Following a bench trial of a pro se defendant accused of running a virtual currency boiler room, the Eastern District of New York found in favor of the US Commodity Futures Trading Commission (CFTC) and again held that “virtual currency may be regulated by the CFTC as a commodity.” CFTC v. McDonnell, No. 18-cv-361, ECF No. 172 (E.D.N.Y. Aug. 23, 2018).
The CFTC charged Patrick K. McDonnell and his company, CabbageTech, for operating “a deceptive and fraudulent virtual currency scheme . . . for purported virtual currency trading advice” and “for virtual currency purchases and trading” which resulted in the misappropriation of retail investors’ funds. Id. at ¶ 25. In essence, the CFTC charged, and the court found, that Mr. McDonnell engaged in a “‘boiler room’ scheme defraud[ing] members of the public by conning them into believing they were paying for, and receiving, bona fide advice on investing in virtual currencies – that is to say: expert virtual currency trading advice from him and an imaginary team of advisors – and that he was making purchases and sales of virtual currencies using their assets on their behalf and for their benefit.” Id.¶ 15. The court held that “in reality, McDonnell never provided or intended to provide these services” and “instead, he ruthlessly misled customers and misappropriated their funds.” Id. ¶ 15. Mr. McDonnell has appeared pro se throughout the various legal proceedings, despite the urging of the court that he retain counsel. Id. ¶ 10. After a three-day bench trial, the court determined that Mr. McDonnell engaged in fraud and ordered a permanent injunction banning him from dealing in virtual currency and ordering a judgment for $290,429.90 in restitution and $871,287.87 in civil penalties.
While Mr. McDonnell’s alleged scheme does not appear to be all that different from traditional securities and commodities fraud allegations, the court’s rulings on the CFTC’s regulatory authority—whether virtual currency constitutes a “commodity” under the Commodities Exchange Act—is important for the virtual currency industry at large.
In a previous decision issued in the same matter, the court held that “virtual currencies can be regulated by the CFTC as a commodity” and that it “fall[s] well-within the common definition of ‘commodity’ as well as the CEA’s definition of commodities.’” CFTC v. McDonnell, et al., 287 F. Supp. 3d 213, 228 (E.D.N.Y. Mar. 6, 2018); see also Rapidly Shifting Regulatory Landscape for Virtual Currencies | Market Participants: Stay Tuned (noting that in the McDonnell decision, the court identified nine options for which regulatory body should be tasked with regulating virtual currency: (1) none; (2) Department of Justice (DOJ); (3) CFTC; (4) SEC; (5); FinCEN; (6) IRS; (7) private exchanges; (8) state regulators; and (9) a combination of any of the above).
A motion for reconsideration was filed...
