US court orders firm and CEO to pay $2.5 million for bitcoin Ponzi scheme

The Commodity Futures Trading Commission has won its case against a fraudulent scheme in which about 80 customers have lost more than $600,000

What has happened?

A New York federal court has ordered a firm and its chief executive to pay over $2.5 million in what was the first anti-fraud action involving bitcoin ever brought by the Commodity Futures Trading Commission (CFTC).

What does this mean?

Between 2014 and January 2016, Gelfman Blueprint, Inc (GBI) and CEO Nicholas Gelfmann, from New York, operated a bitcoin Ponzi scheme, soliciting more than $600,000 from at least 80 customers.

The defendants claimed the customers' funds would be placed in a pooled commodity fund that "purportedly employed a high-frequency, algorithmic trading strategy" executed by their computer trading programme.

However, as in all Ponzi schemes, payouts of supposed profits consisted of other customers' funds.

The court orders find that, to conceal their trading losses and misappropriation, the defendants made false performance reports to pool participants, when in reality the trading account records showed only "infrequent and unprofitable" trading.

Gelfmann is also alleged to have staged a fake computer hack that supposedly caused the loss of nearly all customer funds.

Ruling in favour of the CFTC, the court ordered GBI and Gelfman to pay $554,734.48 and $492,064.53 in restitution to customers and $1.85 million and $177,501 in civil monetary penalties.

It also imposed permanent trading and registration bans on the defendants.

However, the CFTC said that victims may never recover their money as the defendants may not have sufficient funds or assets to repay them.

James McDonald, the CFTC’s Director of Enforcement, said:

“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.”

Next steps

If you want to take advantage of blockchain's huge potential and disruptive impact, while avoiding falling foul of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.

Contacts
Gregory Lisa
Partner
Washington D.C.
Languages English
Topics Blockchain
Countries United States

 

© 2020 Hogan Lovells. All rights reserved. "Hogan Lovells" or the “firm” refers to the international legal practice that comprises Hogan Lovells International LLP,Hogan Lovells US LLP and their affiliated businesses, each of which is a separate legal entity. Attorney advertising. Prior results do not guarantee a similar outcome.