## Facts

- The Commodity Futures Trading Commission (CFTC) sued Patrick K. McDonnell and CabbageTech, Corp. (doing business as Coin Drop Markets) for operating an alleged fraudulent virtual-currency scheme.
- Defendants marketed paid memberships and purported virtual-currency trading services involving cryptocurrencies such as Bitcoin and Litecoin.
- Promotional materials promised unusually high returns, including claims of weekly profits up to 300% from day trading.
- Customers paid fees (often in virtual currency) for trading advice, access to trading groups, and/or management of customer cryptocurrency for trading.
- The CFTC presented evidence that, after receiving payments, defendants failed to provide the promised services or returns and provided little to no useful information.
- Defendants allegedly shut down online operations, stopped communicating with customers, failed to provide refunds, and misappropriated customer funds.
- The CFTC sought a preliminary injunction and related equitable relief to stop ongoing violations and preserve assets.
- McDonnell, appearing pro se, moved to dismiss for lack of jurisdiction, arguing the CFTC lacked authority over virtual currencies and the alleged spot-market conduct.

## Issues

1. Whether virtual currencies fall within the Commodity Exchange Act (CEA) definition of “commodity.”
2. Whether the CFTC has authority under CEA § 6(c)(1), 7 U.S.C. § 9(1), and CFTC Rule 180.1 to pursue fraud connected to virtual-currency spot (cash) transactions, even without futures or swaps.
3. Whether the CFTC satisfied the standards for preliminary injunctive relief in a statutory enforcement action.

## Decision

- The court denied defendants’ motion to dismiss for lack of jurisdiction.
- The court held that virtual currencies are “commodities” within the meaning of the CEA.
- The court held that the CFTC’s anti-fraud authority under CEA § 6(c)(1) and Rule 180.1 reaches deceptive conduct in connection with contracts of sale of commodities in interstate commerce, including virtual-currency spot transactions.
- The court found the CFTC made a prima facie showing of fraud and demonstrated entitlement to preliminary injunctive relief.
- The court entered a preliminary injunction barring defendants from trading in virtual currencies and from soliciting or accepting funds for such trading, and authorized measures to preserve assets for potential restitution and penalties.

## Legal Principles

- The CEA’s definition of “commodity” is broad and can include virtual currencies when they are goods, articles, services, rights, or interests in which futures contracts are or may be dealt in.
- CEA § 6(c)(1) and CFTC Rule 180.1 prohibit deceptive or manipulative conduct “in connection with” contracts of sale of commodities in interstate commerce and are not limited to derivatives markets.
- The CFTC may bring enforcement actions for fraud in spot commodity markets when the alleged deception is connected to commodity sales in interstate commerce.
- In CFTC enforcement actions, preliminary injunctive relief may issue when the agency shows a strong likelihood of success and a risk of ongoing harm such that equitable relief serves the public interest.

## Conclusion

The court concluded that virtual currencies are commodities under the CEA and that the CFTC may police fraud tied to virtual-currency spot transactions under CEA § 6(c)(1) and Rule 180.1, denying the jurisdictional dismissal motion and granting a preliminary injunction to halt the alleged scheme and preserve assets.


Commodity Futures Trading Comm’n v. McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018)