CFTC Files Fraud Charges Against Three Cryptocurrency Operators

The U.S. Commodity Futures Trading Commission (CFTC) filed fraud charges against three virtual currency companies alleging they defrauded customers and violated trading rules involving cryptocurrency investments.

The CFTC accused Entrepreneurs Headquarters Ltd., CabbageTech and an unnamed bitcoin operator of financially harming investors by engaging in fraud, misrepresentation and misappropriation of funds.

The agency filed lawsuits against the companies in a New York district court.

The first case named Entrepreneurs Headquarters Ltd. and its CEO Dillon Michael Dean as defendants. Dean was charged with fraud for orchestrating a complex Ponzi scheme. Over 600 investors were told they would get high returns for pooling together their cryptocurrency for investment.

Through his company, Dean allegedly acquired bitcoin worth $1.1 million from investors but never delivered on his promises. Instead, Entrepreneurs Headquarters allegedly paid the money to other investors, claiming to have obtained it due to the fund’s high rate of return.

“Increased public interest in bitcoin and other virtual currencies has provided new opportunities for bad actors,” said CFTC Division of Enforcement Director James McDonald. “The CFTC will continue to take swift action to stop such fraudulent schemes and to hold fraudsters accountable for their misconduct.”

The CFTC brought a second lawsuit against Patrick McDonnell and his New York-based company CabbageTech for billing customers for various cryptocurrency investment services that were never provided. Investors ended up losing their money, bitcoin and other cryptocurrencies after CabbageTech falsely promised them expert advice on virtual currency trading.

The CFTC released a statement saying that the company lured clients into its fraudulent scheme by “promising them the opportunity to get the inside scoop on the next new thing.”

The recent lawsuits are indicative of the CFTC’s heightened efforts to root out fraud with enhanced regulatory oversight of the cryptocurrency market. They mark the first steps the agency has taken toward enforcement since greenlighting the launch of bitcoin futures trading in December last year.

The CFTC and the Securities and Exchange Commission (SEC) released a joint statement last month warning investors about the risky nature of cryptocurrency investments. They pledged to work together to crack down on cryptocurrency fraud and investment scams. The enhanced regulatory oversight is in line with the watchdogs’ expanding jurisdiction over the volatile cryptocurrency market, which has no overriding federal regulator.

SEC and CFTC heads are scheduled to appear at a U.S. Senate Committee on Banking, Housing and Urban Affairs hearing on February 6. The hearing will focus on the agencies’ role in the oversight of virtual currencies. It comes amid growing concerns over the risks cryptocurrencies pose to the financial system.

Facebook recently announced a ban on advertisements for bitcoin and other cryptocurrencies. It is hoping the new policy will help shield consumers from scammers on the platform and advertisements selling “financial products and services that are frequently associated with misleading or deceptive promotional practices.”

The CFTC alleged CabbageTech’s McDonnell used Facebook and other social media to defraud potential cryptocurrency investors. In addition, he shared a post about the regulator’s lawsuit against his company on its Facebook page.