Don't Forget to Feed the Ponzi

Sarson Funds claimed to bring Wall Street to crypto. Instead, they steered their investors' money into one scam after another.

While Bernie Madoff gets the credit for operating the largest Ponzi scam in history, his “success” did not occur in a vacuum. Unlike many other Ponzi scammers, Bernie generally didn’t directly solicit funds from investors. Instead, he outsourced this work to upstream “feeder funds” that recruited investors, pooled the funds, and sent the money to Bernie to work his magic. In return, these feeder funds took a percentage of the yield paid out by Madoff. This was a lucrative business, with the upstream funds earning millions of dollars in returns for doing very little work. For example, one of Madoff’s biggest feeder funds, Fairfield Greenwich Capital, transferred over $4 billion to Madoff and earned hundreds of millions of dollars in fees in the process.

Things worked great for the Madoff feeders until the Ponzi collapsed. These funds were then sued by investors arguing the funds should have recognized Madoff was running a fraudulent enterprise.

Like the Madoff scheme, the interlinked Ponzi and pyramid scams that dominate the crypto-conomy have benefitted from the activities of similar feeder funds. In several instances, crypto firms that offered yield-paying crypto deposits were outsourcing fund management to other downstream firms that subsequently collapsed. One prominent example was the Canadian crytocurrency exchange and lending firm Voyager Digital. Voyager offered an “Earn” account to customers, then pooled the funds and lent large amounts to companies like Celsius Network and the hedge fund Three Arrows Capital. While Voyager managed to escape the Celsius fraud before its collapse, the company collapsed after its massive bet on Three Arrows Capital went bad.

Another smaller example is the Indiana-based firm Sarson Funds, Inc. We originally encountered this firm over a year ago after a Twitter run-in with the company’s founder and CEO, John Sarson. Mr. Sarson had responded to a post in which we questioned whether certain transfers of the CEL token were suspect. Things escalated, and at the end of the exchange Mr. Sarson requested that we write about him and his business practices:

Almost a year later, we had forgotten about Mr. Sarson until we accidentally happened on another Twitter post of his, admitting to losing money in the Celsius Network collapse.

So, this article was written to keep our promise to Mr. Sarson. However, the story of Sarson Funds provides an excellent context for understanding how the crypto-conomy’s interlinked scams have fed into one another… and how contagion from one firm’s collapse can bring down the entire house of cards.

Founded in 2017, the company is led by John Sarson. Accordingt to LinkedIn, Sarson was previously a “Sales Specialist” at BNY Mellon and a “Regional Vice President” for Guggenheim. In 2016, he struck out on his own to create his own investment firm called ETF Momentum Investing. For some reason, it seems selling ETFs didn’t work out well for Mr. Sarson and he rapidly pivoted to the fast-paced world of cryptocurrency, founding Sarson Funds in 2018.

Using the motto “Real. Clear. Crypto,” Sarson Funds offers multiple services. Sarson Funds, Inc. acts as a marketing arm selling accredited investors a variety of limited partnership cryptocurrency “strategies” managed by Sarson’s team. Sarson also sells a cryptocurrency education course for investment advisors and provides free educational resources. Finally, Sarson offers its own “digital asset consulting” services to new projects, promising to “help bring crypto projects to Wall Street.”

Unfortunately for the team at Sarson Funds, and for their investors, things have not gone so great over the last year. Let’s take a look at a few examples of the risks of being a feeder fund for the biggest scams in crypto.

One of the fund offered is Sarson’s Stablecoin Index, LP. This vehicle invests in a pool of different stablecoins which are then deposited into various yield-generating schemes. Sarson Funds has consistently misrepresented aspects of this fund. For example, their website describes the stablecoins in the fund as:

… cryptocurrency tokens that are specially designed to have a 1:1 corresponding investment in US Dollars, known as “stablecoins.”

This is a bold-faced lie, as most of the coins in the fund are not backed directly by US dollars. The most reputable tokens in the fund are backed by a combination of dollars and other securities, like Treasury bonds. This lie is particularly egregious because 40% of the fund is invested in “algorithmic” stablecoins like DAI, mUSD, and FRAX. These tokens are backed by other cryptocurrencies and do not directly hold either real currency or securities. One of the primary stablecoins held by Sarson was the Terra algorithmic stablecoin UST, which collapsed in May 2022. It is unclear if Sarson took losses during the collapse of Terra or managed to escape that Ponzi in time.

Sarson Funds also makes the false claim that these stablecoins are all “regulated by OECD 20 countries.” In general, stablecoins operate outside of regulatory oversight and are now being targeted by the SEC and other agencies. Again, this claim is particularly egregious when one considers the algorithmic stablecoins on Sarson Funds’ books, as these are entirely unregulated and decentralized.

