Commodity Futures Trading Comm'n v. McDonnell

• Decision Date: 28 August 2018
• Docket Number: 18-CV-361
• Citation: 332 F.Supp.3d 641
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. Patrick K. MCDONNELL, and CabbageTech, Corp. d/b/a Coin Drop Markets, Defendant.
• Court: U.S. District Court — Eastern District of New York

332 F.Supp.3d 641

COMMODITY FUTURES TRADING COMMISSION, Plaintiff,

v.Patrick K. MCDONNELL, and CabbageTech, Corp. d/b/a Coin Drop Markets, Defendant.

18-CV-361

United States District Court, E.D. New York.

Signed August 28, 2018

Commodity Futures Trading Commission, David William Oakland, Commodity Futures Trading Commission, 140 Broadway, 19th Floor, New York, NY 10005, Kenneth B. Tomer, Commodity Futures Trading Commission, 140 Broadway, 19th Floor, New York, NY 10005, Gates Salyers Hurand, Commodity Futures Trading Commission, 140 Broadway, 19th Floor, New York, NY 10005

Patrick McDonnell, Pro se

CabbageTech Corp., d/b/a/ Coin Drop Markets, (Defaulted) (No Attorney)

AMENDED MEMORANDUM, FINDINGS OF FACT, CONCLUSIONS OF LAW, AND DIRECTIONS FOR FINAL JUDGMENT AND INJUNCTION

Jack B. Weinstein, Senior United States District Judge

Table of Contents

I. Introduction and Overview...648

II. Fact...653

A. Procedural History...653

B. McDonnell's Scheme to Defraud with Virtual Currencies...658

i. Parties...658

ii. CabbageTech, Corp. d/b/a Coin Drop Markets...658

iii. Array of Accounts to Execute Fraud...658

iv. Fraud Involving Virtual Currency Trading Advice...660

v. Fraud Involving Purchase and Trading of Virtual Currency...664

vi. Fraud Involving Misappropriated Customer Funds...667

vii. McDonnell's Control...671

viii. Testimony of Victims...672

a. Junor Taylor...672

b. Martin Newman...687

c. Richard Brewell...693

d. Anthony Dimovski...701

III. Law...716

IV. Relief...725

A. Permanent Injunction...725

B. Restitution...726

C. Civil Monetary Penalties...727

V. Conclusion...728

I. Introduction and Overview

1. This memorandum constitutes the court's findings of fact and conclusions of law pursuant to Federal Rules of Civil Procedure 52(a) and 55(b)(2), and equity and common law and applicable administrative law, 7 U.S.C. § 13a-1, following a bench trial held from July 9 through July 12, 2018. See, infra , ¶¶ 32–42.

2. Plaintiff Commodity Futures Trading Commission ("CFTC" or "Commission") seeks decrees and judgments against Defendants Patrick K. McDonnell ("McDonnell") and CabbageTech, Corp. d/b/a Coin Drop Markets ("CabbageTech," and together with McDonnell, "Defendants") for violations of Section 6(c)(1) of the Commodity Exchange Act (the "Act" or "CEA"), 7 U.S.C. § 9(1), and Commission Regulation ("Regulation") 180.1(a), 17 C.F.R. § 180.1(a). The CFTC seeks a permanent injunction as well as an award of restitution and imposition of civil monetary penalties against Defendants.

3. The Commission relies for its jurisdiction on 7 U.S.C. § 9(1). It reads as follows:

It shall be unlawful for any person, directly or indirectly, to use or employ, or attempt to use or employ, in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, any manipulative or deceptive device or contrivance , in contravention of such rules and regulations as the Commission shall promulgate by not later than 1 year after July 21, 2010, provided no rule or regulation promulgated by the Commission shall require any person to disclose to another person nonpublic information that may be material to the market price, rate, or level of the commodity transaction, except as necessary to make any statement made to the other person in or in connection with the transaction not misleading in any material respect.

(emphasis added).

4. The court's jurisdiction to grant relief is set forth in 7 U.S.C. § 13a-1(a) as follows:

Whenever it shall appear to the Commission that any registered entity or other person has engaged, is engaging, or is about to engage in any act or practice constituting a violation of any provision of this chapter or any rule, regulation, or order thereunder, or is restraining trading in any commodity for future delivery or any swap, the Commission may bring an action in the proper district court of the United States or the proper United States court of any territory or other place subject to the jurisdiction of the United States, to enjoin such act or practice, or to enforce compliance with this chapter, or any rule, regulation or order thereunder, and said courts shall have jurisdiction to entertain such actions: Provided, That no restraining order (other than a restraining order which prohibits any person from destroying, altering or disposing of, or refusing to permit authorized representatives of the Commission to inspect, when and as requested, any books and records or other documents or which prohibits any person from withdrawing, transferring, removing, dissipating, or disposing of any funds, assets, or other property, and other than an order appointing a temporary receiver to administer such restraining order and to perform such other duties as the court may consider appropriate) or injunction for violation of the provisions of this chapter shall be issued ex parte by said court.

