safeguards against “rug pulls” by claiming that the tokens were “liquidity locked,” according to the complaint.
The SEC says the two individuals hired a third person for GME distribution and website development. This third person enlisted Zhu for technical support, the complaint says.
On June 22, 2021, Zhu coded the GME smart contract, minted 100 billion tokens and burned 25 billion of them to increase the asset’s value, the SEC says.
The SEC claims that Zhu distributed 20 billion tokens to the unnamed individuals, in part for marketing purposes, and deposited the rest with Binance Coin into a pool named the GME Liquidity Pool. Zhu allegedly then transferred LP tokens to the third individual with locking instructions to prevent their withdrawal from the pool.
Pulling the rug?
On June 22, 2021, GME became available for purchase on PancakeSwap, with Zhu deploying a smart contract that charged a 10% fee on each transaction and automatically distributed the fees to various addresses, the SEC says.
Zhu allegedly retained control of 8.16 unlocked LP tokens, giving him the ability to withdraw liquidity from the GME Liquidity Pool at will, despite knowing investors expected safeguards against such actions.
In August 2021, the two GME founders hired technical support that identified vulnerabilities in LP token concentration, leading them to seek control of Zhu’s address containing the 8.16 unlocked LP tokens by Sept. 16, 2021, the SEC says.
The next month, Zhu withdrew GME and Binance Coin from the GME Liquidity Pool using unlocked LP tokens, the SEC says. He then sold GME back, causing a 12% price decline and investor panic, according to the commission.
The SEC says Zhu transferred approximately $553,000 worth of proceeds to an offshore crypto trading platform, leading the two GME founders to suspect a rug pull and eventually abandon the token’s promotion.
Zhu breached Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, 15 U.S.C.A. §§ 77q(a)(1) and 77q(a)(3), by engaging in interstate securities fraud, the SEC says.
He also breached Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, by engaging in deceptive practices, according to the complaint.
Without admitting or denying the charges, Zhu agreed to pay disgorgement and prejudgment interest of $672,992, and a civil penalty of $150,000, the SEC said in a Jan. 16 release.