Commodity Futures Trading Commission v. Control-Finance Limited

Background

The Commodity Futures Trading Commission sued Benjamin Reynolds under Section 6(c)(1) of the Commodity Exchange Act and Commission Regulation 180.1(a). The Commission alleged that Reynolds, acting through Control-Finance Limited, solicited customers to deposit Bitcoin for supposed trading, falsely reported trading profits, and misappropriated the deposits.

The opinion states that Reynolds represented himself as a United Kingdom national residing in Manchester, England, and that he was Control-Finance’s sole director and owner. Reynolds did not appear or answer the complaint. He was served by publication, the Clerk entered his default, and he did not respond to an order requiring him to explain why judgment should not be entered or attend the resulting hearing.

Findings and legal conclusions

Because Reynolds defaulted, the court treated the complaint’s well-pleaded allegations as true. The court found that Reynolds and Control-Finance made false or misleading statements about trading customers’ Bitcoin, expert traders, guaranteed profits, security measures, risk-management practices, referral rewards, account balances, and the ability to withdraw profits. The court also found that they fabricated trade reports, failed to disclose the misappropriation, and diverted new customer deposits to other customers in a manner described as a Ponzi scheme.

The court found that, during the relevant period from at least May 2017 through October 2017, Reynolds and Control-Finance solicited and misappropriated at least 22,190.542 Bitcoin from more than 1,000 customers worldwide, including at least 169 customers residing in the United States. The court accepted the Commission’s valuation of those deposits at approximately $143 million and found that Reynolds returned only $13,411.17, leaving a difference of $142,986,589.

The court concluded that Bitcoin qualifies as a commodity under the Commodity Exchange Act. It further concluded that Reynolds intentionally or recklessly used a fraudulent scheme, made materially false or misleading statements or omissions, and engaged in conduct operating as fraud or deceit in connection with contracts for the sale of Bitcoin in interstate commerce. The court also concluded that it had jurisdiction and that venue was proper, including because Reynolds solicited customers in the district and used a website hosted and registered with a company in the United States.

Relief ordered

The court granted the Commission’s motion for final judgment by default, permanent injunction, civil monetary penalty, and other statutory and equitable relief. The court entered final judgment by default against Reynolds.

The permanent injunction prohibits Reynolds, and persons acting in concert with him who receive notice, from specified fraudulent conduct involving commodities, swaps, and contracts for future delivery. It also permanently prohibits specified activities involving registered entities, commodity interests, Bitcoin, commodity trading accounts, soliciting funds, Commission registration, and service as a principal, agent, officer, or employee of certain persons or entities regulated by the Commission.

The court ordered Reynolds to pay $142,986,589 in restitution, with post-judgment interest if the amount is not paid immediately. The National Futures Association was appointed to receive and distribute restitution payments to eligible Control-Finance customers. The court separately imposed a $429 million civil monetary penalty, also subject to post-judgment interest if not paid immediately. The court retained jurisdiction to enforce the order and consider any request by Reynolds to modify or obtain relief from its terms.