New York Federal Court Rules in Favor of CFTC in its First Ever Anti-Fraud Enforcement Action Involving Bitcoin
Mary Donohue
Associate Editor
Loyola University Chicago School of Law, JD 2020
Judge P. Kevin Castel of the U.S. District Court for the Southern District of New York entered an Order for Final Judgment and Consent Order for Final Judgment (“the Orders”) early this month, resolving charges of a Commodity Futures Trading Commission (the “CFTC”) Complaint against a New York Corporation, Gelfman Blueprint Inc. (“GBI”) and its Chief Executive Officer, Nicholas Gelfman. The CFTC’s complaint, filed in January of 2017, marked the first anti-fraud enforcement action involving Bitcoin filed by the Commodity Futures Trading Commission. The Orders found that from approximately January of 2014-January 2016 Defendants Gelfman and GBI, through its officers and agents and employees, operated a Bitcoin Ponzi scheme in which they fraudulently solicited more than $600,000 from at least 80 customers.
CFTC v. Gelfman Blueprint, Inc., and Nicholas Gelfman Marks Significant Advancement in CFTC’s Ability to Prosecute Cryptocurrency Fraud
In the enforcement action, the CFTC used its authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to prosecute manipulative or deceptive device or contrivance in connection with a cryptocurrency in interstate commerce. According to the complaint, the defendants solicited approximately $600,000 from at least 80 customers to trade bitcoin in a pooled fund with a proprietary trading algorithm called “Jigsaw.” Instead, the CFTC claimed the money collected was misappropriated for their own use and rarely traded for customers.
Defendants allegedly misled investors and potential investors through false advertisements and misleading and materially inaccurate statements. Mr. Gelfman claimed to have a high-frequency trading computer program that could mine profits from Bitcoin, claiming his clients usually earned “7-11% monthly return on their Bitcoins.” However, the complaint alleges Gelfman and GBI presented fake performance reports to investors and paid them using other investors’ money. In addition, Gelfman also carried out a fake hack that supposedly wiped the customer deposits and profits from the platform. According to the court documents, trading account records show a bitcoin balance of zero for months leading up to October 2015.
The court ordered GBI and Gelfman to pay fines and restitution in excess of $2.5 million combined, and Mr. Gelfman personally consented to an order of permanent injunction and a trading ban. Out of that sum, GBI will pay $554,734.48 and Gelfman $492,064.53 for restitution, while $1,854,000 and $177,501 is for civil monetary penalties. Gelfman admitted to the charges against him and GBI and agreed not to appeal the decision made by the court. Gelfman is also expected to “cooperate fully and expeditiously” by the CFTC, cooperation being a theme throughout the CFTC’s recent enforcement actions. The CFTC has indicated the victims may not receive restitution because he has insufficient funds.
Contextualizing Gelfman
Although this was the CFTC’s first enforcement action against GBI and Mr. Gelfman, this case is accompanied by subsequent enforcement actions the CFTC has filed on a similar theme. In one case, obtaining a permanent injunction and sanctions and prevailing in a motion to dismiss in another. This case is the latest by regulators and federal prosecutors eager to crack down on illegal activity in cryptocurrency markets. Earlier this fall, a federal court in Massachusetts affirmed the CFTC’s jurisdiction to prosecute fraud involving cryptocurrency, not limiting cases to instances of market manipulation.
James McDonald, the CFTC Director of Enforcement said of this string of cases, “As this string of cases shows, the CFTC is determined to identify bad actors in these virtual currency markets and hold them accountable. I’m grateful to the members of Enforcement’s Virtual Currency Task Force for their tireless work on these matters.”
Despite the likely increase in fraud actions brought in relation to cryptocurrency trading, regulatory changes are said to attract more institutional investors at some point. The Intercontinental Exchange (ICE), has teamed up with Microsoft and Starbucks to create a new cryptocurrency format called Bakkt aimed at consumer use.