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Prime Trust and Fortress Trust, Scott Purcell’s two crypto custodians that previously boasted clients BinanceUS, Swan Bitcoin, Abra, and TrueUSD, have both collapsed after disturbing allegations of financial misconduct.
On October 22, Nevada’s Financial Institutions Division revealed that several third-party businesses declined to follow through on acquisition offers or provide sufficient bridge financing for Fortress Trust, the successor to Purcell’s first failed attempt at crypto custody, Prime Trust.
This month’s collapse of Fortress Trust is eerily similar to Purcell’s 2023 failure.
Prime Trust filed for Chapter 11 bankruptcy in August 2023 after its Banq subsidiary collapsed and Nevada’s Financial Institutions Division revealed that it had improperly utilized customers’ funds to cover others’ withdrawals.
The former president of the Bank of Nevada had to step in as receiver.
Regulators revealed Prime Trust’s staggering obligations as of June 26, 2023: $85.6 million in cash obligations against just $2.9 million in cash.
They also revealed Prime Trust’s alleged loss of crypto wallet keys in December 2021 that it had hidden from public view for years.
A couple of months later, the company filed for bankruptcy. By that point, it had switched CEOs from Tom Pageler to Jor Law but none of their turnaround efforts succeeded.
Scott Purcell creates Fortress Trust
As Purcell faded away from Prime Trust in 2021, he began creating the similar Fortress Trust. Somehow, he convinced Nevada financial regulators to grant Fortress Trust a trust company license by May 2022.
They would soon come to regret that decision.
By September 2023, Fortress Trust claimed a “hack” had resulted in approximately $15 million in customer losses.
In early September 2023, Fortress initially stated there was “no loss of funds,” although subsequent reporting revealed a different truth.
On September 8, 2023, Ripple announced it had agreed to acquire Fortress Trust and cover those customer losses. However, by September 28, Ripple CEO Brad Garlinghouse announced the company would not proceed with the acquisition, though Ripple would remain an investor.
Read more: Fortress Trust says ‘no loss of funds’ as its customers’ crypto was stolen
In 2023 — similar to his departure from the collapsing Prime Trust in 2021 — Purcell stopped serving as CEO of Fortress Trust. The company would go through a couple of new CEOs, Rich Hauschild and Anthony Botticella.
Unfortunately, just like Prime Trust’s executive carousel, they would fail to prevent insolvency.
Finally, on October 22 this year, the Nevada Financial Institutions Division issued a cease-and-desist order against Fortress Trust, finding the company “on the verge of insolvency” with assets “wholly inadequate to meet customer obligations.”
The order prevents Fortress Trust from accepting fiat currency, crypto assets, or commodities from existing or new clients for custodial purposes.
A pattern of behavior from Prime Trust to Fortress Trust
In a declaration filed alongside Fortress Trust’s cease and desist order, Botticella stated, “I learned after assuming the position of chief executive officer that the trust was experiencing severe financial difficulties and challenges related to events that occurred prior to assuming my role.”
Both Prime Trust and Fortress Trust collapsed under similar circumstances: Failure to properly safeguard customer assets, inability to meet customer withdrawals, and critical shortfalls between liabilities and funds that are hidden from public view for months or more.
Both companies were Nevada-chartered companies that served the crypto industry, and both failures resulted in Nevada regulatory intervention citing unsound business practices.
The two failures, sharing the same founder, reiterate the risks of centralized custodians generally and Purcell in particular.
