A new warning regarding virtual currencies was issued on Jan. 19 by the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The joint statement, regarding virtual currency enforcement actions. 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,” they wrote. “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.”
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.” The CFTC also issued several other customer protection Fraud Advisories that provide the warning signs of fraud.
Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.
The joint statement follows a busy week in virtual currency enforcement.
On Jan. 18, the CFTC filed a federal civil enforcement action in the U.S. District Court for the Eastern District of New York against defendants Patrick K. McDonnell, of Staten Island, New York, and CabbageTech, Corp. d/b/a Coin Drop Markets, a New York corporation, charging them with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.
The CFTC 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 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. McDonnell and CDM used their fraudulent solicitations to obtain and then simply misappropriate customer funds.
The 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 of their invested funds due to defendants’ fraud and misappropriation. Neither defendant has ever been registered with the CFTC in any capacity.
Also on Jan. 18, the CFTC filed a civil enforcement action in the U.S. District Court for the Eastern District of New York against defendants Dillon Michael Dean of Longmont, Colorado, and his company The Entrepreneurs Headquarters Limited, a UK-registered company. The 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.
“Increased public interest in Bitcoin and other virtual currencies has provided new opportunities for bad actors,” the CFTC’s McDonald said in a statement. “The defendants sought to take advantage of that public interest, offering retail customers the chance to use Bitcoin to invest in binary options, when, in reality, they were only buying into a Ponzi scheme. As this case shows, the CFTC will continue to take swift action to stop such fraudulent schemes and to hold fraudsters accountable for their misconduct.”