For the primary time, the US Commodity Futures Buying and selling Fee (“CFTC”) filed a grievance alleging a manipulative scheme involving digital belongings.1 The CFTC’s grievance, filed on March 5, 2021 within the Southern District of New York, charged antivirus software program creator John McAfee and his former worker, Jimmy Gale Watson, who served as government adviser of McAfee’s cryptocurrency crew, for partaking in a pump-and-dump scheme in quite a lot of digital currencies.2
McAfee isn’t any stranger to enforcement actions. These new fees filed by the CFTC come along with a grievance filed in October by the Securities and Trade Fee in opposition to McAfee, alleging fraudulent promotion of a number of preliminary coin choices.3 And whereas McAfee is in custody in Spain, he awaits doable extradition for legal fees filed by the U.S. DOJ final June referring to tax violations, a few of which stem from unreported revenue related to this very manipulation scheme.4
In response to the grievance, this pump-and-dump scheme came about in three levels. First, the defendants secretly gathered positions in sure cryptocurrencies, reminiscent of dogecoin, reddcoin, and verge. Second, they used McAfee’s clout to advertise these digital belongings on social media as worthwhile long-term investments, inflicting their worth to rise. Lastly, they offered the belongings at these inflated values to earn greater than $2 million in complete revenue. The CFTC’s grievance seeks “restitution, disgorgement, civil financial penalties, everlasting buying and selling and registration bans, and a everlasting injunction in opposition to additional violations of the Commodity Trade Act and CFTC laws . . . .”5
Vincent McGonagle, the CFTC’s Appearing Director of Enforcement, commented on the company’s first enforcement motion associated to market manipulation within the digital forex enviornment. “Monetary innovation is continually breaking new floor, and the CFTC’s enforcement efforts should sustain,” he remarked. “We’ll at all times act to carry fraudsters and manipulators accountable for misconduct.”6
McAfee and Watson’s scheme additionally caught the eye of legal authorities. On March 5, 2021 the Federal Bureau of Investigation (FBI) and Audrey Strauss, the US Legal professional for the Southern District of New York, introduced the unsealing of a legal indictment charging each people with conspiracy to commit commodities and securities fraud, conspiracy to commit securities and touting fraud, wire fraud conspiracy and substantive wire fraud, and cash laundering conspiracy offenses.7 Every depend carries a most potential sentence of twenty years in jail. FBI Assistant Director William F. Sweeney Jr. made clear that prosecutors is not going to give a particular go to cryptocurrency promoters: “[w]hen partaking in criminal activity, merely discovering new methods to hold out outdated tips received’t produce totally different outcomes. Funding fraud and cash laundering schemes carry a strict penalty beneath federal legislation.”8
Though that is the primary digital asset market manipulation case introduced by the CFTC, cryptocurrencies have lengthy been on the company’s radar. The CFTC introduced its first case involving cryptocurrencies in 2015 and has been very energetic ever since. In fiscal 12 months 2020 alone, the CFTC introduced seven enforcement actions associated to retail fraud within the cryptocurrency area.9
But, the CFTC’s grievance in opposition to McAfee and Watson marks the daybreak of a brand new period in digital forex buying and selling enforcement. The CFTC’s enforcement motion ought to function a discover to the digital forex market that the company views cryptocurrencies by the identical regulatory lens as different regulated merchandise. Asset managers and others with digital currencies of their portfolios ought to intently monitor these new developments and will ensure that their compliance packages are adequately designed and working to answer the elevated CFTC scrutiny.