On 9 November 2018, the U.S. Commodity Futures Trading Commission (CFTC) announced that it had issued an Order filing and settling charges against crypto trader Joseph Kim, requiring him to pay a penalty of over $1.1 million for "a fraudulent Bitcoin and Litecoin scheme." Furthermore, Kim was given a 15 months sentence by the U.S. District Court for the Northern District of Illinois.
Kim, a 24-year-old University of Chicago economics graduate, was employed as a trader at Consolidated Trading, a Chicago-based proprietary trading firm from approximately July 2016 through November 2017 (when his employment contract was terminated).
According to the CTFC, here are the summarized facts of the case:
- "Between September and November of 2017, Kim misappropriated approximately 980 Litecoins and 339 Bitcoins from his employer to cover personal trading losses in his own personal virtual currency trading accounts."
- "When questioned by his employer about the transfers, Kim concealed his misappropriation and provided false explanations for the transfers."
- "Kim’s employer suffered a loss of approximately $601,000 as a result of Kim’s scheme."
- "After Kim ’s employment was terminated, he fraudulently solicited approximately $545,000 from at least 5 individuals between December 2017 and March 2018 to continue trading virtual currencies in an ill-fated attempt to cover his previous losses."
- "In soliciting customers, Kim made a number of false statements, including that he left his employment on his own terms and that he would invest funds in a low-risk arbitrage virtual currency strategy."
- "Kim lost all $545,000 of the customers’ funds trading virtual currencies in his personal trading accounts." (CFTC says that he made the losses by making "high-risk, directional bets on the movement of virtual currencies", and concelaed them by "sending false account statements to customers reflecting profitable trading.")
CFTC's press release says that "Kim was able to misappropriate the Firm’s Bitcoin and Litecoin through a series of transfers between the Firm’s accounts and Kim’s own personal accounts", and that when Kim was questioned about the missing LTC and BTC, he "falsely represented that there were security issues with a virtual currency exchange that necessitated transfers into various accounts."
According to the Order, "virtual currencies such as Bitcoin and Litecoin are encompassed in the definition of 'commodity' under Section 1a(9) of the Commodity Exchange Act, and the Commission used its authority under Section 6(c)(1) of the Act and Regulation 180.1 to take action against Kim, who admitted to the findings and conclusions in the Order, and submitted an Offer of Settlement, which the Commission decided to accept.
In addition to "requiring Kim to pay $1,146,000 in restitution to his company and customers", the Order "imposes permanent trading and registration bans on Kim, including virtual currency trading and solicitation bans, and permanently enjoins him from further violations of the Commodity Exchange Act and CFTC Regulations."
CFTC's Director of Enforcement, James McDonald, stated:
“Today’s Order stands as yet another in the string of cases showing the CFTC’s commitment to actively police the virtual currency markets and protect the public interest. In addition, the criminal indictment and sentence reaffirms the CFTC’s commitment to working in parallel with our partners at the Department of Justice to root out misconduct in these markets. My thanks to U.S. Attorney Lausch and his staff, as well as the Federal Bureau of Investigation, for their assistance in this case.”
Also, in a separate criminal action brought by "the U.S. Attorney for the Northern District of Illinois", Kim "pleaded guilty to one count of wire fraud in connection with the misappropriation of approximately $601,000 (USD value) of Litecoin and Bitcoin from his employer, and fraudulent solicitation of $545,000 in funds from investors." According to a report in the Chicago Sun-Times, Kim was given a 15-month prison sentence by U.S. District Judge Andrea Wood "at the conclusion of a 2 ½-hour hearing," during which Kim made the following apology to his victims:
“I betrayed your trust with my desperate actions. I’m still desperately trying to make things right.”
The report also mentions that Kim’s attorney, William Ziegelmueller, pointed out that "while Kim may have defrauded people of millions of dollars, he did not spend any of it on himself":
“The whole reason he did what he did … was because he had a big debt. He was desperate about it. He didn’t know how to react. Mr. Kim’s intent was always to invest,” Ziegemueller added. “He didn’t blow it on Ferraris — he just lost it.”
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