The CFTC filed two separate civil enforcement actions in the U.S. District Court for the Eastern District of New York charging entities with fraud in connection with cryptocurrency-related activities. In addition, the CFTC and SEC issued a joint statement vowing to pursue fraudulent activity related to cryptocurrency transactions. Focusing on fraudulent activity involving the offer and sale of digital instruments, SEC Enforcement Co-Directors Stephanie Avakian and Steven Peikin and CFTC Enforcement Director James McDonald stated: "the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws."
In a Complaint, the CFTC alleged that Dillon Michael Dean and his UK-registered company, The Entrepreneurs Headquarters Limited ("TEH"), solicited cryptocurrency investments for the stated purpose of using the pooled funds to invest in binary options and other products. Instead of operating the commodity pool as promised, Mr. Dean and TEH allegedly misappropriated over $1 million in customer funds and never traded any options with the pooled funds. The CFTC contended that Mr. Dean and TEH used much of the invested principal in order to make Ponzi-style payments to other customers. The CFTC said that TEH and Mr. Dean have refused to return customer funds and stopped responding to inquiries. As a result of the misconduct, the CFTC charged Mr. Dean and TEH with violations of CEA Sections 4c(b), 4o(1)(A)-(B), 4m(1), 4k(2), and CFTC Rules 3.12(a) and 32.4.
The CFTC also filed a Complaint charging Patrick K. McDonnell and his company, CabbageTech Corp. d/b/a Coin Drop Markets ("CDM"), with operating a scheme in which they solicited money and cryptocurrency transfers from customers in exchange for virtual currency trading advice. Mr. McDonnell and CDM allegedly used promotional materials to falsely advertise expertise and access to appeal to customers. The CFTC charged that Mr. McDonnell and CDM misappropriated customer investments, ceased communication with customers, and removed internet postings in order to conceal the scheme. The CFTC charged Mr. McDonnell and CDM with violating CEA Section 6(c)(1) and CFTC Rule 180.1(a).
Commentary /Bob Zwirb
The wrongdoing alleged in these two matters, involving various forms of fraud ranging from misrepresentation, to acting as unregistered CPOs and CTAs, to operating a Ponzi scheme, to misappropriation of customer funds, represents the type of serious, but ordinary, fraud that the CFTC addresses on a daily basis. The only difference here is that it occurs in connection with the latest financial craze to make its way on stage, cryptocurrency. While this "commodity" is relatively new, the methods allegedly employed by the respondents are not. Indeed, those methods affirm Chair Giancarlo's recent observation that "Virtual currencies are not unique in their utility in illicit activity." Thus, while the activity here is not unique, it is noteworthy that in one of these two matters (the McDonnell/Cabbage Tech matter), the respondents are being charged with violating a new provision of the CFTC's rulebook, CFTC Rule 180.1, which was intended to deal primarily with manipulation, but which, in actuality, is really an anti-fraud rule modeled after Securities Exchange Act Rule 10b-5.
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