On July 12, 2018, a federal judge of the U.S. District Court for the Eastern District of New York reaffirmed its view that cryptocurrency fraud is subject to the U.S. Commodity Futures Trading Commission’s (“CFTC’s”) anti-fraud and anti-manipulation enforcement authority. The ruling involved a federal civil enforcement action filed by the CFTC in January 2018 against Patrick McDonnell and his company, CabbageTech, Corp. d/b/a Coin Drop Markets (“CDM”), charging the defendants with fraud and misappropriation in connection with purchases and trading of the virtual currencies Bitcoin and Litecoin. The CFTC’s complaint alleges that McDonnell and CDM operated a deceptive and fraudulent virtual currency scheme to induce customers to send money and virtual currencies to CDM in exchange for purported virtual currency trading advice, and for virtual currency purchases and trading on behalf of customers under McDonnell’s direction.
On March 6, 2018, the court issued a preliminary injunction in favor of the CFTC and found that virtual currencies are “commodities” under the Commodity Exchange Act, and thus the CFTC had standing to seek relief related to virtual currency fraud under its anti-fraud jurisdiction. The July ruling came after the defendants asked the court to reconsider its motion to dismiss, arguing that the “actual delivery exception” in Section 2(c)(2)(D) of the Commodity Exchange Act barred enforcement in the alleged virtual currency fraud scheme and citing a recent decision from the U.S. District Court for the Central District of California, CFTC v. Monex Co., in support of its argument that the action is absent of any claims specifying “fraud-based manipulation.”
In denying the motion to dismiss, the court rejected both of the defendants’ arguments. The court found that the “actual delivery exception” is irrelevant to the court’s prior decision because the CFTC’s complaint never alleged any transactions entered into on a leveraged, margined or financed basis. The court also rejected the defendants’ second argument, noting that the California decision is not binding authority. Consequently, the court reaffirmed its view that the CFTC has standing to exercise its enforcement power over the fraudulent schemes alleged in the complaint.