US Federal Court Fines Bitcoin Ponzi Schemer Over $2.5 Million

A U.S. federal court has fined a New York firm and its chief executive officer over $2.5 million in the first anti-fraud action involving bitcoin filed by the Commodity Futures Trading Commission. The Ponzi scheme involved a fake pooled investment strategy and a “fake computer ‘hack’ that supposedly caused the loss of nearly all customer funds,” the derivatives regulator detailed.

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CFTC’s First Bitcoin Anti-Fraud Action

The U.S. Commodity Futures Trading Commission (CFTC) announced on Thursday that a New York federal court has ordered two defendants “to pay in total over $2.5 million in civil monetary penalties and restitution” in a bitcoin fraud case.

The orders against New York corporation Gelfman Blueprint Inc. (Gbi) and its CEO Nicholas Gelfman were entered by Judge P. Kevin Castel of the U.S. District Court for the Southern District of New York. According to the commission, this case was “the first anti-fraud enforcement action involving bitcoin” filed by the CFTC.

The derivatives watchdog explained that “Gelfman was liable as a controlling person for Gbi’s violations” while “Gbi was liable as a principal for the violations of Gelfman and its other officers, agents, and employees.”

Noting that the complaint was originally filed against the defendants on Sept. 21, the CFTC wrote in Thursday’s announcement:

In addition to requiring Gbi and Gelfman, respectively, to pay $554,734.48 and $492,064.53 in restitution to customers and $1,854,000 and $177,501 in civil monetary penalties, the orders impose permanent trading and registration bans on Gbi and Gelfman.

The orders also “permanently enjoin them from further violations” of the CFTC Act and regulations. While the defendants are required to repay victims, the agency emphasized that the orders “may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets.”

More Than 80 Customers Defrauded

From approximately 2014 to January 2016, “Gelfman and Gbi, by and through its officers and agents and employees, operated a bitcoin Ponzi scheme,” the CFTC wrote. “They fraudulently solicited more than $600,000 from at least 80 customers.”

The scheme promised to place customers’ funds “in a pooled commodity fund that purportedly employed a high-frequency, algorithmic trading strategy executed by defendants’ computer trading program called ‘Jigsaw.’” The CFTC noted that the defendants posted on social media statements such as “We are a software development firm, currently offering customers access to a high-frequency BTC trading program called ‘Jigsaw’ (2% weekly BTC return).”

However, the commission asserted:

The strategy was fake, the purported performance reports were false, and — as in all Ponzi schemes — payouts of supposed profits to Gbi Customers in actuality consisted of other customers’ misappropriated funds.

Furthermore, in order to conceal “trading losses and misappropriation,” the defendants “made and provided false performance reports to pool participants.” Among the fake reports were statements showing positive bitcoin trading gains “when in truth defendants’ Jigsaw trading account records reveal only infrequent and unprofitable trading,” the CFTC described. The orders additionally detail:

Gelfman, in order to conceal the scheme’s trading losses and misappropriation, staged a fake computer ‘hack’ that supposedly caused the loss of nearly all customer funds.

What do you think of this CFTC’s enforcement action against Gbi and its CEO? Let us know in the comments section below.

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