Updated: CFTC v. McDonnell, et al., Court Reaffirms CFTC Authority Over Virtual Currency Fraud | Practical Law

Updated: CFTC v. McDonnell, et al., Court Reaffirms CFTC Authority Over Virtual Currency Fraud | Practical Law

A New York federal judge reaffirmed a previous order finding that the CFTC has enforcement authority over fraudulent virtual currency schemes.

Updated: CFTC v. McDonnell, et al., Court Reaffirms CFTC Authority Over Virtual Currency Fraud

by Practical Law Finance
Published on 23 Aug 2018 • USA (National/Federal)
A New York federal judge reaffirmed a previous order finding that the CFTC has enforcement authority over fraudulent virtual currency schemes.
On July 16, 2018, in Commodity Futures Trading Commission v. Patrick K. McDonnell and CabbageTech Corp. d/b/a Coin Drop Markets (332 F.Supp.3d 641 (E.D.N.Y. 2018)), a federal judge in the Eastern District of New York reaffirmed a previous order finding that the CFTC has enforcement authority over fraud related to virtual currencies sold in interstate commerce ( (E.D.N.Y. July 16, 2018).
The CFTC alleged that defendants Patrick McDonnell and his company Cabbagetech, Corp. d/b/a Coin Drop Markets were operating a fraudulent virtual currency scheme involving the virtual currencies Bitcoin and Litecoin. The CFTC sought injunctive relief, monetary penalties, and restitution of funds against the defendants.
In March 2018, the court found that the CFTC had authority over dealings in virtual currencies, including fraudulent schemes involving virtual currencies, and issued a preliminary injunction against defendants (see Legal Update, Federal Judge Rules Virtual Currency Is a Commodity Subject to CFTC Oversight). Defendants filed a motion to reconsider the March 2018 order, challenging the CFTC's authority to exercise its jurisdiction over fraud that does not directly involve the sale of futures or derivatives contracts.
In their motion to reconsider, defendants argued that:
  • The "actual delivery exception" in Section 2(c)(2)(D) of the Commodity Exchange Act (CEA), which specifies that transactions that result in the actual delivery of a commodity within 28 days of sale are not considered "retail commodity transactions" subject to CFTC regulations, bars enforcement against defendants (7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa)).
  • The action should be dismissed because the CFTC did not specify any claims of "fraud-based manipulation," citing a recent case CFTC v. Monex Credit Co. (Monex) where the court found that the CEA only protects against fraud where "a particular commodity transaction manipulates or potentially manipulates the derivatives market" (, at *8 (C.D. Cal. May 1, 2018).
Judge Jack Weinstein denied defendant's motion to dismiss on reconsideration and reaffirmed the March 2018 order, stating that there was no valid basis for a change in the order. The court reaffirmed that the CFTC has statutory authority to exercise its enforcement power over the virtual currency fraud alleged in the complaint, reasoning that:
  • Monex is a non-binding case and does not mandate reconsideration of the order.
  • The "actual delivery exception" only applies to certain transactions entered into on a leveraged, margined, or financed basis, none of which the CFTC alleged in its complaint.
In December 2017, the CFTC proposed a legal interpretation of the "actual delivery exception" within the context of virtual currency transactions (see Legal Update, CFTC Proposes Legal Interpretation of Actual Delivery Exception for Virtual Currency Regulation).
Update: On August 23, 2018, following a bench trial, Judge Weinstein issued a final judgment and order of permanent injunction, restitution, and civil monetary penalties against defendants, in which the court ordered defendants to pay over $1.1 million in civil monetary penalties, including $290,429.29 in restitution to customers and a $871,287.87 civil monetary penalty. The court also imposed permanent trading and registration bans on defendants, and permanently enjoined defendants from further violations of the CEA and CFTC regulations.
The court also issued a memorandum setting out findings of fact, conclusions of law, and directions for final judgment and injunction, which reflected the court's findings that defendants engaged in a deceptive and fraudulent virtual currency scheme to induce customers to send money and virtual currencies to CDM, purportedly in exchange for real-time expert virtual currency trading advice and for virtual currency purchasing and trading on behalf of the customers under McDonnell’s direction. The court found these misrepresentations were lies and McDonnell simply misappropriated customer funds in what the court described as “vicious defrauding" of customers.