CFTC wins landmark case against cryptocurrency fraudster

Maria Nikolova

In the course of the proceedings against Patrick K. McDonnell, the CFTC had to prove that it has the authority to take action against virtual currency scams.

A landmark case targeting Patrick K. McDonnell and CabbageTech also known as Coin Drop Markets has just concluded at the New York Eastern District Court, with the Court siding with the Commodity Futures Trading Commission (CFTC).

On August 23, 2018, Judge Jack B. Weinstein entered a final judgement in favor of the CFTC and against defendants Patrick K. McDonnell and CabbageTech also known as Coin Drop Markets.

A permanent injunction was issued against the fraudsters. The defendants were also ordered to pay restitution in the amount of $290,429, as well as a civil monetary penalty of $871,287.

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”). Virtual currency may be regulated by the CFTC as a commodity.

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.

The Judge found that the evidence proves that McDonnell and Cabbagetech engaged in a systematic pervasive fraudulent scheme between January and July 2017. The precision of Defendants’ scheme, and his detailed method of operations, allows extrapolation backwards and forwards with respect to specific actions of fraud against specific customers (whether or not they testified). The evidence establishes a detailed modus operandi requiring the inference that all funds obtained by Defendants’ illegal enterprise during the relevant time period must be attributed to Defendants’ scheme to defraud.

Victims of McDonnell and CabbageTech’s fraud believed they were paying for the purchase and sale of virtual currencies and expert virtual currency trading advice from him and from his company’s team of advisors. But McDonnell and CabbageTech simply misappropriated customers’ funds.

McDonnell presented himself as the “Chief Technology Officer” and claimed that CabbageTech had multiple offices, including one at 110 Wall Street. McDonnell also falsely told customers he was the “boss” of a CabbageTech representative named “Jason Flack” an that CabbageTech had a “secretary” and an executive assistant named Michelle Robertson, as well as a “team of digital asset trading specialists” and a “management team”. On top of that, the defendants’ Twitter account purported to have thousands of “followers”.

In reality, however, CabbageTech was run by McDonnell alone from his “dusty and grimy” home basement in Staten Island. McDonnell testified under oath that he was the sole person behind CabbageTech, that he was his own secretary and that he was not aware of ever having done CabbageTech work outside his home.

In June 2017, McDonnell claimed that there had been a hack of CDM. At some point after that statement, the CDM website posted a message that it was suspending services due to a hack.

In reality, in June and July 2017, Defendants shut down the website and chatroom, deleted social media accounts, ceased communicating with customers by email or telephone, and kept the customers’ funds.

On January 18, 2018, Patrick K. McDonnell and his company — fully owned and controlled by McDonnell — Cabbage Tech, were charged by the Commission with operating “a deceptive and fraudulent virtual currency scheme . . . for purported virtual currency trading advice” and “for virtual currency purchases and trading . . . misappropriated [investor] funds.”

The case is now closed.

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