Sept. 7—Pennsylvania educator Mayama Kesselly said she was skeptical when a co-worker pitched her on a lucrative investment in one of the most explosive financial marketplaces in the world: cryptocurrency, which had gained glowing endorsements from Hollywood celebrities and Silicon Valley CEOs.

Shortly after her initial investment last spring in VBit Technologies — a novel bitcoin mining venture launched by a flamboyant Philadelphia entrepreneur — started to reap hefty profits, she and her husband went all in.

The Bristol couple took out $50,000 in loans to buy the company’s top-of-the-line “Black Diamond” mining package and soon started reeling in as much as $9,000 a month in returns.

In time, Ms. Kesselly became something of an evangelist for VBit, signing up her friends through the company’s pyramid-like “affiliates” program and reinvesting her own profits into more packages instead of paying off her initial loan.

It was a decision she would come to deeply regret.

“Every single day, I have a phone call, people call me asking, ‘When are they going to return our money?'” Ms. Kesselly said.

By January, VBit’s 34-year-old CEO, Don Vo, had vanished — selling the business for $105 million dollars to a Chinese company with no disclosed ownership on any public records, while customers lost access to millions of dollars in bitcoin in what has become the largest cryptocurrency scandal in Pennsylvania.

The founder’s abrupt exit capped off a year of lavish spending by company executives, who enjoyed fine wines and dinners at Philadelphia’s priciest restaurants while they bragged on social media about gifting luxury sports cars to their top performers and sailing on a private yacht.

The company that once pledged enormous returns for investors is now the target of a crackdown from state financial regulators, complaints to the U.S. Securities and Exchange Commission, and a federal lawsuit alleging massive securities fraud and what’s alleged to be a Ponzi scheme.

Meanwhile, the rapid change in ownership marked the beginning of what customers called a monthslong downward spiral, ending with them being barred from accessing their cryptocurrency and their computers.

“I’m so embarrassed. I’m so devastated,” Ms. Kesselly said. “I don’t even know how to lift my head up.”

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Ms. Kesselly, her husband, and their friends and co-workers are among the thousands of investors around the world — roughly 15,000 in all — whose money is now sitting inaccessible in company-controlled accounts as they try to recover bitcoin valued collectively at over $11 million.

Among the increasingly angry and frustrated customers are more than 100 Pennsylvanians who were drawn in by the promises from a company whose headquarters in bustling South Philadelphia was in their own backyard.

“It was so popular in Pennsylvania,” Ms. Kesselly said. “In Philadelphia, around here, we all thought it was a good thing. Everybody was just bringing their loved ones into this.”

The 2022 global crash of cryptocurrency markets — which lost an estimated $1 trillion in value in May and June, erasing an era of highly publicized returns — has also brought the exposure of a budding industry with little oversight and plagued by rampant fraud.

While buying cryptocurrency on a registered exchange is a legitimate form of investment, the industry is rife with get-rich-quick schemes. The Federal Trade Commission estimates that consumers have lost at least $1 billion in crypto fraud cases since last year, though that actual figure is probably much higher because many losses go unreported.

In the case of VBit Technologies, neither top officials with the successor company, Advanced Mining Group, nor Mr. Vo, who is no longer involved with the firm, responded to repeated interview requests from the Pittsburgh Post-Gazette.

The losses mark a rapid reversal of fortune from when VBit was surfing on the peak of 2021’s crypto wave. That summer, Mr. Vo captured the zeitgeist of the bitcoin boom in a post to his personal Twitter account.

“Bought 20 [bitcoin] at $29.5k before I left for vacation a week ago,” the then-CEO wrote, accompanied by a photo of him reclining with a glass of wine, a bright blue ocean in the background. “Now a happy camper while I sit on a private yacht.”

In local media, Mr. Vo was championed as Pennsylvania’s cryptocurrency luminary, a self-styled financial guru whose startup promised the average investor an opportunity to cash in on the bitcoin craze that was spiraling into a buying frenzy.

Through VBit, customers could buy into a high-powered bitcoin mining computer, which the company kept at one of its remote facilities. Month by month, VBit would kick back a portion of the mined cryptocurrency as a return.

» READ MORE: New crypto oversight legislation arrives as industry shakes

To make sure their pool of investors was constantly increasing, VBit enlisted a nationwide team of affiliates like Ms. Kesselly to act as regional figureheads, using word-of-mouth tactics to simplify the complexities of cryptocurrencies and sell their friends and coworkers on the company’s packages.

