On Thursday (18 October 2018), the U.S. Commodity Futures Trading Commission (CFTC) issued a press release ("Release 7831-18"), which said that a New York federal court had ordered Bitcoin hedge fund "Gelfman Blueprint" (a New York-based company) and its CEO Nicholas Gelfman to pay over $2.5 million in "civil monetary penalties and restitution" in what was "the first anti-fraud enforcement action involving Bitcoin" filed by the CFTC.
On 21 September 2017, the CFTC announced (via press release 7414-17) that it had filed a federal civil enforcement action in the U.S. District Court for the Southern District of New York against Defendants Nicholas Gelfman Blueprint, Inc. (GBI), charging them with "fraud, misappropriation, and issuing false account statements in connection with solicited investments in Bitcoin, a virtual currency."
The CFTC Complaint alleged that "from approximately January 2014 through approximately January 2016, GBI and Gelfman, company Chief Executive Officer and Head Trader, operated a Bitcoin Ponzi scheme in which they fraudulently solicited more than $600,000 from approximately 80 persons, supposedly for placement in a pooled commodity fund that purportedly employed a high-frequency, algorithmic trading strategy, executed by Defendants’ computer trading program called 'Jigsaw'."
However, the Complaint said that "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." It also alleged that "to conceal Defendants’ trading losses and misappropriation, Defendants made and provided false performance reports to pool participants, including statements that created the appearance of positive Bitcoin trading gains, when in truth Defendants’ Jigsaw trading account records reveal only infrequent and unprofitable trading." Gelfman is also aleged to have "staged a fake computer 'hack' designed to conceal trading losses and misappropriation."
Per the Complaint, the CFTC was seeking "among other relief, restitution to defrauded pool participants, disgorgement of benefits from violations of the Commodity Exchange Act and CFTC Regulations, civil monetary penalties, trading bans, and a permanent injunction against future violations of federal commodities laws."
Yesterday, the CFTC said "the Order for Final Judgment by Default (Default Order), and the Consent Order for Final Judgment (Consent Order) (collectively, the Orders), entered respectively on October 2, 2018 and October 16, 2018, by Judge P. Kevin Castel of the U.S. District Court for the Southern District of New York, resolve the charges of the CFTC Complaint against GBI and Gelfman filed on September 21, 2017."
James McDonald, the CFTC’s Director of Enforcement, had this to say about the outcome of the case:
“This case marks yet another victory for the Commission in the virtual currency enforcement arena. As this string of cases shows, the CFTC is determined to identify bad actors in these virtual currency markets and hold them accountable. I’m grateful to the members of Enforcement’s Virtual Currency Task Force for their tireless work on these matters.”
GBI and Gelfman were ordered to pay $554,734.48 and $492,064.53 respectively in restitution to customers and $1,854,000 and $177,501 in civil monetary penalties. The Orders also impose "permanent trading and registration bans on GBI and Gelfman and permanently enjoin them from further violations of the Commodity Exchange Act and CFTC Regulations."
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