CFTC Files Suits Against Crypto Investment Schemes for Alleged Fraud

The U.S. Commodity Futures Trading Commission (CFTC) brought two lawsuits against allegedly fraudulent cryptocurrency investment schemes yesterday.

The cases, both filed in the U.S. federal court in the New York Eastern District, are the latest move from the country’s derivatives regulator in bringing closer scrutiny over activities involving cryptocurrencies, which the agency regulates as commodities.

The CFTC and the Securities and Exchange Commission published a joint statement on the lawsuits, attributed to SEC Co-Enforcement Directors Stephanie Avakian and Steven Peikin and CFTC Enforcement Director James McDonald, who noted:

“When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments.”

In one case, the CFTC alleged that Dillon Michael Dean from Colorado and his company, Entrepreneurs Headquarters Limited, collected more than $1.1 million in bitcoin from over 600 people as part of a pooled investment vehicle for trading commodity interests. The pool was said to invest in binary options contracts, according to the complaint. However, the CFTC alleged that the defendants misappropriated the funds.

In the second case, Patrick Kerry McDonnell from New York and the company CabbageTech, are being sued by the CFTC for allegedly absconding with customers’ digital assets.

According to the complaint, the agency alleged that McDonnell branded himself as a cryptocurrency investment expert with trading advice that could result in highly attractive returns on investment. For example, the complaint said that, in one case, McDonnell allegedly claimed a return of 300 percent with his trading tips.

Subsequently the regulator alleged that soon after customers sent in money and cryptocurrencies for his advisory services, the defendant cut off communications with customers and “simply misappropriated” the funds.

In both cases, according to the complaints, the CFTC said neither of the two defendants and their companies had previously registered with the agency. And to a report from Reuters, a third CFTC case is still under seal.

These cases aren’t the first time the agency has acted on alleged wrongdoings involving cryptocurrencies. Last year, the regulator also brought a suit against another man for an alleged bitcoin Ponzi scheme.

In addition, the CFTC also indicated last year that, in the future, tokens issued through initial coin offerings may also be treated as commodities.

The filings for the two cases can be found below:

CFTC vs Dillon Michael Dean by CoinDesk on Scribd

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CFTC vs Patrick K. McDonnell by CoinDesk on Scribd

This report has been updated with additional information.

CFTC image via CoinDesk archive