5. Civil monetary penalties are provided as follows:

In any action brought under this section, the Commission may seek and the court shall have jurisdiction to impose, on a proper showing, on any person found in the action to have committed any violation—(A) a civil penalty in the amount of not more than the greater of $100,000 or triple the monetary gain to the person for each violation; or

(B) in any case of manipulation or attempted manipulation in violation of section 9, 15, 13b, or 13(a)(2) of this title, a civil penalty in the amount of not more than the greater of $1,000,000 or triple the monetary gain to the person for each violation.

7 U.S.C. § 13a-1(d)(1).

6. Restitution and disgorgement are allowed as follows:

In any action brought under this section, the Commission may seek, and the court may impose, on a proper showing, on any person found in the action to have committed any violation, equitable remedies including--

(A) restitution to persons who have sustained losses proximately caused by such violation (in the amount of such losses); and

(B) disgorgement of gains received in connection with such violation.

7 U.S.C. § 13a-1(d)(3).

7. In support of § 9(1) of the United States Code, the Commission has adopted 17 C.F.R. § 180.1(a) dealing with frauds. 17 C.F.R. § 180.1(a) provides:

It shall be unlawful for any person, directly or indirectly, in connection with any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity, to intentionally or recklessly:

(1) Use or employ, or attempt to use or employ, any manipulative device, scheme, or artifice to defraud;

(2) Make, or attempt to make, any untrue or misleading statement of a material fact or to omit to state a material fact necessary in order to make the statements made not untrue or misleading;

(3) Engage, or attempt to engage, in any act, practice, or course of business, which operates or would operate as a fraud or deceit upon any person; or,

(4) Deliver or cause to be delivered, or attempt to deliver or cause to be delivered, for transmission through the mails or interstate commerce, by any means of communication whatsoever, a false or misleading or inaccurate report concerning crop or market information or conditions that affect or tend to affect the price of any commodity in interstate commerce, knowing, or acting in reckless disregard of the fact that such report is false, misleading or inaccurate. Notwithstanding the foregoing, no violation of this subsection shall exist where the person mistakenly transmits, in good faith, false or misleading or inaccurate information to a price reporting service.

8. A default has been entered by the Clerk of this court against CabbageTech. See Clerk's Certificate of Default as to Defendant CabbageTech, Corp., d/b/a Coin Drop Markets, ECF No. 164, Aug. 01, 2018; see also Minute Entry for Proceedings, ECF No. 40, Mar. 6, 2018. It failed to appear with an attorney as required of corporations. See Jones v. Niagara Frontier Transp. Auth. , 722 F.2d 20, 22 (2d Cir. 1983) ("[I]t is established that a corporation, which is an artificial entity that can only act through agents, cannot proceed pro se."). It also failed to file an answer or otherwise move with respect to CFTC's complaint. See ECF No. 164.

9. In extensive memoranda and orders, the court has found the Commission has standing and authority to bring this action for fraud involving virtual currencies (also referred to commercially as "cryptocurrencies," "crypto," "crypto coins," "digital currencies," and "digital tokens"). See, e.g., Commodity Futures Trading Comm'n v. McDonnell , 287 F.Supp.3d 213, 228 (E.D.N.Y. 2018), adhered to on denial of reconsideration, No. 18-CV-361, 2018 WL 3435047 (E.D.N.Y. July 16, 2018) ; Steven Russolillo et al., Digital Currencies Tumble , Wall St. J., Aug. 15, 2018, at A1. Virtual currency may be regulated by the CFTC as a commodity. McDonnell , 287 F.Supp.3d at 228. CFTC's broad statutory authority, Title 7 U.S.C. § 9(1), and regulatory authority, Title 17 C.F.R. § 180.1, extends to fraud or manipulation in the virtual currency derivatives market and its underlying spot market. Id. at 229.

10. The litigation has been particularly difficult to administrate because McDonnell has appeared pro se despite various attempts of the court to explain why he needs counsel. He has appeared in court intermittently. See Trial Tr. 1:20-22, 146:20-22, 296:20-22, 426:20-22.

11. The court has urged defendant to retain counsel on various occasions, but he has refused to do so. He was referred by this court to the Eastern District's City Bar Justice Center's Pro Se Legal Assistance Project ("Clinic"), with whom he met on April 23, 2018. See Ltr. from Clinic, ECF No. 151, July 18, 2018. The Clinic attempted to place McDonnell with pro bono counsel and arranged meetings with two different law firms. But McDonnell cut himself off from the Clinic on May 9, 2018 after just two weeks, expressing skepticism that the firms were interested in his case. H...