U.S. regulators, such as the SEC and CFTC, continue to caution investors about virtual currencies. New stories recount significant price swings in the markets while Government enforcement actions illuminate the risks of fraudsters. Debates continue about banning the potential investments. Yet all things virtual currency draw significant investor interest.
The CFTC’s latest virtual currency not only highlights the risks of such investments but seems to turned the cautions of regulators into a sales pitch. Rather than directly soliciting investors to buy coins or other instruments, the Defendants sought to sell them trading advise and programs to develop their skills which, if true, might help them avoid frauds. CFTC v. McDonnell, Case No. 18-cv-0361 (E.D.N.Y. Filed Jan. 18, 2018).
Named as defendants are Patrick McDonnell and his firm, Cabbage Tech, Corp, d/b/a Coin Drop Markets. Both Defendants are from Staten Island, New York. Neither has ever been registered with the CFTC.
Beginning in January 2017, and continuing until at least July of that year, the Defendants solicited investors who wanted to receive expert trading advise, expert trade signals and perhaps invest along side experts. The solicitations were made in the United States and other countries. Mr. McDonnell, who claimed to be, among other things, the Chief Technology Officer of his firm, and Coin Drop told investors that they could subscribe for services such as a “Turn-Key Annual Membership” that provide access to the CTO’s expertise, mentorship and guidance. A variation of this claim involved a Lifetime Membership which claimed to offer returns as high as 300% in one week.
The promotional materials amplified these claims with statements about “continuous, ongoing monitoring and trading signals . . .” and a dedicated team of “digital asset trading specialists . . .” These advantages were, of course, all tied to the expertise of Mr. McDonnell who was represented on the website as having made a single virtual currency trade that generated a 1,000% return. That claim for many investors may have echoed the price swings for virtual currency reported regularly in market reports and on television.
Defendants publicized their claims in a variety of venues. For example, in April 2017 membership was advertises in trading groups such as RedliteGreenLite, BTC relating to Bitcoin. Other ads were at RedligeGreenLite, LTC, relating to the virtual currency Litecoin. Other times investors were solicited by telephone, through social media, e-mails and the Coin Drop website.
To secure the benefits of Defendants” expertise –and avoid those pitfalls the regulators discussed, although this was not stated – the investor just had to pay an up-front fee and secure expert tutelage. When the fee was paid, however, Defendants stopped communicating with that investor. The investor funds were misappropriated. The complaint alleges violations of fraud Section 6(c)(1) of the CEA. The case is in litigation.