If a guy in a shirt and tie is pointing to a magical electronic pyramid in the air while on a cell phone, chances are it's a Ponzi scheme and you should run away (via Shutterstock).
If a guy in a shirt and tie is pointing to a magical electronic pyramid in the air while on a cell phone, chances are it's a Ponzi scheme and you should run away (via Shutterstock).
Bitcoin,  United States

CFTC says investors were duped by a $47 million Ponzi scheme

Control-Finance Ltd promised returns of 45% a month that were backed up by fictitous accounts, complaint alleges

By  / June 19, 2019 /

A new civil enforcement action by the Commodity Futures Trading Commission serves to reinforce a lesson everyone should have learned from Bernie Madoff: if it guarantees a return, it’s a Ponzi scheme.

In this case, the Commodity Futures Trading Commission (CFTC) is seeking the return of nearly 23,000 bitcoin (BTC), then valued at $47 million, as well as a fine plus the barring the principals of UK-based Control-Finance Ltd. from trading.

According to a complaint filed in the Southern District of New York, Benjamin Reynolds attracted more than 1,000 investors via a website and social media by “falsely representing that [Control-Finance Ltd.] employed expert virtual currency traders who earned guaranteed daily trading profits on all Bitcoin deposits.”

The fraud occurred from May to October 2017, according to the civil enforcement action announced by the CFTC on June 18.

Investors were told these experts used “risk diversification methods to protect customers’ Bitcoin deposits [and] provide a ‘safe haven’” for them from the bitcoin market’s volatility, the complaint alleges. They were also told the company earned 1.5% daily and up to 45% monthly in trading profits.

“In reality,” the CFTC said, “the defendants made no trades on customers’ behalf, earned no trading profits for them, and misappropriated their Bitcoin deposits.”

Reynolds created sham accounts with fake balances and profit numbers, as well as a weekly trade report identifying fictitious trades that supported those balances. The bitcoins received were transferred from the unique wallets created in exchanges around the world for every customer to pooled wallets controlled by the defendant. These transactions “lacked any valid business purpose and were designed solely to conceal misappropriation,” according to the CFTC.

In all, 22,858.8 bitcoin were misappropriated. That’s nearly $210 million at today’s price.

Beyond fake accounts, Control-Finance Limited also ran an illusory affiliate program-based pyramid scheme, offering escalating rewards to customers who referred friends, relatives, and others, said the complaint.

All this was concealed in classic Ponzi scheme style by funding withdrawals with other customers’ bitcoin deposits, the CFTC alleges.

“The CFTC will continue to vigorously police the Bitcoin markets, including fraudulent trading activity as alleged in the complaint here,” said James McDonald, the CFTC’s director of enforcement. “Fraud in these markets not only harms customers, but if left unchecked, it could also hinder innovation. We caution potential virtual currency customers, once again, that they should engage in appropriate diligence before purchasing or trading virtual currencies.”

The CFTC is seeking “civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and permanent injunctions against further violations of the federal commodity laws.”

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.