The Criminal Defense Blog

The Commodity Futures Trading Commission today filed a civil enforcement action in the U.S. District Court for the Southern District of New York charging Avraham Eisenberg with a fraudulent and manipulative scheme to unlawfully obtain over $110 million in digital assets from a purported decentralized digital asset exchange. This is the CFTC’s first enforcement action for a fraudulent or manipulative scheme involving trading on a supposed decentralized digital asset platform, and its first involving a scheme that is sometimes called “oracle manipulation.” CFTC Press Release

In its continuing litigation, the CFTC seeks, among other relief, civil monetary penalties, disgorgement of any ill-gotten gains, restitution, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act (CEA), as charged.

“The CFTC will use all available enforcement tools to aggressively pursue fraud and manipulation regardless of the technology that is utilized,” said Acting Director of Enforcement Gretchen Lowe. “The CEA prohibits deception and swap manipulation, whether on a registered swap execution facility or on a decentralized blockchain-based trading platform.”   CFTC Press Release

The complaint alleges that on October 11, 2022, Eisenberg unlawfully misappropriated over $110 million in digital assets from Mango Markets, a purported decentralized digital asset exchange, through “oracle manipulation.” To accomplish his scheme, Eisenberg created two anonymous accounts on Mango Markets, which he used to establish large leveraged positions in a swap contract whose value was based upon the relative price of MNGO, the “native” token of Mango Markets, and USDC, a stablecoin. Eisenberg then artificially pumped up the price of MNGO by rapidly purchasing substantial quantities of MNGO on three digital asset exchanges that were the inputs for the “oracle,” or data feed, that Mango Markets used to determine the value of Eisenberg’s swap positions. 

As a result of Eisenberg’s manipulative trading, the price of MNGO as reported by the oracle, jumped over 13-fold during a 30-minute span, resulting in a temporary, artificial spike in the value of Eisenberg’s swap positions. Eisenberg then cashed out his illicit profits by using the artificially inflated value of his swaps as collateral to withdraw over $110 million in digital assets from Mango Markets, thereby draining the platform of most of the assets that had been deposited by other users. Subsequently, in an attempt to evade liability, Eisenberg agreed to return a portion of the misappropriated digital assets on the condition that Mango Markets agreed, among other things, to “not pursue any criminal investigations or freezing of funds.” Eisenberg ultimately returned approximately $67 million to Mango Markets, while retaining approximately $47 million worth of various digital assets.

United States Attorney Jane E. Young, announced that a federal jury convicted Ian Freeman, 42, of Keene, on all counts of money laundering, conspiracy to launder money, operation of an unlicensed money transmitting business, and tax evasion (four counts).

            According to trial exhibits and witness testimony during the ten-day trial, Freeman laundered over ten million dollars in proceeds of romance scams and other internet frauds by exchanging U.S. dollars for bitcoin. By failing to register his business with the Financial Crimes Enforcement Network as required by law, disabling “know your customer” features on his bitcoin kiosks, and ensuring that bitcoin customers did not tell him what they did with their bitcoin, among other things, Freeman created a business that catered to fraudsters. By charging exorbitant fees, Freeman made in excess of a million dollars.

            Records and exhibits proved that as part of the conspiracy, Freeman and his co-conspirators opened and operated accounts at financial institutions in the names of various churches including the Shire Free Church, the Church of the Invisible Hand, the Crypto Church of New Hampshire and the NH Peace Church. Freeman instructed bitcoin customers, who were often victims of scams, to lie to the financial institutions and describe their deposits as church donations. From 2016 to 2019, he paid no taxes, and concealed his income from the Internal Revenue Service.   

“Today’s verdict proves Ian Freeman operated a large-scale multi-million-dollar virtual currency business under the guise of a religious organization receiving charitable contributions that broke numerous laws to evade detection. As a member of this criminal conspiracy, Mr. Freeman took advantage of the emotions and bank accounts of unwitting victims to line his own pockets,” said Joseph R. Bonavolonta, Special Agent in Charge of the FBI Boston Division. “Make no mistake, the FBI will continue its longstanding tradition of following the money, whether physical, or digital, to expose criminal schemes like this one, and the fraudsters behind them. We thank the jury for its service and its decision to hold Mr. Freeman accountable.” DOJ Press Release

            "Today, Ian Freeman became another example of an individual who attempted to conceal the true source of his money‎ and was caught,” said Joleen Simpson, Special Agent in Charge of IRS- Criminal Investigation’s Boston Field Office. “Federal laws that regulate the reporting of financial transactions are in place to detect and stop illegal activities and the IRS will continue to take every step necessary to ferret out those who attempt to avoid their reporting obligations under the law.”

The crime of "scheme to defraud" is a serious and often complex offense that involves the use of communications technology to solicit victims and thereby conceal the identities of the perpetrators. This type of crime is often perpetrated by individuals or groups who use various forms of communication, such as email, text messaging, or social media, to reach out to potential victims and convince them to part with their money or personal information.

At its core, a "scheme to defraud" is a systematic, ongoing course of conduct that is designed to deceive or mislead one or more individuals with the intention of obtaining something of value from them. This can take many different forms, including scams, frauds, and schemes designed to steal money or personal information from unsuspecting victims.

One common example of a "scheme to defraud" is the use of email or text messaging to solicit individuals with offers of fake or fraudulent products or services. These scams often involve the use of personalized sales messages and false promises to convince victims to part with their money or personal information.

Another example of a "scheme to defraud" is the use of social media to spread false or misleading information in order to manipulate public opinion or manipulate stock prices. This type of activity, known as "pump and dump," involves spreading false or misleading information about a company or its products in order to artificially inflate the value of its stock. Once the stock price has been artificially inflated, the perpetrators will sell their shares at a profit, leaving unsuspecting investors holding the bag.