“Best in class”

The Stablecoin Index was originally “powered by Celsius Network.” As of March 2022, 40% of the fund was deposited in Celsius Network. Like Madoff’s feeder funds, Sarson then sat back and took a cut off the top of the yield paid by the Celsius fraud. Unfortunately for Sarson, in June 2022 Celsius Network froze withdrawals. Based on bankruptcy filings, Stablecoin Index LP has over $420,000 worth of stablecoins and other assets stuck in Celsius Network:

Stablecoin Index LP funds locked in Celsius Network

After Celsius collapsed, their strategy changed. According to the most recent proposal on their website (dated 11/1/22), the Stablecoin fund was:

…tactically deployed to various on-chain income-generating opportunities or deposited with the Gemini Earn program based on prevailing market conditions.

Unfortunately, in November the Gemini Earn program met an ignominious end. Gemini was acting as a feeder fund for Genesis Lending, a subsidiary of the Digital Currency Group. Genesis froze withdrawals in November 2022 after losing a substantial sum in FTX. Prior to that, Genesis had been teetering on the edge of insolvency due to massive losses on loans to the failed crypto hedge fund Three Arrows Capital. Consequently, all of the Gemini Earn capital was frozen upon the collapse of Genesis. It is unclear whether Sarson was able to exit Gemini Earn prior to this disaster, or if the fund has investor capital trapped in this failed enterprise as well. It is also unclear how Sarson is accounting for the exposure to these failed firms.

The ill-fated Stablecoin Index is only one of several opportunities offered by Sarson Funds. Other options include their “Cryptocurrency ESG Strategy,” “Large Coin Fund,” “Small Coin Fund,” and their “Crypto and Income Strategy.” These funds have understandably benefitted from being early to the pyramid game, with some showing massive gains of 200-300%. Of course, these figures are all before fees: Sarson charges their clients a classic hedge fund fee set of 2% of the principal and 20% of the generated income.

Despite high returns, Sarson’s strategies have often underperformed the markets. For example, the Blockchain Momentum LP “Large Coin Strategy” massively underperformed the returns of a passive Bitcoin index even before fees are deducted:

In addition to offering these “investment strategies,” Sarson also provides educational materials for learning about the crypto-conomy. These materials demonstrate the general lack of insight and common sense displayed by the firm. For example, Sarson posted an article from April of 2022 touting the Terra/Luna Ponzi scam as “Revolutionizing Digital Payments:”

Terra’s explosive growth over 2021 and 2022 has positioned the network to lead the future of blockchain innovation and adoption….Terra has established itself as the cutting edge of digital payments, especially in the Asian e-commerce market. 

A month later, the Terra system collapsed. Sarson Funds then posted a new article entitled “UST and Luna: What Went Wrong?” Other articles tout other frauds like the Helium network, which Sarson Funds has also invested in.

Like Sarson’s investment “opportunities” and educational offerings, the firm’s consulting gigs have also been duds. The firm’s website lists multiple projects that Sarson has advised. These include a cryptocurrency project called “Crown Sterling” which purports to offer “quantum-resistant” identity protection services. Of course, since quantum computers remain a far-off aspiration, their claims seem somewhat… questionable. The project’s token has performed about as well as one might expect, down over 90% from its opening price:

Rug. Pulled.

Sarson also advised a DeFi project called “Popcorn Network,” which describes itself as:

Popcorn is a regenerative yield optimizing protocol with soul.

It's easy to deposit crypto, optimize yield, and create positive global impact at the same time.

Sounds legit, right? Again, their token has performed about as well as one would expect, down about 80% from its opening price:

Rug. Pulled. Again!

It’s interesting to note that Sarson’s “Cryptocurrency ESG Fund” held 4.7% of its assets in the Popcorn Network “POP” token. This might seem like a conflict of interest given Sarson acted as an advisor to the project, then put his investors’ funds into that same project:

Also note 10% in Helium, another failing fraud

Feeding the crypto-conomy is hard and thankless work…

Unfortunately, Sarson Funds only one small example of a myriad of similar crypto feeder funds operating throughout the world. Impressively, despite Sarson Fund’s micro size, it managed to gain exposure to almost every major crypto fraud in the last year. And note that we didn’t even touch on the many smaller frauds that Sarson Funds has exposed their investors to.

Sarson’s careless approach to deploying investors funds is a microcosm of the wider scam-ception that occurred in the crypto-conomy: Too busy to do the work themselves, firm after firm outsourced the hard work of generating returns to downstream entities, performing minimal due diligence in the process. In several instances, investors’ funds were dumped directly into obvious Ponzi scams. Consequently, when one of the firms failed, the resulting contagion brought down the entire edifice.

Scam-Ception!

It remains to be seen whether Sarson Funds, and others of their ilk, survive the continuing crypto winter.