Block Bits co-founder convicted in $960K crypto fraud

A 12-member federal jury in San Francisco found Japheth Dillman guilty on Aug. 24 of four counts of wire fraud and one count of conspiracy. Jurors reached the verdict after roughly six hours of deliberation spread over two days.

Prosecutors presented evidence that Dillman and co-founder David Mata raised about $960,000 from roughly 22 retail investors for Block Bits Fund I between June 2017 and August 2018. The fund’s sales pitch described a proprietary bot that traded about 100 digital assets across more than 30 exchanges to capture price differences and said roughly 40% of assets were held in low-risk cold storage arrangements producing steady returns.

Trial exhibits and testimony showed the automated trading system and the cold-storage arrangements did not exist. Prosecutors said actual trading was limited to manual trades placed by Mata and that funds were diverted into risky loans and an initial coin offering tied to AML Bitcoin.

A criminal complaint estimated investor losses at about $508,000 by 2022. Prosecutors relied on financial records to show investors invested because of Dillman’s representations about the technology and protective arrangements.

David Mata pleaded guilty in June 2022 to one count of wire fraud and testified against Dillman under a plea agreement while awaiting his sentence. Defense attorney Richard A. Tamor described Mata as a “stone-cold liar” and argued Dillman handled investor relations while relying on Mata for technical operations.

The jury rejected the defense account and convicted Dillman on all counts. No sentencing date has been scheduled. Each wire fraud count carries a statutory maximum of 20 years in prison and a $250,000 fine; the actual sentence will be set under federal sentencing guidelines and will reflect factors such as investor losses. Restitution and forfeiture remain unresolved.

The Securities and Exchange Commission is pursuing a separate civil enforcement case against Dillman and the Block Bits entities, seeking remedies that may include injunctions, disgorgement, monetary penalties and limits on participation in future securities offerings. Block Bits was formed during the 2017 initial coin offering boom, when automated trading systems and arbitrage strategies were common fundraising claims and retail investors had limited means to verify technical assertions.