CFTC announced $1.16 million virtual-currency fraud judgment

The Commodity Futures Trading Commission announced on August 24, 2018 that a federal court had ordered Patrick K. McDonnell and CabbageTech Corp., doing business as Coin Drop Markets, to pay $1,161,717.16 in restitution and civil penalties for a fraudulent virtual-currency operation.

The announcement followed an August 23 final judgment from Judge Jack B. Weinstein of the U.S. District Court for the Eastern District of New York. After a four-day bench trial, the court found that McDonnell and the company had used false claims about trading expertise and investment services to obtain customers’ money, bitcoin and litecoin.

The result mattered beyond the size of the judgment. It demonstrated the CFTC’s ability to apply its antifraud authority to misconduct connected with sales of virtual currencies, even though the agency was not asserting general regulatory control over every transaction in the retail cryptocurrency spot market.

The court imposed restitution, a penalty and permanent bans

The final order made McDonnell and CabbageTech jointly and severally responsible for $290,429.29 in restitution, plus statutory post-judgment interest. It appointed the National Futures Association to monitor payments and distribute recovered funds to eligible customers.

The court also imposed an $871,287.87 civil monetary penalty. The accompanying findings identified $290,429.29 as the defendants’ gain and calculated the penalty at three times that amount. Adding the two ordered amounts produces the $1,161,717.16 total; that is a Coinburn calculation from the judgment’s exact figures, before interest.

The injunction permanently prohibited the defendants from trading commodity interests or virtual currencies for their own accounts, directing such trading for other people, accepting funds for those purposes, and registering with the CFTC in most capacities. It also barred further violations of the Commodity Exchange Act and CFTC Regulation 180.1.

An order to pay restitution did not establish that customers would recover the full amount. The CFTC expressly cautioned on August 24 that a repayment order may not produce actual recovery when defendants lack sufficient funds or assets.

What the court found about the operation

The court found that McDonnell and Coin Drop Markets conducted a systematic fraudulent scheme from January through July 2017. Customers were offered purported expert entry-and-exit guidance, cryptocurrency purchasing services and trading performed on their behalf.

According to the findings, the promised services were not delivered as represented. The operation used pseudonyms, fictional employees, a purported Wall Street address, social-media accounts and false reports showing imaginary profits. Customers who sent funds for purchases or managed trading generally did not receive the promised assets or returns. The court found that McDonnell eventually stopped communicating with customers and removed online materials.

The bench trial ran from July 9 through July 12, 2018. The court heard six witnesses and received more than 150 exhibits. CabbageTech had defaulted, while McDonnell represented himself and stopped attending the evidentiary proceedings after the first trial day. The judgment nevertheless followed the court’s consideration of an extensive evidentiary record rather than an agency settlement.

Why the jurisdictional point mattered

In its March 6, 2018 preliminary-injunction decision, the district court had held that bitcoin and litecoin were commodities under the Commodity Exchange Act and that the CFTC could pursue fraud connected with their sale in interstate commerce. The August findings applied that reasoning in entering judgment after trial.

The distinction was important in 2018: the ruling supported federal commodity-fraud enforcement without converting the CFTC into a comprehensive supervisor of retail cryptocurrency exchanges or spot trading. It was a decision by one federal district court, not an appellate ruling establishing a universal rule for every digital asset or transaction.

As of August 24, the verified conclusion was therefore limited but significant. A federal court had found virtual-currency fraud after trial, ordered restitution and a triple-gain penalty, and imposed permanent market bans under the CFTC’s commodity antifraud authority. The surviving event-day record did not establish how much money would ultimately be collected.