- J Markezic and M Bacina
CFTC cracks down on pump and dump schemes
Earlier this week, the US Commodity Futures Trading Commission (CFTC) charged two individuals for allegedly running a manipulative and deceptive digital asset 'pump and dump' scheme.
The CFTC has charged John McAfee - the late entrepreneur in digital software - and Jimmy Gale Watson Jr, an associate and 'executive advisor' of McAfee for allegedly secretly accumulating positions in digital assets and then promoting the tokens on social media as valuable long-term investments - before selling for a substantial profit.
Ensuring appropriate customer protections and enforcing against fraudulent schemes like this one are core principles deeply embedded in the agency’s legal and regulatory framework, history, and ethos... such fraudulent and manipulative schemes are particularly egregious when they target the most vulnerable market participants, here hardworking retail investors.
Watson has also permanently been banned from trading derivatives, as well as from registering with the CFTC to provide regulated services. It is alleged that the scheme resulted in profits exceeding USD$2 million, and utilised cryptocurrencies such as Verge, Dogecoin and Reddcoin.
The recent charges follow the SEC's enforcement action against McAfee and Watson in 2020, where it was alleged that the pair promoted investments in an initial coin offering without disclosing that they were compensated for doing so. Watson is also personally banned from participating in the issuance, purchase, offer or sale of any digital asset deemed a security.
In Australia, entities will require an Australian Financial Services Licence to issue financial products of any type, which may include digital assets in some circumstances. It is an offence under s 1041H of the Corporations Act 2001 (Cth) to engage in conduct, in relation to a financial product or financial service, that is misleading or deceptive, or to engage in conduct that is likely to mislead or deceive. Entities may also be banned from holding an Australian Financial Services Licence under s 920C of the Corporations Act.
Irrespective of whether a digital asset is or is not a financial product, it is an offence to engage in misleading and deceptive conduct in the course of trade and commerce under s 18 of the Australian Consumer Law, and significant penalties could apply. The Australian Securities and Investments Commission (ASIC) has been delegated powers from the Australian Consumer and Competition Commission (ACCC) to, in coordination with the ACCC, respond to potentially misleading or deceptive conduct relating to crypto-assets which affect Australian consumers. ASIC is yet to prosecute any Australians for being involved in "pump and dump" schemes, but this matter serves as a warning to those who might engage in such actions here, that there are serious consequences.