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From Securities Regulation Daily, March 7, 2018

Preliminary injunction in favor of CFTC halts alleged cryptocurrency scammer

By Amy Leisinger, J.D.

The Eastern District of New York has issued a preliminary injunction in favor of the CFTC against a purported cryptocurrency trader and advisor and his company in an action charging them with fraud in connection with purchases of and trading in virtual currencies. The court found that the Commission has standing to seek relief related to virtual currency fraud because virtual currencies are "commodities" under the Commodity Exchange Act, and therefore the CFTC may exercise its anti-fraud jurisdiction. According to the court, the CFTC had demonstrated a reasonable likelihood that the defendants would continue to violate the Commodity Exchange Act unless restrained and prohibited them from engaging in fraud in violation the CEA. The court also imposed a trading ban and ordered the defendants to preserve books and records and provide expedited discovery (CFTC v. McDonnell, March 6, 2018, Weinstein, J.).

Fraudulent scheme. In its complaint, the CFTC charged defendants Patrick McDonnell and his company, CabbageTech, Corp. d/b/a Coin Drop Markets (CDM) with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin, as well as failing to register with the CFTC. The CFTC alleged that the defendants induced customers to send money and virtual currencies to CDM in exchange for real-time virtual currency trading advice, as well as to trade under McDonnell’s direction. No such trading occurred and the defendants shut down their website and social media accounts, ceased communicating with customers, and kept the customers’ funds

CFTC authority, standing. The court found that, until Congress acts to clarify a system for cryptocurrency regulation, the CFTC has concurrent authority with other state and federal entities over dealings in virtual currency. "A ‘commodity’ encompasses virtual currency both in economic function and in the language of the CEA," the court noted, and the CFTC has regulatory authority over commodities traded as futures and derivatives and has recently expanded its enforcement authority to fraud related to spot markets underlying the regulated derivative markets. While its regulatory oversight authority over commodity cash markets is limited, the CFTC maintains general antifraud enforcement authority over virtual currency cash markets as a commodity in interstate commerce. As such, the CFTC has standing to seek relief against defendants alleged to have engaged in fraud in connection with virtual currencies, the court found.

Preliminary injunction granted. The court determined that the CFTC made a prima facie showing that McDonnell and CDM made misrepresentations concerning trading advice and potential profits and misappropriated investor funds. Further, the court noted that the defendants’ intent is evidenced by their ignoring of customer complaints and refusal to return the investments. The CFTC has adequately pleaded fraud for the purpose of a preliminary injunction and, together with its showing that, without an injunction, there is a reasonable likelihood of continuing violations, the CFTC is entitled to a preliminary injunction, the court concluded.

The case is No. 18-CV-361.

Attorneys: David William Oakland for the CFTC. Patrick K. McDonnell, pro se.

Companies: CabbageTech, Corp. d/b/a Coin Drop Markets

MainStory: TopStory CFTCNews Enforcement FraudManipulation NewYorkNews

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