Some affiliates were more savvy, hosting informal Zoom sessions that touted VBit’s promise or sharing one of the company’s promotional YouTube videos — animations in which dollar signs swirl around brightly colored characters as they invest their way into a zen-like state of financial contentment.

Packages began with the “Silver Offer,” which, for $2,443, customers could buy a basic mining computer and hosting services. Once the bitcoin was mined, users were free to withdraw it from the company-controlled wallet and convert to U.S. dollars — or allow it to accumulate, as many customers did when the cryptocurrency’s value was bounding upwards.

Since its inception, bitcoin has been a costly endeavor due to the amount of energy that even a single computer requires. By some estimates, one transaction consumes the same amount of power that an average household uses in 50 days, while producing up to 75 decibels of noise — comparable to the sound of constantly running a vacuum cleaner.

That’s where Mr. Vo positioned his company as a solution for the everyday investor, hosting their noisy, power-hungry computers at VBit’s remote facilities in Montana and Alberta, Canada — places where the cost of energy was cheap and the likelihood of noise complaints was low.

Steve Reniari, a marketing professional and crypto enthusiast from Nevada, bought into VBit just as the market was taking off.

In early 2021, he purchased a Black Diamond mining package and hosting services for a total of $129,674, of which 50% was due up front.

When bitcoin’s value was rising, Mr. Renieari was making $4,000 to 5,000 per month. But like Ms. Kesselly, he didn’t pocket many of those funds from the company, instead choosing to let it amass and make smaller withdrawals.

In May, around the time bitcoin was crashing globally, he began to notice big changes.

“Every single day, I have a phone call, people call me asking, ‘When are they going to return our money?’”

Over the course of a month, payouts that were normally ready in hours began to take days. Then they took weeks. Then they froze entirely.

Customers quickly demanded an explanation from Advanced Mining Group, which around the same time was dealing with internal struggles after its newly hired chief operating officer left the company after just three weeks.

Mr. Reniari began to grow worried when he tried to withdraw bitcoin and a team member responded in email to one of his support tickets on June 13 with the brief message: “Unfortunately, we are unable to provide an estimate time frame on when your transaction will be processed as the team is currently working on resolving the issue.”

A little less than two weeks later, Mr. Reniari’s fears were realized.

On June 27, he woke up to an email from Advanced Mining Group that the company sent to all of its customers.

“Advanced Mining has positively impacted many lives during its few years in operation,” the company wrote. “Therefore, it saddens us to inform you that we can no longer service the United States market.”

For reasons the company said it would not be “over-disclosing,” it was ceasing all withdrawals and sales of its mining packages due to a “potential pending settlement” with the SEC — the first revelation of a federal investigation.

In an email, the SEC would not confirm any such probe.

In addition to the SEC, another group of regulators from Washington state initiated a separate crackdown, which was related to whether Advanced Mining Group’s business model dealt in unregistered securities.

Worse yet, Mr. Reniari and other customers could still log into the company’s web portal and see their bitcoin accumulating — inaccessibly — in digital wallets that the company controls in what he would later call a “red flag” that he should have caught earlier.

Sporadic communication rolled in over the next several weeks, though, by then, customers were starting to organize on private messaging groups like Telegram to validate each other’s concerns.

In a July 15 email, Advanced Mining Group promised to refund customers for their mining packages, though that was one of the last times investors would hear from the company.

‘I left everything in it’

In a further blow, customers soon learned this wasn’t the first time the company came under regulatory scrutiny during its four-year existence.

In the fall of 2020, Mr. Vo, then the CEO, received a consent order from Washington state financial regulators, who ordered VBit to cease its operations in the state and pay back 82 customers in the state the $156,000 they had invested in its mining packages.

Regulators argued that VBit was technically selling securities when it was unregistered to do so. The company allegedly maintained its customers’ computers in a large group instead of individually, kicking back bitcoin proportional to how much each customer invested — a practice that met their definition of a security, records show.

In a lawsuit filed in federal court in Delaware, a customer who claims to have invested more than $200,000 alleges that customers never actually owned their mining computers in the first place and that the company sold far more computing power than it had available.

In an email obtained by the Post-Gazette, Adam Yeaton, a Washington financial examiner, confirmed that Mr. Vo responded to the state’s subpoena on Oct. 27, 2020, ensuring that VBit Technologies would comply with their demands.

