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From Securities Regulation Daily, October 19, 2018

CFTC scores $2.5M penalty in first bitcoin enforcement action

By John M. Jascob, J.D., LL.M.

A federal district judge in Manhattan has imposed $2.5 million in penalties against Nicholas Gelfman and his firm, Gelfman Blueprint, Inc., for operating a bitcoin-based Ponzi scheme that defrauded investors out of more than $600,000. The court’s order resolves the first enforcement action brought by the CFTC involving cryptocurrency-related fraud. Gelfman himself had previously pleaded guilty in New York state court to petit larceny for conduct related to the scheme (CFTC v. Gelfman Blueprint, Inc., October 15, 2018, Castel. P.K.).

"This case marks yet another victory for the Commission in the virtual currency enforcement arena," said CFTC Enforcement Division Director James McDonald in a news release. "As this string of cases shows, the CFTC is determined to identify bad actors in these virtual currency markets and hold them accountable."

The CFTC alleged that from approximately 2014 through 2016, Gelfman and his firm had solicited and received more than approximately $600,000 from at least 80 customers, who invested amounts ranging from a few hundred dollars to tens of thousands of dollars for entering into contracts of sale of bitcoin. Among other things, Gelfman Blueprint's website touted the high investment performance of its high-frequency, algorithmic trading program named "Jigsaw." The website also claimed that Gelfman Blueprint's customers averaged a 7-9 percent monthly increase in bitcoin and that the investment program protected against volatility because trading results were maximized during price drops.

In reality, the CFTC alleged, the defendants’ Jigsaw trading account revealed only infrequent and unprofitable trading. During 2015, for example, account records revealed trading on only 17 calendar days that incurred approximately 185 Bitcoin in losses. And while the defendants claimed to have had 2,367 bitcoins under management and have generated 717 bitcoins in revenue as of August 1, 2015, the Jigsaw trading account records showed a bitcoin balance of less than 270 bitcoin as of early July 2015 (equivalent to approximately $73,000), no bitcoin trading activity at all after early July 2015, and a bitcoin balance of zero beginning in early August 2015.

In or around October 2015, Gelfman told other Gelfman Blueprint officers that a computer "hack" had caused the firm to lose all or nearly all their customers’ investments. The defendants then conveyed this story to customers to explain the loss. In fact, the CFTC alleged, the defendants had invented the falsehood of the "hack" to conceal their misappropriation of nearly all the customers’ funds for their own financial benefit and to transfer the funds illegally to other customers of the Ponzi scheme.

Judge Kevin Castel's order requires Gelfman Blueprint and Gelfman, respectively, to pay $554,734 and $492,064 in restitution to customers and $1,854,000 and $177,501 in civil monetary penalties. The order also imposes permanent trading and registration bans on the defendants.

The case is No. 17-7181 (PKC).

MainStory: TopStory Blockchain CFTCNews Enforcement NewYorkNews

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