CFTC Granted Default Judgment Against Ooki DAO for CEA Violations | Practical Law

CFTC Granted Default Judgment Against Ooki DAO for CEA Violations | Practical Law

The US District Court of the Northern District of California granted the CFTC's motion for default judgment in CFTC v. Ooki DAO in its enforcement action against the decentralized autonomous organizations (DAO) for violations of the Commodity Exchange Act (CEA).

CFTC Granted Default Judgment Against Ooki DAO for CEA Violations

Practical Law Legal Update w-039-7921 (Approx. 5 pages)

CFTC Granted Default Judgment Against Ooki DAO for CEA Violations

by Practical Law Finance
Published on 14 Jun 2023 • USA (National/Federal)
The US District Court of the Northern District of California granted the CFTC's motion for default judgment in CFTC v. Ooki DAO in its enforcement action against the decentralized autonomous organizations (DAO) for violations of the Commodity Exchange Act (CEA).
On June 8, 2023, Judge William H. Orrick of the US District Court of the Northern District of California (court) issued:
  • An order in CFTC v. Ooki DAO, 3:22-cv-05416-WHO (N. D. Cal. 2023) granting the CFTC's motion for default judgment.
  • A judgment against Ooki DAO for violations of:
    • Section 4(a) of the Commodity Exchange Act (CEA) (7 U.S.C. §6(a)), by engaging in unlawful off-exchange leveraged and margined retail commodity transactions, including executing such transactions with persons who are not eligible contract participants (ECPs) or eligible commercial entities, without being designated by the CFTC as a designated contract market (DCM);
    • Section 4(d) of the CEA (7 U.S.C. §6d), by soliciting and accepting orders for leveraged or margined retail commodity transactions with customers and accepting money or property to margin those transactions, which are activities that can only lawfully be performed by a registered futures commission merchant (FCM); and
    • CFTC Regulation 42.2 (17 C.F.R. §42.2), which requires every FCM to comply with the Bank Secrecy Act (BSA), by failing to implement a customer information program and failing to implement know-your-customer (KYC) and anti-money laundering (AML) procedures, as well as advertising the absence of these controls.
In the order granting the CFTC's motion for default judgment, Judge Orrick first found that the court had jurisdiction over Ooki DAO because:
  • Service of process was proper.
  • There is a federal question at issue because the complaint was brought by a federal agency.
  • Ooki DAO acted in the US and caused and established minimum contacts with the US.
The court next considered the Eitel factors (Eitel v. McCool, 782 F. 2d 1470, 1471-72 (9th Cir. 1986)), which are seven factors to be considered by a court in determining whether to grant a default judgment. The Eitel factors are:
  • Possibility of prejudice to the plaintiff.
  • Merits of plaintiff’s substantive claim.
  • Sufficiency of the complaint.
  • The sum of money at stake in the action.
  • Possibility of a dispute concerning material facts.
  • Whether the default was due to excusable neglect.
  • The policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.
Judge Orrick found that under the Eitel factors:
  • Ooki DAO's failure to participate in the litigation would leave the CFTC with no recourse without the default judgment.
  • The CFTC sufficiently alleged that Ooki DAO may be held liable under the CEA.
  • The civil penalty requested by the CFTC is tailored to Ooki DAO's specific misconduct.
  • The risk of dispute concerning material facts is low and mitigated by defendant’s choice to not participate in the litigation.
  • Ooki DAO's failure to participate in the litigation was not a result of excusable neglect.
  • Policy grounds that favor a resolution on the merits of a despite are outweighed by the need for resolution of this matter because Ooki DAO chose not to appear, respond, or participate in this litigation and its unlawful behavior continues via operation of the trading platform.
The judgement entered in favor of the CFTC provides that Ooki DAO:
  • Must pay a civil monetary penalty of $645,542 for the three CEA violation noted in the complaint.
  • Must remove all webpages posted or authorized by Ooki DAO to be posted in which Ooki DAO offers to enter into, enters into, executes, confirms the execution of, or conducts business in the US for the purpose of soliciting or accepting orders for, or otherwise dealing in, any transaction in, or in connection with, leveraged or margined retail commodity transactions.
  • Is permanently enjoined from directly or indirectly continuing and further violations of the CEA as alleged in the complaint and found by the order.
In a related statement, CFTC Division of Enforcement Director Ian McGinley noted the court's decision is "precedent-setting" in its finding that Ooki DAO is a “person” under the CEA and can be held liable for violations of the law.
For more information on the enforcement action against Ooki DAO, see Legal Update, Updated: CFTC Charges Ooki with Failure to Register as FCM, Finds Members Personally Liable for DAO's Debts.