U.S. District Court Affirms CFTC Enforcement Authority To Combat Virtual Currency Fraud

Author:Mr Robert Zwirb
Profession:Cadwalader, Wickersham & Taft LLP
 
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The U.S. District Court for the Eastern District of New York determined that "the CFTC's antifraud authority unambiguously applies broadly to the use or attempted use of any manipulative or deceptive device in connection with a contract of sale of any commodity in interstate commerce, including the virtual currencies at issue." The case involved a CFTC enforcement action against a virtual currency investment adviser for fraud and misappropriation in connection with purchases and trading of bitcoin and litecoin. The Court, rejecting arguments that the CFTC lacked jurisdiction and standing, imposed permanent trading and registration bans on the defendants and ordered them to pay more than $871,000 civil penalties and $290,000 in restitution.

Commentary / Bob Zwirb

The significance of this case is in establishing jurisdiction. The fraud involved here, as Judge Weinstein observed, was of the ordinary "boiler room" variety. What is noteworthy, however, is the Court's endorsement of the CFTC's authority to act. As Judge Weinstein wrote in his opinion: "If the Commission is ultimately found to be without jurisdiction and standing, this case should be dismissed."

The Court's analysis to support that position is significant in three respects. First, in an earlier stage of the proceeding, the Court ruled that that virtual currency was a "commodity" within the meaning of the CEA. CFTC v. Patrick K. McDonnell and Cabbagetech, Corp. d/b/a Coin Drop Markets, Case No. 18-CV-361 (E.D.N.Y. Mar. 6, 2018). While the CFTC had made a similar assertion three years earlier, such a determination has more weight coming from a disinterested venue such as a federal court than from the agency itself. In addition, ruling that virtual currency is a commodity provides the legal building block for bringing...

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