Category: Enforcement

Andrew P. Cross —

This week’s BR Derivatives Report Regulatory Review focuses exclusively on a complaint filed by the U.S. Commodity Futures Trading Commission (“CFTC”) on October 12, 2023 (the “Complaint”) against the chief executive officer of a now-bankrupt company alleging fraud and commodity pool operator registration failures in connection with the operation of a digital asset lending platform.

CFTC Charges CEO of Digital Asset Platform with Fraud and CPO Registration and Compliance Related Oversight Failures

CFTC Press Release 8805-23

Type of Market Participant Involved

Unregistered Commodity Pool Operator (“CPO”)

Summary

On October 12, 2023, the CFTC filed a complaint in the U.S. District Court for the Southern District of New York against the former chief executive officer (“CEO”) of several now-bankrupt companies affiliated with a public company listed on the Toronto Stock Exchange that operated a digital asset trading and custody platform (the “Platform”). For purposes of this summary, we refer to the public company and its affiliates collectively as the “Company.”

In short, the CFTC’s complaint alleges that the CEO and the Company fraudulently solicited participation in and operated an unregistered commodity pool in violation of registration and compliance requirements under the Commodity Exchange Act (the “CEA”). In support of its positions, the CFTC specifically alleged the following key facts:

• The Platform allowed customers in the United States to buy, sell, trade, and store various digital asset commodities, including Bitcoin (“BTC”) and USD Coin (“USDC”);
• The CEO and the Company portrayed the Company as a safe and trustworthy custodian of the customers’ digital assets;
• The Company promised customers a high-yield return of as high as 12 percent via a “Rewards Program” for certain digital assets stored on the Platform;
• To fund the Rewards Program, the Company pooled billions of dollars’ worth of customer BTC and USDC and, in turn, conveyed this customer property to high-risk third parties, including a hedge fund (referred to as “Firm A” in the complaint) that had the ability to invest in CFTC-regulated commodity interests, including digital asset derivatives;
• Despite offering its customers the promise of operating with the “same level of rigor and trust” as traditional financial institutions, the CEO and the Company transferred pooled customer property to Firm A without conducting any meaningful due diligence on Firm A;
• Firm A ultimately filed for bankruptcy, defaulted on its obligations to the Company, and failed to repay any of digital asset commodities previously transferred to it by the Company; and
• The Company, in turn, filed for bankruptcy on July 5, 2023, yet during the period of time leading up to that filing, the CEO and the Company made public statements that downplayed the Company’s exposure to Firm A and gave false assurances about the Company’s own financial strength.