CFTC Files Complaint for Fraudulent Forex and Digital Asset Scheme
On April 16, 2020, the Commodity Futures Trading Commission (CFTC) filed a civil enforcement action (Complaint) against two Florida-based crypto companies and their founder and sole owner (Defendants). According to the CFTC, the Defendants raised $1.6 million from hundreds of customers by fraudulently marketing and soliciting a digital asset to be used in connection with the Defendants’ proprietary foreign exchange (forex) algorithm called ART.
The CFTC alleges that from 2016 to 2018, the defendants made untrue and materially false statements to illegally solicit customers to purchase their digital asset called “Compcoin.” Specifically, as alleged in the complaint, the Defendants falsely promised that Compcoin would provide access to ART, which could be utilized for retail forex trading on a margined or leveraged basis.
According to the CFTC, the Defendants made numerous representations through their website, press releases, statements and otherwise that promised potential customers the immediate use and functionality of Compcoin with respect to ART, including statements that ART was “ready for release.” The Defendants’ representations also included comments about ART’s “high success rate” of predicting forex trades and promised customers a “high success rate of return” from using ART.
The CFTC alleges that the Defendants made these representations to customers despite being fully aware that the customers could not lawfully use ART without the National Futures Association’s (NFA) approval of the Defendants’ risk disclosures as required by CFTC rules. The Defendants first solicited Compcoin without seeking the NFA’s approval. Although the Defendants eventually sought approval during the solicitation process, according to the complaint, the NFA advised the Defendants as early as September 2017 that their disclosure documents were inadequate and would not be accepted. And, indeed, the NFA’s approval was never received. As a result, customers never received access to ART, rendering Compcoin and the customers’ purchases worthless according to the CFTC. The Complaint notes that the NFA’s correspondence with the Defendants included a warning that soliciting Compcoin without first obtaining the NFA’s approval would be in violation of NFA rules and CFTC regulations.
The CFTC is seeking civil monetary penalties, restitution, disgorgement of ill-gotten gains, trading and registration bans and permanent injunctions against further violations of the federal commodity laws. Although sister agency the Securities and Exchange Commission has brought a far greater number of recent cases involving fraudulent or unlawfully offered digital assets, this case serves as a reminder that the CFTC shares jurisdiction over the space and will act when it perceives a violation of the federal commodity laws.