The Commodity Futures Trading Commission (CFTC) announced the filing of a civil enforcement action against Control-Finance Limited, a purported Bitcoin trading and investment company, and its founder, Benjamin Reynolds, of the United Kingdom.
The complaint charges the defendants misappropriated at least 22,858.822 bitcoin—worth at least $147 million at the time—from more than 1,000 customers through a pyramid scheme called the Control-Finance “Affiliate Program.”
According to the documents, from May 1 through October 31, 2017, Reynolds exploited public enthusiasm for Bitcoin by fraudulently soliciting customers to purchase and transfer bitcoin to Control-Finance. He alleged his expert virtual currency traders earned up to 45% trading returns per month, and used risk diversification methods to create a “safe haven” from crypto market risks and protect customers’ Bitcoin deposits.
“In reality, the defendants made no trades on customers’ behalf, earned no trading profits for them, and misappropriated their Bitcoin deposits,” write the CFTC in a statement.
Reynolds also enticed his clients to invite family and friends to the platform through promises of “affiliate” bonuses.
The misappropriation scheme relied on creating unique single-use wallet addresses to receive customers’ Bitcoin deposits, which would then be routed to other, pooled wallet addresses held by virtual currency payment processors and exchanges in North America, Europe, and Asia. CFTC authorities allege these uneconomical and confusing blockchain transactions were executed solely to conceal misappropriation.
Additionally, when customers requested account withdrawals, Reynolds would illegally divert funds from other customer’s to make the payments.
Reynold’s concealed the fraud by providing customers with sham account balances and profit figures that falsely reflected trading profits that did not exist. Weekly “Trade Reports,” which identified illusory profitable trades were also fabricated.
In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and permanent injunctions against further violations of the federal commodity laws, as charged.
The complaint was lodged in the U.S. District Court for the Southern District of New York.