Unveiling the first digital asset “Ponzi scheme” sued by CFTC

Case Overview

The US Commodity Futures Trading Commission (CFTC) has for the first time entered the field of “romantic fraud” in a recent case. According to reports, the CFTC filed a lawsuit on Friday against Justby International Auctions and its CEO Cunwen Zhu, alleging that the company misappropriated customer funds amounting to $1.3 million, which were supposed to be used for digital asset trading.

The CFTC’s lawsuit was filed in the US Central District Court of California. According to the CFTC’s allegations, Cunwen Zhu deceived at least 29 customers through his company Justby International Auctions from April 2021 to March 2022, and obtained more than $1.3 million in funds.

These customer funds were supposed to be used for digital asset commodities and foreign exchange trading, which Justby should have managed and brought in profits, but Cunwen Zhu used these funds for personal consumption and transferred most of the funds to bank accounts, digital wallets, and digital asset trading platforms controlled by employees involved in his case plan.

What are the specific methods of the “pig-killing ring”?

According to the CFTC, these scammers use social media to contact customers and “pretend to make friends or fall in love” with them to induce them to open accounts. The CFTC mentioned three types of people who played a role in it in the lawsuit: (1) “solicitors” contacted planned customers through social media and pretended to make friends or fall in love with them in order to induce them to open and fund trading accounts; (2) “trading companies” claimed to represent planned customers to establish trading accounts; (3) “shell companies”, such as the defendant Justby, whose bank accounts were used by the defendant and planned entities to receive and misappropriate planned clients’ funds.

Interestingly, the CFTC mentioned the pinyin of “pig-killing ring” in the lawsuit.

The CFTC mentioned in detail the methods of the “pig-killing ring” in the lawsuit. The document mentioned that “solicitors” spent more than a year building a romantic relationship with a customer, and then persuaded the customer to open an investment trading account in their company and invest funds. In order to achieve this goal, “solicitors” often share seemingly expensive life photos, records of driving luxury cars, and screenshots of high-yield fake accounts. These solicitors usually claim to be very successful traders and often attribute their success to an “uncle” or “insider” who provides inside information.

Once scammed, they would introduce the clients to trading companies and set up trading accounts and payments. The trading companies themselves are legitimate, but the trading software downloaded by the instigated clients is not genuine and would provide various forms of false information. Typically, if the clients follow the “recruiters'” investment advice and trade on the software, the trading software would show substantial profits. The CFTC lawsuit documents show that the account of one of the defrauded clients falsely showed profits of over two million US dollars.

CFTC’s Response and Recommendations

The US Commodity Futures Trading Commission (CFTC) has released multiple client protection fraud warnings and articles, including “Avoiding Forex, Precious Metals, and Digital Asset Romance Scams,” warning users to be wary of the recent increase in scamming activities on online dating and social media platforms that lure victims into sending money to fraudulent websites claiming to conduct forex, precious metals, or digital asset trading.

In the ongoing lawsuits against Zhu and Justby, CFTC seeks compensation for defrauded clients, disgorgement of ill-gotten gains, civil monetary penalties, trading bans, and permanent injunctions against further violations of the Commodity Exchange Act (CEA) and CFTC regulations. This incident demonstrates that regulatory agencies are increasingly paying attention to and taking action against fraudulent activities in the cryptocurrency field. It can be foreseen that there will be greater regulatory efforts in this regard as financial cases related to digital currencies are more difficult to trace funds for.

In a statement, Ian D. McCaleb, Director of Enforcement for the CFTC, said, “As people try to escape isolation during the pandemic and connect with others online, scammers see a new opportunity to exploit the public and engage in fraud. Today’s action is the CFTC’s first enforcement case involving this kind of romance scam, demonstrating that the CFTC will hold unethical individuals accountable for defrauding customers and protect the public from online fraud.”

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