It would be almost two years before customers were made aware that executives knew they were violating securities laws, despite their continuing to aggressively pursue new customers elsewhere and spend extravagantly on company perks, all while delaying refunds.

“$156,000 and 82 customers. That’s peanuts compared to all of us,” a customer named Pat wrote in the Telegram group. “Just myself and downlines [had] over 600k. Plus more and more for all of us. I wonder if VBit has the liquidity to refund everyone.”

One investor from Philadelphia who spoke to the Post-Gazette on the condition of anonymity because of ties to employees at Advanced Mining Group similarly doesn’t expect a refund on the nearly $50,000 he invested in a mining package.

“There’s so many people getting affected by this, and it’s just sad to hear some of the stories,” the investor said. “For me, I invested, but I’m really, really sad that I got my friend in on it. At least we’re kind of young enough that we can go and make money back. Some folks are retired, and their whole retirement is down the drain.

“I don’t know how these people sleep at night.”

Last year, the investor was brought into VBit by a lower-level employee. He began mingling with others at the company and soon noticed executives flouting their wealth as bitcoin’s value exploded, creating a miniature class of crypto’s nouveau riche in Pennsylvania.

“You’re talking about wines in the thousands, thousand-dollar bottles of liquor,” the investor said. “All this kind of lifestyle is what’s upsetting.”

Top executives, the investor said, regularly splurged on alcohol, luxury goods and fancy dinners. In an image posted to Advanced Mining Group’s Instagram in September 2020 — when the company was still VBit — then-vice chairman Jin Gao is seen posing with a sleek black BMW i8, a sports car that retails for $147,500.

“A subtle yet big flex,” the company wrote in the caption as Mr. Gao kneels next to the vehicle’s “VBIT1” vanity plate.

Elsewhere, on the company’s YouTube account, a video shows Mr. Vo and Mr. Gao presenting two BMW 430i sports cars to two top-performing affiliates. Skip McCoy, an affiliate based in the Philadelphia area, wrote in the video’s caption that the car was awarded because he “met the requirements in the compensation plan.”

According to Washington state regulators, many of these affiliates had little to no experience or company training in cryptocurrency.

“Many of VBit’s salespersons in Washington had minimal experience with Bitcoin mining or cryptocurrency more broadly, and sold the packages primarily to other, similarly inexperienced persons by advertising the ease of using VBit’s mining packages and the potential for substantial passive returns,” regulators wrote in their 2020 consent order.

Following the crackdown in Washington, Pennsylvanians are now wondering when state officials will follow suit.

Attorney General Josh Shapiro’s office said it has received three complaints from state residents who were customers. But Mr. Shapiro’s office would not comment further on the nature of the complaints or whether legal action will be taken.

Just across the state line, proceedings are already in motion. The securities fraud lawsuit filed in a Delaware district court on Sept. 2 alleges that over $200,000 of an investor’s money was pooled with other VBit investors’ money as “part of a ‘Ponzi scheme.'”

Mr. Vo, his wife Katie, Mr. Tu and Mr. Gao were all named as defendants and have yet to retain counsel.

Meanwhile, customers looking for more direct action were surprised to find Advanced Mining Group’s headquarters on Washington Avenue in South Philadelphia shuttered — closed on June 24 for what the company said were reasons related to COVID-19. To date, the office remains closed.

Though the company went quiet, some have found evidence that Advanced Mining Group is actively working against them: When several customers made claims to their credit card companies to refund their investments on the basis of fraud, they were told Advanced Mining Group was disputing the charges.

In August, Advanced Mining Group’s CEO, Lillian Zhou, responded to an email from the Post-Gazette, saying she would consult with the company’s lawyer before answering questions about the controversy. When those queries were provided, Ms. Zhou did not respond or answer a follow-up email.

It’s been two years since Mr. Vo championed bitcoin as a boon for Philadelphia, a city where he prophesied that soon, Pennsylvanians would be opening their digital wallets at restaurants, bars and clothing stores to shell out bitcoin mined with the help of VBit.

Instead, its customers are now reporting major financial and emotional distress — or, as Ms. Kesselly put it, a situation that could “make someone suicidal.”

“For now, I’ve talked to a couple lawyers who are saying I have to pay money for them to start a process,” Ms. Kesselly said when asked whether she would take steps to recover her investment. “But I don’t even have most of my money right now. I don’t. Because I left everything in it. Everything.”