Penalty for one-man cryptocurrency boiler room may exceed $11.2m

Fake promises to investors, misleading messages about hacks and misappropriation of client funds – the gloomy details of a fraudulent virtual currency scheme, operated by Patrick McDonnell from his dusty and grimy home basement, have been disclosed by the United States Commodity Futures Trading Commission (CFTC).

On Friday, July 27^th, the US regulator requested that the New York Eastern District Court issue an order entering final judgment, including a permanent injunction, restitution, civil monetary penalties, and ancillary equitable relief against Defendant Patrick K. McDonnell and defaulted Defendant CabbageTech, Corp. doing business as Coin Drop Markets (CDM) for violations of the Commodity Exchange Act and the Commission’s Rules and Regulations.

The CFTC argues that restitution in the amount of $457,393.54 is appropriate, as indicated by the amount of funds misappropriated.

In addition, according to the CFTC, The Court should impose a Civil Monetary Penalty equal to triple the monetary cain. The Commission therefore seeks a civil monetary penalty of $1,372,180.62, plus post-judgment interest as prescribed by statute.

The penalty, however, may be much higher. The other method of calculating a civil monetary penalty under Section 6c of the Commodity Exchange Act would be to multiply the maximum amount of $177,501 (as adjusted for inflation pursuant to statute) times the number of violations.

Even if the Court were to limit its calculation to the number of actual transfers by customers to CabbageTech, the evidence at trial established that McDonnell defrauded customers into giving him money or virtual currency on 62 occasions. Thus, under such a per-violation approach, the Court could choose to impose a CMP of up to $177,501 per violation, or between $1,952,511 (177,501 x 11) and $11,230,052.00 (177,501 x 62).

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.

McDonnell admitted under oath that he threw away the computers he used for CabbageTech business, and did not recall when he did so.

On June 17, 18, and 19, 2017—at the same time that customer demands for refunds were mounting, McDonnell transferred more than 660 litecoin from the Bittrex cdmmerchant account to the Bittrex cryptoclown account that was opened under the name of his wife.

From July 9 to 12, 2018, a trial was held before the Court. The Court heard testimony from several witnesses, including four victims of the scheme, and received more than 150 exhibits into evidence in support of the CFTC’s allegations. McDonnell, proceeding pro se, participated vigorously on the first day, but then declared that he would not attend the remainder of the trial.

The CFTC argues that the Court can issue a judgment on all claims and relief being requested, including the determination of civil monetary penalties, because McDonnell never requested a jury trial and indeed never raised this issue prior to the conclusion of this Court’s bench trial held on July 9 through 12, 2018. To the extent McDonnell now claims that proceeding without a jury violates the Seventh Amendment, he waived any such right by actively participating without objection in this Court’s bench trial, and by failing timely to object to the Commission’s motion to withdraw its jury demand.

The case is captioned Commodity Futures Trading Commission v. McDonnell et al (1:18-cv-00361).