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CFTC Charges Residents of Florida, Louisiana, and Arkansas with Crypto Fraud

CFTC Charges Residents of Florida, Louisiana, and Arkansas with Crypto Fraud

The CFTC initiated legal proceedings against the founders of Fundsz, a cryptocurrency investment company.

Anyone following crypto news knows about the Security and Exchange Commission’s (SEC) contentious relationship with the industry. However, it’s less common knowledge that several regulatory bodies are in charge of protecting investors and consumers.

The U.S. Commodity Futures Trading Commission (CFTC) regulates commodity futures and options markets. The agency’s primary role is to ensure integrity, transparency, and fairness in markets and protect participants and the public from fraud, manipulation, and abusive practices.

In August, the CFTC initiated legal proceedings against the founders of Fundsz, a cryptocurrency investment company. The agency cited their involvement in a deceptive scheme concerning cryptocurrencies and precious metals trading.

Let’s take a closer look.

Crypto Buyer Beware

Unregulated financial products and markets always attract fraud. Today’s online trading platforms can process transactions instantly for bad actors leveraging social media to recruit their victims. Both factors have magnified the scope of crypto fraud to historic levels. While multi-million dollar hacks and theft make headlines, fraud damages investors and the sector more. The chart below shows the fraud proportion relative to hacks from 2018 – 2020.

Crypto Buyer Beware
Source: CipherTrace

Unfortunately, the situation got much worse after 2020. The FBI reports that fraudulent activity drained an eye-popping $10B from investors in 2022.

Legal Action Against Fundsz

Fundsz is an unincorporated entity not registered with the CFTC. Founders named in the suit include Florida residents Rene Larralde and Juan Pablo Valcarce, Louisiana resident Brian Early, and Alisha Ann Kingrey from Arkansas. They face allegations of misleading investment solicitations and enticing investors with implausible returns based on a “proprietary algorithm.”

On August 2, US District Court Judge Wendy Berger signed a restraining order freezing the defendants’ assets, preserving records, and appointing a temporary receiver. In continuing litigation, the CFTC will seek restitution to defrauded investors, repayment of gains, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further Commodity Exchange Act (CEA) violations.

The CFTC lodged a complaint in the United States District Court for the Middle District of Florida, alleging that the defendants attracted customers by promising steady 3% weekly profits through cryptocurrency and precious metal trading.

Although the agency intends to seek repayment, officials warn that the defendants may not have enough funds to refund all investors fully.

The Backstory of the CFTC Crypto Fraud Action

According to the CFTC complaint, the founders have been promoting Fundsz as an investment opportunity from October 2020 to the present. The Fundsz website encourages visitors to “Secure your spot and start building their team today!”

It claims that Fundsz is the first to offer “instant peer-to-peer donation payments,” a decentralized fundraiser platform, and a placement tool to strategically “build a team” (code for pyramid scheme). Members also receive access to a Financial Freedom Library of weekly content.

Fundszz’s founders claimed the company utilizes revolutionary blockchain technology that empowers individuals, charities, and organizations to raise recurring, unrestricted, and sustainable income.

The CFTC points out several problematic claims made by Fundszz founders in promoting and marketing the fund:

  • Claiming Fundszz had a history of making more than 3% profit weekly using a proprietary algorithm to trade cryptocurrencies and precious metals.
  • Saying they’ve been making accurate payments for seven years.
  • Promising to turn $2,500 into $1 million in just 48 months without additional investment.

According to the CFTC’s complaint, Fundsz doesn’t use the money from investors to trade anything. The gains they claim are false, as are the financial statements they created as “weekly reports” for investors.

Fundsz’s positioning as a quasi-charitable organization adds to the ick factor, using the tagline “Fundsz For Your Cause!” The message to prospects was that their investments would generate passive income and help with clean water, humanitarian efforts, health, education, and disaster relief.

The Backstory of the CFTC Crypto Fraud Action

The website claims that over 14,000 people trust Fundsz. The private Facebook group has 5,700 people.

The Fundsz public Facebook group’s tagline is Passive Income. Money while you sleep. Generational Wealth Builder. The group has 356 members and a slew of spammy posts, including info about similar shady investment schemes, posted as recently as August 22 by people who may not know the CFTC is investigating Fundsz.

Background of US Commodity Futures Trading Commission

The CFTC, also known as the Commodity Futures Trading Commission, is an independent agency of the U.S. federal government. Established in 1974, it regulates the commodity futures and options markets in the United States.

The CFTC’s main objectives include protecting market participants from fraud and manipulation, ensuring the integrity and transparency of the markets, and fostering competition to benefit consumers. The agency oversees various entities, including futures exchanges, clearinghouses, commodity pool operators, and commodity trading advisors.

In the context of digital assets, the CFTC classifies cryptocurrencies as commodities, which means they fall under the agency’s regulatory oversight. Therefore, if a platform or exchange offers cryptocurrency derivatives trading, it might need to register with the CFTC and adhere to its regulations. The CFTC’s role is to ensure that users conduct trades fairly and transparently.

A few key aspects of the CFTC’s role in crypto regulation include:

  1. Registration and Oversight: The CFTC requires cryptocurrency exchanges and trading platforms to register as a Futures Commission Merchant (FCM) or Swap Execution Facility (SEF) if they offer futures, options, or derivatives trading.
  2. Enforcement: The CFTC has the authority to take legal action against individuals or entities that engage in fraudulent or manipulative activities in the crypto market.
  3. Market Surveillance: The CFTC monitors and investigates potential market manipulation, fraud, or other illegal activities in the crypto market.
  4. Education and Guidance: The CFTC provides educational resources and guidance to market participants, investors, and the general public to promote understanding and awareness of cryptocurrency risks.

Moving Ahead

In a statement issued by the CFTC, the Director of Enforcement Ian McGinley says, “Though the products fraudsters purport to trade and their methods of attracting victims—in this case through social media—may have changed, the adage ‘if something sounds too good to be true, it probably is’ remains as valid as ever.”

Even sophisticated investors are at risk from fraud schemes. The FTC has excellent information about avoiding crypto scams. The CFTC’s recommendations also strongly urge the public to verify a company’s registration with the CFTC before committing funds. If the company isn’t registered, customers should be wary of providing funds to that company. You can find a company’s registration status by using NFA BASIC.

If you invest in crypto assets, ZenLedger can help you aggregate transactions across multiple wallets and exchanges, compute your capital gain or loss, and generate the paperwork you must file each year. In addition, you can access tax-loss harvesting, portfolio management, and other tools to help you better understand your holdings and optimize your taxes.

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This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.

Kala Philo