Federal Court Grants $119 Million Judgment in CFTC Case Involving Cryptocurrency Fraud

According to an article by Cadwalader, the US District Court for the Northern District of Illinois ordered Sam Ikkurty and his affiliated companies to pay $119 million in restitution and disgorgement for engaging in cryptocurrency fraud and misappropriating funds tied to a carbon credit scheme. 

The US Commodity Futures Trading Commission (CFTC) successfully argued that Ikkurty operated unregistered commodity pools despite the absence of derivatives trading. This case marks a significant step in the CFTC’s enforcement of environmental commodity fraud, setting a new legal precedent in cryptocurrency and carbon offset markets.

Peter Y. Malyshev, writing on the Cadwalader site, observes that the case would have been a classic Ponzi scheme if not for two novel issues: carbon credits and a commodity pool.

The CFTC argued that an investment vehicle wasn’t required to trade derivatives of “commodity interests,” such as swaps, futures, or options, to qualify as a “commodity pool.” The mere solicitation of funds to invest in a vehicle for trading in derivatives qualifies said vehicle as a “commodity pool.”

The court agreed. It found that the vehicles Ikkurty used to invest in Bitcoin, Ethereum, and other cryptocurrencies were “commodity pools” although they had no positions in derivatives. Therefore, Ikkurty was an unregistered commodity pool operator (CPO) and committed cryptocurrency fraud.

The court also agreed that carbon credits in a carbon offset program were “commodities” and that Ikkurty misappropriated customer funds through such a program, resulting in a $20 million shortfall for participants.

Malyshev says that the court order did not provide much detail on how the carbon offset program operated but calls it notable that this is the first instance in which the CFTC successfully prosecuted fraud in connection with trading in environmental commodities.

It is also notable that it confirms the CFTC’s position that simply stating that a vehicle might establish positions in the future qualifies it as a commodity pool and the operator as a CPO, with all statutory obligations.