On January 18, 2018, the Commodity Futures Trading Commission announced two enforcement actions as part of a continuing crackdown on virtual currency fraud schemes by numerous federal agencies. (We have previously written about the Securities and Exchange Commission’s efforts in this area here and here.)  And today the CFTC and SEC issued a joint statement reaffirming their agencies’ commitment to continuing to address violations and to bringing legal actions to stop and prevent fraud in the offer and sale of digital instruments.

Patrick K. McDonnell and CabbageTech, Corp. d/b/a Coin Drop Markets

The CFTC announced the filling of a federal civil enforcement action in the U.S. District Court for the Eastern District of New York against Patrick K. McDonnell, of Staten Island, New York, and CabbageTech, Corp. d/b/a Coin Drop Markets (CDM), a New York corporation, charging them with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.

The CFTC’s Complaint alleges that from approximately January 2017 to the present, McDonnell and CDM engaged in a deceptive and fraudulent virtual currency scheme to induce customers to send money and virtual currencies to CDM, purportedly in exchange for real-time virtual currency trading advice and for virtual currency purchasing and trading on behalf of the customers under McDonnell’s direction. In fact, as charged in the CFTC Complaint, the supposedly expert, real-time virtual currency advice was never provided, and customers who provided funds to McDonnell and CDM to purchase or trade on their behalf never saw those funds again. In short, according to the CFTC, McDonnell and CDM used their fraudulent solicitations to obtain and then simply misappropriate customer funds.

The CFTC Complaint further alleges that to conceal their scheme, soon after obtaining customer funds, Defendants removed the website and social media materials from the Internet and ceased communicating with CDM Customers, who lost most if not all of their invested funds due to Defendants’ fraud and misappropriation. The CFTC Complaint also alleges that neither Defendant has ever been registered with the CFTC in any capacity.

In its continuing civil litigation, the CFTC seeks, among other relief, restitution to defrauded customers, disgorgement of benefits from violations of the Commodity Exchange Act and CFTC Regulations, civil monetary penalties, trading bans, and a permanent injunction against future violations of federal commodities laws, as charged.

Dillon Michael Dean and The Entrepreuneurs Headquarters Limited

The CFTC also announced the filing of a civil enforcement action in the U.S. District Court for the Eastern District of New York against Dillon Michael Dean of Longmont, Colorado, and his company, The Entrepreneurs Headquarters Limited, a UK-registered company. The CFTC Complaint charges the Defendants with engaging in a fraudulent scheme to solicit Bitcoin from members of the public, misrepresenting that customers’ funds would be pooled and invested in products including binary options, making Ponzi-style payments to commodity pool participants from other participants’ funds, misappropriating pool participants’ funds, and failing to register with the CFTC as a Commodity Pool Operator (CPO) and Associated Person of a CPO, as required.

Specifically, the Complaint alleges that, from approximately April 2017 through the present, Defendants, who have never been registered with the CFTC in any capacity, have engaged in a fraudulent scheme through which they solicited at least $1.1 million worth of Bitcoin from more than 600 members of the public. Defendants allegedly promised to convert this Bitcoin into fiat currency to invest on the customers’ behalf in a pooled investment vehicle for trading commodity interests, including trading binary options on an online exchange designated as a contract market by the CFTC. Potential pool participants were solicited to invest with Defendants by false claims of trading expertise and promises of high rates of return. The Complaint further alleges that, rather than convert customers’ Bitcoin to fiat currency to invest in binary options contracts, as promised, Defendants misappropriated their customers’ funds, including by using the funds to pay other customers, in the manner of a Ponzi scheme.

The Complaint alleges that Defendants solicited customer deposits using company websites, YouTube videos, and Facebook posts, where Defendants claimed that customers’ funds would be pooled and invested in commodity options on behalf of customers, that Dean had “strong skills” in options trading, and that Defendants were generating high rates of return through trading commodity options, among other false claims. But, as alleged, Defendants were not actually engaged in trading on behalf of their customers, and Defendants’ purported trading profits were fictitious. As alleged in the Complaint, Defendants stopped making payments to their customers, having misappropriated over $1 million in customers’ funds, while Dean has launched another similar purported trading venture under the name Real Trade Profits, using a website to solicit customers to deposit Bitcoin for a pooled investment in binary options trading and promising high rates of return.

In its ongoing litigation, the CFTC seeks restitution to defrauded persons, disgorgement of ill-gotten gains, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC Regulations, as charged.

Joint statement from CFTC and SEC Regarding Virtual Currency Enforcement Actions

Today the following joint statement was issued by CFTC Enforcement Director James McDonald and SEC Enforcement Co-Directors Stephanie Avakian and Steven Peikin:

When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – 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.

The Divisions of Enforcement for the SEC and CFTC will continue to address violations and to bring actions to stop and prevent fraud in the offer and sale of digital instruments.

CFTC’s Customer Fraud Advisory on Virtual Currencies and Bitcoin

The CFTC has issued a Customer Advisory on the Risks of Virtual Currency Trading to inform the public of possible risks associated with investing or speculating in virtual currencies or recently launched Bitcoin futures and options.

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