CFTC Charges Former CEO of Digital Asset Platform with Massive Commodity Pool Scheme Fraud

The Commodity Futures Trading Commission (CFTC) has made a resounding move in the world of digital asset platforms, filing a complaint in the U.S. District Court for the Southern District of New York. The complaint, targeting Tennessee resident Stephen Ehrlich, former CEO of Voyager Digital Ltd., Voyager Digital Holdings, Inc., and Voyager Digital, LLC (collectively referred to as Voyager), levels serious allegations of fraud and registration failures.

The CFTC's complaint centers around Voyager's operation of an unregistered commodity pool and alleged fraudulent activities. Ehrlich and Voyager are accused of deceptively marketing the Voyager platform as a "safe haven" for customers seeking high-yield returns on their digital asset commodities. This misrepresentation was purportedly used to entice customers into purchasing and storing digital assets through Voyager.

The CFTC's litigation against Ehrlich seeks a range of remedies, including restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against future violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.

Dire Consequences for Fraudulent Conduct

Director of Enforcement Ian McGinley underscored the gravity of the allegations, stating, "This is yet another CFTC action seeking to hold accountable a chief executive officer for his role in the fraudulent operation of a digital asset platform. Ehrlich and Voyager lied to Voyager customers. While representing they would treat customers' digital asset commodities safely and responsibly, behind the scenes, they took shockingly reckless risks with their customers' assets, leading to Voyager's bankruptcy and huge customer losses."

The deceptive practices allegedly continued even as Voyager's financial situation worsened. As McGinley pointed out, "When their business began to collapse, they continued lying to their customers, concealing Voyager's true financial health." Furthermore, Ehrlich and Voyager operated in capacities that required CFTC registration, which they failed to obtain.

Deceptive Practices and Their Consequences

According to the CFTC's complaint, from at least February 2022 through July 2022, Ehrlich and Voyager orchestrated a scheme to defraud customers by falsely portraying the safety and financial health of the Voyager digital asset platform. They presented Voyager as a "safe haven" for digital assets, promising to operate with the same level of rigor and trust as traditional financial institutions. Customers were also lured in with promises of high-yield returns of up to 12% on specific digital asset commodities stored on the Voyager platform.

To deliver on these high returns, Ehrlich and Voyager pooled customer assets stored on the Voyager platform and transferred billions of dollars' worth of digital asset commodities as "loans" to high-risk third parties. Voyager operated the Voyager Pool, effectively acting as a commodity pool operator (CPO) without the necessary CFTC registration.

Ehrlich's failure to register as an associated person of a CPO, despite soliciting contributions from the public for the Voyager Pool, adds another layer to the allegations.

The consequences of these alleged fraudulent actions were severe. Customer assets worth over $2 billion collectively were entrusted to Voyager, under the belief that it was a "safe haven." However, instead of providing safety, Voyager transferred these assets to risky counterparties, ultimately leading to the company's liquidity issues. As a result, Voyager declared bankruptcy on July 5, 2022, leaving U.S. customers owed more than $1.7 billion.

Parallel Action by FTC

The Federal Trade Commission (FTC) also took action against Ehrlich and Voyager, charging them with violations of the FTC Act and the Gramm-Leach-Bliley Act.

This case highlights the growing importance of regulatory scrutiny in the digital asset space and serves as a reminder of the potential legal consequences for those found in breach of financial regulations.