The Commodity Futures Trading Commission disclosed that it filed an enforcement action on January 16 against My Big Coin Pay, Inc. (MBCP), and two persons closely involved with the company – Randall Crater and Mark Gillespie – for allegedly engaging in a virtual currency scheme that misappropriated approximately US $6 million from 28 or more persons from at least January 2014 through this month. The CFTC’s complaint, filed in a federal court in Massachusetts, also named other persons as “relief defendants” who purportedly received customer funds obtained through the misappropriation.

The CFTC charged the defendants with making false or misleading statements to customers and fraud.

According to the CFTC, as part of their fraudulent scheme, the defendants offered a virtual currency coin named “My Big Coin” (MBC) for sale to customers. The CFTC claimed that the defendants falsely represented, among other misrepresentations, that their coin was actively traded on multiple currency exchanges, including the MBC Exchange; issued daily statements regarding the daily trading price of MBC; and issued written statements saying that MBC was backed by gold, was a global currency that could be used to send money worldwide, and could be used anywhere that MasterCard was accepted. None of these claims were true, charged the CFTC.

The CFTC also claimed that some MBCP customers were paid out using funds of other customers “in the manner of a ‘Ponzi scheme’.”

The CFTC sought and obtained a temporary order from the court freezing all of the defendants’ and relief defendants’ assets and prohibiting them from destroying or altering any records. The CFTC seeks an injunction, disgorgement, restitution, and fines against the defendants.

On January 18, the CFTC brought two enforcement actions in a federal court in Brooklyn, New York, alleging fraud and other law violations in connection with cryptocurrency investment schemes. At the time, the media reported that a third action was pending, but the details of the action – this enforcement action against MBCP – were not disclosed until last week. (Click here for details in the article “CFTC Files Two Enforcement Actions Charging Fraud in Connection with Cryptocurrencies Sale Schemes” in the January 21, 2018 edition of Bridging the Week.)

Legal Weeds: To prosecute alleged miscreants fraudulently offering or selling spot virtual currencies, the CFTC continues to use the full force of its authority under a provision of law (enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act) and a 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.” To employ this provision, the CFTC is not required to allege fraud in connection with transactions involving swaps or a commodity for future delivery on or subject to the rules of any registered entity. Solely alleging fraud in connection with a spot commodity in transactions in interstate commerce is sufficient. (Click here to access CEA Section 6(c)(1), 7 U.S.C. §9(1) and here for CFTC Rule 180.1(a).)

The CFTC has previously employed these legal provisions in response to a wide variety of fact patterns from their first use in the JP Morgan “London Whale” episode to allegations of illegal off-exchange metals transactions, insider trading, claims of more traditional manipulation and attempted manipulation (without endeavoring to show an artificial price) and allegations of spoofing. (Click here for background in the article “International Bank and Affiliates Settle Two CFTC Enforcement Actions for Alleged Benchmarks Manipulation” in the June 5, 2016 edition of Bridging the Week.)

In September 2017, the CFTC brought an enforcement action against a company and its chief executive officer and head trader for running a purported Ponzi scheme related to Bitcoin. That case remains pending. (Click here for background in the article “CFTC Files Charges Alleging Bitcoin Ponzi Scheme Not Involving Derivatives” in the September 24, 2017 edition of Bridging the Week.)