June 18, 2019
CFTC Charges Company and its Principal in $147 Million Fraudulent Bitcoin Trading Scheme
Washington, DC – The Commodity Futures Trading Commission (CFTC) announced the filing of a civil enforcement action (Complaint) in the U.S. District Court for the Southern District of New York against defendants Control-Finance Limited (Control-Finance), a purported Bitcoin trading and investment company, and its principal, Benjamin Reynolds (together, defendants), both of the United Kingdom. The Complaint charges the defendants with exploiting public enthusiasm for Bitcoin by fraudulently obtaining and misappropriating at least 22,858.822 Bitcoin—worth at least $147 million at the time—from more than 1,000 customers.
CFTC Director of Enforcement Comments
Director of Enforcement James McDonald stated: “The CFTC will continue to vigorously police the Bitcoin markets, including fraudulent trading activity as alleged in the Complaint here. Fraud in these markets not only harms customers, but if left unchecked, it could also hinder innovation. We caution potential virtual currency customers, once again, that they should engage in appropriate diligence before purchasing or trading virtual currencies.”
Defendants’ Fraudulent Solicitations and Fabricated Trade Reports
The Complaint specifically alleges that since at least May 1 through October 31, 2017, the defendants used a website and accounts at popular social media sites to fraudulently solicit customers to purchase and transfer Bitcoin to them. The defendants induced customers into transferring Bitcoin to them by falsely representing that they employed expert virtual currency traders who earned guaranteed daily trading profits on all Bitcoin deposits.
The defendants made numerous material misrepresentations and omissions, including that they (1) earned customers 1.5 % in daily Bitcoin trading profits and up to 45% per month; (2) used risk diversification methods to protect customers’ Bitcoin deposits; and (3) provided a “safe haven” from Bitcoin market risks. In reality, the defendants made no trades on customers’ behalf, earned no trading profits for them, and misappropriated their Bitcoin deposits.
The defendants concealed their fraud by providing customers with sham account balances and profit figures that falsely reflected trading profits that did not exist. They also created fabricated weekly Trade Reports, which identified illusory, purportedly profitable virtual currency trades that Defendants never placed.
The Fraudulent “Affiliate Program” Pyramid Scheme
The defendants marketed and concealed their fraud through an elaborate pyramid scheme they called the Control-Finance “Affiliate Program.” Through the Affiliate Program, the defendants fraudulently promised to pay, in the form of Bitcoin, escalating referral profits, rewards, and bonuses to “Affiliates,” or persons who referred new customers to Defendants.
The Affiliate Program used referral hyperlinks that Affiliates could send to friends and family and post publicly on social media websites. New customers who clicked on a referral hyperlink were directed to the Control-Finance website to deposit Bitcoin with the defendants. The defendants then provided the Affiliate associated with the hyperlink with a nominal Bitcoin credit in the Affiliate’s Control-Finance account. In reality, Affiliates’ accounts, like all customer accounts, reflected sham balances that were not backed up by actual Bitcoin.
Misappropriation and Confusing Blockchain Transactions
According to the Complaint, the defendants misappropriated customers’ Bitcoin deposits in two primary ways: (1) by executing uneconomical and confusing blockchain transactions to move customers’ Bitcoin into other wallet addresses under Defendants’ control; and (2) by illegally diverting customers’ Bitcoin deposits to make Ponzi scheme-like payments to customers who requested account withdrawals.
The defendants’ misappropriation scheme relied on creating unique single-use wallet addresses to receive customers’ Bitcoin deposits. After customers deposited Bitcoin into the single-use addresses, the defendants routed the deposits to other, pooled wallet addresses that they created at virtual currency payment processors and exchanges throughout North America, Europe, and Asia. The Complaint alleges that the defendants moved customers’ Bitcoin into these pooled wallet addresses through transactions that lacked any valid business purpose and were designed solely to conceal misappropriation.
In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and permanent injunctions against further violations of the federal commodity laws, as charged.
The CFTC appreciates the assistance of the British Columbia Securities Commission.
This case is brought in connection with the CFTC Division of Enforcement’s Virtual Currency Task Force, and CFTC staff members responsible for this action are Daniel J. Grimm, Kyong J. Koh, Dmitriy Vilenskiy, Jonah E. McCarthy, Christopher Giglio, Lauren Fulks, Luke B. Marsh, Paul G. Hayeck and former staff member John Einstman.
June 10, 2019
CFTC Chairman J. Christopher Giancarlo Announces Signing of Collective Bargaining Agreement with National Treasury Employees Union
Washington, DC — Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo joined Tony Reardon, President of the National Treasury Employees Union, to sign a new Master Collective Bargaining Agreement (CBA) today at CFTC’s Washington, D.C. headquarters. This marks the first Master CBA that covers all bargaining unit employees CFTC-wide.
“During my tenure as Chairman, I have recognized the importance that satisfaction in the workplace has for us as an organization, and I have been committed to helping to improve your work experience,” said Chairman Giancarlo. “I am confident that this CBA along with other successes such as implementation of a new telework and work schedules policy, a three-year compensation agreement and the promise of performance management and pay reform have helped to begin that journey.”
After nearly three years of negotiation, the Master CBA signed today represents an agreement between labor and management on how conditions of employment will be handled at the CFTC and details the roles and duties of management, the union and employees. This collective bargaining agreement covers typical conditions of employment, including, negotiated grievance procedures; telework and work schedules; merit promotions and performance management.