In order to be convicted of a "scheme to defraud," prosecutors must be able to prove that the defendant engaged in a systematic, ongoing course of conduct with the intention of defrauding one or more individuals or obtaining property from them by means of false or fraudulent pretenses, representations, or promises. This means that the prosecution must be able to show that the defendant had a specific plan in place to deceive or mislead the victim and that this plan was carried out over a period of time.

If you have been accused of a "scheme to defraud," it is important to seek legal counsel as soon as possible. An experienced criminal defense attorney can help you understand the charges against you and develop a defense strategy that is tailored to your unique circumstances.

U.S. DOJ Office of US Trustee filed motion seeking appointment of independent examiner to investigate alleged “substantial and serious allegations of fraud, dishonesty, incompetence, misconduct and mismanagement” related to FTX. Let me discuss why the DOJ's motion requesting appointment an examiner to investigate allegations of fraud relating to the FTX bankruptcy case may open the door to a potential criminal investigation.

First, let me explain why the DOJ is involved in the FTX bankruptcy case. In 1978, the US Bankruptcy Trustee Program was formed "to promote the efficiency and protect the integrity of the Federal bankruptcy system." The Attorney General of the United States appoints United States Bankruptcy Trustees. These Trustees are part of the Department of Justice and it is their job to "promote the efficiency and protect the integrity of the Federal bankruptcy system." Part of the duties of a US Trustee are to take "legal action to enforce the requirements of the Bankruptcy Code and to prevent fraud and abuse" AND refer "matters for investigation and criminal prosecution when appropriate."

So, if the US Trustee's investigation uncovers compelling evidence of fraud related to the FTX bankruptcy case, then the Trustee can refer the matter to the DOJ's criminal division for further investigation and prosecution. The US Trustee's motion lays one of the best summaries of the alleged FTX fraud and mismanagement that I've seen to date. Let's break it all down.

The motion notes that Section 8.2.6 FTX's Trading Terms of Service with its customers provides that "Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading." The terms further provide that: "None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading; FTX Trading does not represent or treat Digital Assets in User’s Accounts as belonging to FTX Trading."

The motion then breaks down a very simple timeline discussing how FTX allegedly acted contrary to its own terms and conditions relating to investor funds and triggered the ultimate collapse of company. "In May and June of 2022, according to news reports, Alameda suffered severe losses from many deals it was engaged in, including a $500 million loan on which its borrower defaulted." ¶14 The New York Times has reported that Bankman-Fried was heavily involved in the decision-making for all of Alameda’s “big trades." On or about November 2, 2022, CoinDesk published that a substantial part of Alameda’s $14.6 billion in assets were held in FTT, the cryptocurrency created by the FTX Debtors, per Alameda’s June 30, 2022, balance sheet." ¶15

The Wall Street Journal reported that Bankman-Fried said in investor meetings during the week of November 6 that Alameda owed FTX about $10 billion based on loans FTX extended to Alameda to fund risky bets." ¶16  "The $10 billion came from money customers had deposited on the exchange for trading purposes. Bankman-Fried described the decision to move FTX customer property to Alameda as a “poor judgment call.”

"The $10 billion constituted more than half of the approximately $16 billion in customer funds on the FTX cryptocurrency exchange." "According to a Reuters report dated November 9, 2022, Bankman-Fried issued an apology to all FTX employees via an internal messaging application that stated: “I’m deeply sorry that we got into this place, and for my role in it." ¶17 "That’s on me, and me alone, and it sucks, and I’m sorry, not that that it makes it any better.” That same day, The Wall Street Journal reported that Alameda CEO Caroline Ellison—joined by Bankman-Fried and two other members of FTX Digital Markets Ltd.’s (“FTX Digital”) management team (Messrs. Wang and Singh)—told Alameda employees that they were aware of the decision to send customer funds to Alameda." "Specifically, according to the report, Ms. Ellison stated that “FTX used customer money to help Alameda meet its liabilities.”

The US Trustee's motion also provides and excellent summary of the declaration filed by FTX's new CEO, John J. Ray III, who is tasked with guiding the company through bankruptcy proceedings. Ray's declaration summarizes troubling business practices by debtors. Mr. Ray described a “complete failure of corporate controls and [] a complete absence of trustworthy financial information. ”As summarized in the Trustee's motion, Ray's declaration stated that: (1) debtors used "software to conceal the misuse of customer funds." (2) absence of any accounting department; 3) absence of centralized controls over Debtors' cash and an absence of an "accurate list of bank accounts and account signatories"  (4) absence of "appropriate books and records, or security controls, with respect to [the Debtors'] digital assets; (5) "[u]nacceptable management practices" such as the use of an unsecured group email account as the root user to access confidential private keys.

In summary, the Trustee seeks appointment of an independent investigator to help answer the critical question of whether FTX was an "unsuccessful business or a successful fraud"

According to court documents unsealed today, 21 individuals have been charged for their roles in transnational money laundering networks, including those that laundered millions of dollars stolen from United States fraud victims through romance scams, business email compromises, technical support schemes, and other fraud schemes. “These defendants orchestrated highly organized and sophisticated schemes to launder fraud proceeds through cryptocurrency,” said U.S. Attorney Brit Featherston." “Today’s announcement sends a clear message that money laundering networks that service fraud schemes targeting American victims, especially the elderly, will not be tolerated, and those operating such networks will be held accountable." "By acting as domestic money launderers for foreign co-conspirators, these defendants played indispensable roles that allowed foreign actors to reach from overseas to target victims in communities across the United States.” DOJ Press Release