Securities Regulation Daily Virtual currency scammer heading to slammer
Tuesday, November 13, 2018

Virtual currency scammer heading to slammer

By Brad Rosen, J.D.

The CFTC simultaneously filed and settled charges against Joseph Kim of Phoenix, Arizona, requiring him to pay more than $1.1 million in connection with a fraudulent scheme involving Bitcoin and Litecoin. In the CFTC’s order, Kim admitted to orchestrating a fraudulent Bitcoin and Litecoin scheme that led to more than $1 million in losses, of which more than $600,000 was misappropriated from his employer and over $500,000 was fraudulently solicited from investors (In the Matter of Kim, October 29, 2018).

Parallel criminal proceeding. In a related criminal action brought by the U.S. Attorney for the Northern District of Illinois, Kim pleaded guilty to one count of wire fraud based upon the same facts set forth in the CFTC’s administrative action. Kim was sentenced to 15 months.

A thieving and deceptive employee. The CFTC’s order found that between September 2017 and November 2017, Kim misappropriated approximately 980 Litecoins and 339 Bitcoins from his employer, Consolidated Trading LLC, a Chicago-based proprietary trading firm that had recently formed a cryptocurrency group. Kim accomplished the misappropriation of the firm’s Bitcoin and Litecoin through a series of transfers between the firm’s accounts and Kim’s own personal accounts. When questioned about the missing Litecoin and Bitcoin, Kim lied, falsely representing that there were security issues with a virtual currency exchange that necessitated transfers into various accounts. The firm discovered Kim’s misappropriation in November 2017 and promptly terminated Kim. After the smoke cleared, the firm had suffered a loss of approximately $601,000 from Kim’s scheme.

Robbing Peter…and not repaying Paul. After Kim’s employment was terminated, he then fraudulently solicited approximately $545,000 from at least five individuals between December 2017 and March 2018, and continued trading virtual currencies in an ill-fated attempt to recover his previous losses. The order notes that in soliciting customers, Kim made a number of false statements, including that he left his prior employment on his own terms and that he would invest their funds in a low-risk arbitrage virtual currency strategy.

In fact, Kim made high-risk, directional bets on the movement of virtual currencies that resulted in Kim losing all $545,000 of his customers’ funds. Kim also concealed those losses by sending false account statements to customers reflecting profitable trading.

CFTC points to recent court victories in assert jurisdiction over virtual currency activities. In its order, the CFTC cited cases recently decided in its favor, including CFTC v. McDonnell and CFTC v. My Big Coin Pay, Inc. establishing that virtual currencies such as Bitcoin and Litecoin are encompassed in the definition of "commodity" under Section 1a(9) of the CEA. Moreover, the commission reaffirmed its authority under Section 6(c)(1) of the CEA and Regulation 180.1 to take action against persons who engage in fraud and fraudulent schemes involving virtual currencies.

Commission committed to policing virtual markets and work in tandem with criminal authorities. CFTC Director of Enforcement James McDonald this to say about the commission’s action, "[The] order stands as yet another in the string of cases showing the CFTC’s commitment to actively police the virtual currency markets and protect the public interest." He added, "In addition, the criminal indictment and sentence reaffirms the CFTC’s commitment to working in parallel with our partners at the Department of Justice to root out misconduct in these markets."

Remedial sanctions and cooperation among law enforcement. In addition to requiring Kim to pay $1,146,000 in restitution to his company and customers, the order imposes permanent trading and registration bans on Kim, including virtual currency trading and solicitation bans, and permanently enjoins him from further violations of the Commodity Exchange Act and CFTC Regulations, as charged. In its release the CFTC’s acknowledged cooperation and assistance received from the U.S. Attorney’s Office for the Northern District of Illinois, the Federal Bureau of Investigation, and the Securities and Futures Commission of Hong Kong.

The case is No. 19-02.

MainStory: TopStory Blockchain CFTCNews Enforcement FraudManipulation IllinoisNews

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