At the signing ceremony, Chairman Giancarlo also gave special recognition to Mary Connelly, President, NTEU Chapter 337, and her bargaining team as well as CFTC Chief Negotiator Shannon Schmidt and the CFTC bargaining team, that included Paul Ullman, Jennifer Plumlee, Jon Van Doren, and Rick Glaser, as well as all the subject matter experts and managers that contributed to this collaborative effort.
June 6, 2019
CFTC Staff Issues No-Action Relief from Uncleared Swap Margin Rule for Certain Amendments to Legacy Swaps
Washington, DC — The Commodity Futures Trading Commission’s (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) today announced it will provide no-action relief to permit certain amendments to legacy swaps without losing their status as legacy swaps.
“Today’s relief provides market certainty with respect to a number of amendments and life-cycle events swap dealers routinely encounter in swap portfolios with counterparties they serve,” said DSIO Director Matthew Kulkin. “Further, the relief for swaps resulting from compression of legacy swap portfolios will permit swap dealers to proceed with an important risk management function.”
“Legacy swap” means a swap executed prior to the applicable compliance date for the CFTC’s uncleared swap margin rule. Legacy swaps are outside the scope of the CFTC uncleared swap margin rule.
The no-action relief provided by the letter would permit swap dealers to continue to treat as legacy swaps (i) legacy swaps that are amended in an immaterial manner, (ii) a swap resulting from the exercise of a swaption that is itself a legacy swap, (iii) the remaining portion of a swap following a partial termination of such legacy swap, (iv) the remaining portion of a swap following a partial novation of such legacy swap, and (v) new swaps resulting from a multilateral compression exercise consisting solely of legacy swaps.
June 5, 2019
CFTC Commissioner Behnam Announces Market Risk Advisory Committee Chair and Agenda for June 12 Public Meeting
Washington, DC – Commodity Futures Trading Commission (CFTC or Commission) Commissioner Rostin Behnam today announced the agenda for the upcoming Market Risk Advisory Committee (MRAC) public meeting that will be held on June 12, 2019 at CFTC’s headquarters in Washington, D.C. and the designation of Nadia Zakir, Executive Vice President and Deputy General Counsel at the Pacific Investment Management Company LLC (PIMCO), as Chairperson of the MRAC. [See CFTC Press Release 7931-19 for attending, viewing and listening instructions.] Commissioner Behnam is the sponsor of MRAC.
At this meeting, the MRAC will focus on climate-related financial market risks. In a series of panels, MRAC members and guests will discuss (1) the potential impact of climate change on the future stability of the global financial system; (2) current domestic and international policy initiatives and supervisory approaches to addressing financial market risks related to climate change; (3) market participant approaches to the management and ongoing mitigation of such risks, including key risk management, governance, and disclosure considerations; and (4) the challenges ahead for regulators and market participants. Additionally, the MRAC will receive a status report from the Interest Rate Benchmark Reform Subcommittee regarding LIBOR transition, and have a presentation on European Market Infrastructure Regulation (EMIR) 2.2, central counterparty stress testing, and Brexit from Steven Maijoor, Chair, European Securities and Markets Authority (ESMA).
“I am very pleased to welcome Ms. Zakir as the Chairwoman of the Market Risk Advisory Committee. Ms. Zakir’s deep experience and knowledge of financial markets and regulatory policy will benefit the MRAC as it continues to tackle a number of critical market issues. I look forward to Ms. Zakir’s leadership and contributions to the Committee’s work,” said Commissioner Behnam.
At PIMCO, Ms. Zakir is responsible for providing legal counsel on a broad spectrum of trading, compliance, regulatory and policy matters that impact PIMCO and PIMCO’s clients. Prior to joining PIMCO in 2013, she was an Associate Director in the Product Review Branch of the Division of Clearing and Risk at the CFTC and also served as Special Counsel in the Exchange and Data Repository Branch of the Division of Market Oversight. Ms. Zakir holds a J.D. from The Washington College of Law at American University, a master’s degree from the University of Chicago, and an undergraduate degree from the University of San Diego.
The meeting is open to the public with seating on a first-come, first-served basis. Members of the public may also listen to the meeting via conference call using a domestic toll-free telephone or international toll or toll-free number to connect to a live, listen-only audio feed. Persons requiring special accommodations to attend the meeting because of a disability should notify Alicia Lewis at (202) 418–5862.
See Agenda here and under Related Links.
SPEECHES & TESTIMONY
CFTC Chairman Giancarlo Statement on the Senate Confirmation of Heath Tarbert as CFTC Chairman
June 5, 2019
CFTC Chairman J. Christopher Giancarlo issued the following statement on the U.S. Senate’s confirmation of Heath Tarbert to become Chairman of the CFTC:
“I would like to extend enthusiastic congratulations to Dr. Heath Tarbert on the Senate passage of his nomination to be the next Chairman of the Commodity Futures Trading Commission. He is highly qualified to lead the agency.
“During my time of service, it has been a priority to transform the CFTC into a 21st Century regulator for today’s digital markets. With Dr. Tarbert’s confirmation, I know the agency is in safe hands to continue this transition. As he completes his current obligations as Acting Under Secretary of the U.S. Treasury, I have committed to stay on as Chairman until Monday, July 15, 2019 when Dr. Tarbert will take up the Chairmanship.
“With the end date for my service in sight, there is still much to do on important matters before the agency. I want to thank my fellow Commissioners and our Commission staff for their support and attention to the many complex matters affecting trading markets overseen by the CFTC.”