Fracture Labs, creator of the Web3 game Decimated, has filed suit against market maker Jump Crypto for allegedly orchestrating a pump-and-dump scheme using its in-game currency, DIO.
In a complaint filed on Oct. 15 in the United States District Court for the Northern District of Illinois, Eastern Division, Fracture Labs alleges that Jump Crypto conspired with crypto exchange Huobi (now known as “HTX”) to freeze $1.4 million of the developer’s funds and refuse to return it.
Fracture Labs is the developer of Decimated, which its website describes as a “post-apocalyptic survival game with elements of cyberpunk.” The game’s currency, DIO, has a market cap of approximately $10 million.
Jump Crypto is the crypto division of Jump Trading Group, a quantitative trading firm. It provides market-making services to crypto exchanges, invests in Web3 startups, conducts research on blockchain technology and develops the Firedancer Solana validator client.
According to CoinMarketCap, HTX is the eighth largest crypto exchange in the world, with over $1.8 billion in daily volume. The exchange was called “Huobi” in the past but rebranded as “HTX” in September.
According to the complaint, in the fall of 2021, Jump Crypto offered to provide Fracture Labs with “consultation and advice,” introduce it to crypto exchanges and provide market-making services for it.
In December 2021, Jump agreed to provide market-making services for the launch of the game’s token, DIO. Fracture Labs originally intended to launch the token on the KuCoin exchange. However, it moved the launch to HTX after Jump allegedly advised it to do so.
As part of the deal, Fracture Labs agreed to loan 30 million DIO tokens to Jump Crypto’s subsidiary, J Digital. These funds were supposed to be used to provide a market for the token so that traders could always find a buyer or seller.
The developer also agreed to deposit $1.5 million in Tether USDT
$0.9998 stablecoin to an account controlled by HTX. This deposit was presented as a “security deposit” that was supposed to protect HTX against the risk of a market manipulation or pump-and-dump scheme from the developer.
The agreement spelled out certain “pricing parameters” that had to be met during the first 180 days of trading. If these parameters were met, the $1.5 million deposit would be returned to the developer after six months. If they were not met, HTX was authorized to deduct penalties from the deposit and would then be obliged to return whatever was left over.
Jump Crypto allegedly assured Fracture Labs that it would keep the price within these parameters and encouraged the team to sign the agreement.
Fracture Labs also agreed to pay HTX a marketing fee of $200,000 USDT and 100,000 DIO, which the exchange allegedly used to “[solicit] online influencers to hype the DIO token.”
On Dec. 29, the token launched. It reached a price-high of $0.98 within the first day of trading. When it reached $0.90, Jump allegedly “embarked on a mass sell-off of the borrowed DIO tokens,” trading over 4 million DIO in transactions totaling $2 million. Partially as a result of this sell-off, the price fell to $0.53. Over the course of the next month, Jump traded over $6.9 million worth of DIO as the price declined to $0.26 per coin. It then continued to sell the coin until it fell all the way to $0.0054, the document claims.
On Aug. 16 and Sept. 21, 2023, the market maker returned the borrowed tokens to Fracture Labs in two batches. DIO had fallen to a price of $0.006443 on Aug. 16 and $0.005158 on Sept. 21.
Fracture Labs claims that it was harmed by Jump Crypto’s selling of the tokens when there was no demand available. According to it, the firm did not provide “legitimate” market-making services, but instead engaged in a fraudulent pump-and-dump for its own profit, devaluing Fracture Labs’ tokens in the process.
In addition to losses from the token’s devaluation, the document also claims that Jump Crypto is responsible for Fracture Labs’ loss of $1.38 million from its deposit account held at HTX.
Because Jump Crypto’s selling caused the token’s price to fluctuate outside of the agreed-upon parameters, HTX deducted penalties totaling almost the entire deposit. As a result, the developer was only able to recover approximately $350,000 from the deposit. The remaining $1.38 million was frozen by HTX, and the exchange has so far refused to return it to the development team.
In a conversation with Cointelegraph, Fracture Labs’ founder, Stephen Arnold, stated that the loss of the deposit devastated his team. In November 2022, he was forced to lay off 30 members, reducing the total staff from 55 to 25. Despite the setback, the team managed to release an alpha version of Decimated and is continuing to develop the game today.
Arnold claimed that his firm should not be held responsible for the token’s price fluctuations, as they had no way to control its price. “How is this our fault?” he asked rhetorically. “Why are we being penalized for the money that we deposited in the account when it was the market makers who were responsible? And it’s not like we can control what happens on the market.”
Cointelegraph contacted Jump Crypto for comment but did not receive a response by the time of publication. The allegations contained in the document have not been proven in court, and Jump Crypto is legally allowed a period of time to formulate a response to the complaint.
In response to the suit’s allegations, HTX told Cointelegraph that it “is committed to operating in full compliance with all applicable laws and regulations.” It added, “As this matter is now subject to ongoing litigation, and HTX is not named as a defendant, we are unable to comment further at this time.”
Some crypto users have long suspected that market makers are manipulating prices during token launches. However, critics have rarely been able to provide proof of wrongdoing.
On Oct. 9, the United States Securities and Exchange Commision, Federal Bureau of Investigation, and Justice Department announced that they had obtained an indictment against 18 individuals associated with four different crypto market-making firms accused of manipulating trading volumes and orchestrating pump-and-dump scams. This was the first time that the US had ever formally charged crypto market makers with manipulation.
However, according to the indictments, these firms had explicitly offered to provide fake trading volume as part of their launch services. The current lawsuit does not accuse Jump Crypto of explicitly offering to provide fake trading volume.
