CFTC Charges Man in Connection with Scheme to Misappropriate Over $110M from Digital Asset Exchange in First Such Case

On Monday, the Commodities Futures Trading Commission (CFTC) filed a civil action against Avraham Eisenberg, alleging a fraudulent scheme, as described by the CFTC in a press release, “to unlawfully obtain over $110 million in digital assets from a purported decentralized digital asset exchange.”

The press release notes that “This is the CFTC’s first enforcement action for a fraudulent or manipulative scheme involving trading on a supposed decentralized digital asset platform, and its first involving a scheme that is sometimes called ‘oracle manipulation.’”

The CFTC filed the action in the Southern District of New York. The press release notes that the Office of the United States Attorney, in a “parallel” action, unsealed a criminal complaint against the Defendant on December 27, 2022. The CFTC says the Defendant is in custody.              

 The asset exchange at issue is blockchain-based Mango Market. The CFTC further explains: “During the Relevant Period Mango Markets operated a collection of smart contracts that purported to facilitate digital asset transactions without the need for intermediaries.” The CFTC defines a “smart contract” as a “self-enforcing piece of computer code … [that] … can execute the agreement contained in the contract without additional inputs from the parties.”

Mango Markets allegedly allowed participants to engage in swap transactions based on the relative value of two digital assets: MNGO, the “native” cryptocurrency token of Mango Markets, and a stablecoin called USDC. According, to the CFTC, a stablecoin “is supposed to be redeemable on a 1:1 basis with the U.S. Dollar,” but is subject to risk of loss.

The CFTC explains that Mango participants could borrow by depositing “ various digital assets as ‘collateral’ and … withdraw[ing] … other digital assets up to a certain amount depending on the amount of collateral.  The CFTC further explains that “An oracle is a program that pulls data from an off-blockchain source and brings it onto the blockchain so that it may be used by smart contracts.” The use of an oracle was key to swap transactions on the platform. “Mango Markets used an oracle (‘Oracle’) that pulled market price data from three exchanges … The prices from the Oracle determined the market prices of assets on Mango Markets, including the price of MNGO and USDC [the two digital assets involved in the swap].”

According to the CFTC, approximately between October 11, 2022 and October 15, 2022 (the “Relevant Period”) the Defendant “engaged in a manipulative and fraudulent scheme to artificially inflate the price of swaps offered by Mango Market …” The Defendant allegedly set up two accounts on Mango Markets, funding each with $5 million: a $19 million dollar long position (“using leverage”) and a $19 million short position on MNGO-USDC swaps. “In this way, Defendant placed himself on both sides off the same transaction, which effectively resulted in a ‘wash’ transaction.” He could do this anonymously. “Mango Markets did not require any identifying information in order to trade on the platform.”

The CFTC alleges that the Defendant also bought large amounts of MNGO on the three “Oracle” exchanges, causing a spike in MNGO’s value. This information fed into Mango Markets and caused both a ten-fold increase in his long position from $19 million to an “artificial value” of over $200 million. The transaction also caused a decline in the value of the Defendant’s short position, but, according to the CFTC, the Defendant’s loss was limited to his $5 million deposit in the account.  “Immediately upon his long MNGO-USDC swaps being valued by Mango Markets at a substantially inflated price Defendant used the inflated value of the swaps as ‘collateral’ to ‘borrow’ $114 million from Mango Markets in the form of … [digital assets] … derived from deposits of other Mango Markets users, comprising all available liquidity on the platform.”

Subsequently, the Defendant allegedly negotiated a transaction with Mango Markets pursuant to which he would return $67 million in digital assets in return for which Mango Markets “would not pursue any criminal investigations or freezing of funds.”

The CFTC alleges two causes of action based on violations of the Commodity Exchange Act and related regulations: Use of a Manipulative or Deceptive Device and Manipulation and Attempted Manipulation of a Swap. The CFTC seeks wide-ranging injunctive and declaratory relief that will essentially bar the Defendant from participation in CFTC-regulated markets. The CFTC also seeks statutory monetary penalties, an accounting, disgorgement and restitution.