The Commodity Futures Trading Commission filed two enforcement actions in a federal court in Brooklyn, New York, alleging fraud and other law violations in connection with cryptocurrency investment schemes.
In one action that named CabbageTech, Corp., a NY corporation, and Patrick McDonnell, its owner and controller, the CFTC charged the defendants with unlawfully soliciting customers to send money and virtual currencies for virtual currency trading advice and for the discretionary trading of virtual currencies by Mr. McDonnell. However, alleged the CFTC, the defendants did not provide the promised services and misappropriated their customers’ funds.
The CFTC charged CabbageTech—which conducted business as Coin Drop Markets—and Mr. McDonnell with fraud.
In the other action, the CFTC named as defendants The Entrepreneurs Headquarters Limited (EHL)—a company incorporated in England and Wales—and Dillon Dean, its sole founder, principal, director and officer. The CFTC charged that the defendants solicited Bitcoin from customers in order to pool their funds and invest in financial products, including binary options traded on the Nadex, a CFTC-registered binary options exchange. In reality, claimed the CFTC, the defendants misappropriated customers’ funds, including using assets from some customers to pay other customers in a Ponzi scheme.
The CFTC alleged that EHL and Mr. Dillon also engaged in fraud, and acted in capacities requiring registration under law (i.e., as a commodity pool operator and an associated person, respectively) without being registered.
The CFTC seeks a permanent injunction against all the defendants in both actions, disgorgement and fines, among other penalties.
The media reported that the CFTC also filed a third enforcement action last week in connection with an alleged cryptocurrency investment scheme (click here for a sample article). However, no details were available as of January 12, 2018.
Following publication of the two CFTC enforcement actions, the heads of enforcement of both the SEC (Stephanie Avakian and Steven Peikin) and CFTC (James McDonald) issued a joint statement noting that their agencies would continue to address violations of law and stop fraud in connection with the offer and sale of digital instruments (click here to read the joint statement).
Legal Weeds: The CFTC’s enforcement action against CabbageTech and Mr. McDonnell marked the second time the Commission has brought an enforcement action against defendants that charged fraud in connection with purported offers or sales of spot cryptocurrencies and not futures or swaps based on cryptocurrencies. Last September, the CFTC sued Gelfman Blueprint, Inc. and Nicholas Gelfman, its chief executive officer and head trader, with running a Ponzi scheme related to Bitcoin. The CFTC brought both its most recent and other enforcement action under a relatively new provision of law (enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act) and Commission regulation that prohibits any person from using a manipulative or deceptive device or contrivance in connection with any “contract for sale of any commodity in interstate commerce”—not solely in connection with swaps or a commodity for future delivery on or subject to the rules of any registered entity. (Click here to access CEA Section 6(c)(1), 7 U.S.C. §9(1) and here for CFTC Rule 180.1(a).)
As I wrote at the time the Gelfman Blueprint case was announced, “[t]he CFTC's willingness to use these provisions in response to a fact pattern related to a commodity only – Bitcoin –, and not to futures or swaps based on Bitcoin, is a powerful statement about its view of its own role in the cryptocurrency arena going forward.” (Click here for further details regarding the Gelfman Blueprint enforcement action in the article, “CFTC Files Charges Alleging Bitcoin Ponzi Scheme Not Involving Derivatives.”)