SA crypto firm faces R27.8bn lawsuit in US

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 01 Jul 2022

The Commodity Futures Trading Commission (CFTC), a US government agency, has filed a civil enforcement action against now-defunct South African Bitcoin company Mirror Trading International (MTI), and its founder Cornelius Steynberg, for fraud and registration violations in a case involving over $1.7 billion (R27.8) billion.

In a statement, the CFTC alleges MTI operated a fraudulent scheme to solicit, accept and pool more than $1.7 billion to trade off-exchange, retail foreign currency (forex) on a leveraged, margined and/or financed basis.

It adds the defendants engaged in an international fraudulent multilevel marketing scheme via various websites, in addition to social media, to solicit Bitcoin from members of the public for participation in their pool.

At least 23 000 of the pool participants – most, if not all, of whom were not eligible contract participants – were from the US, it notes.

Mirror Trading was a South African crypto-currency website that promised huge returns.

The company grew in popularity because of its “too good to be true” returns. However, it collapsed in December 2020, leaving tens of thousands of investors without access to their funds.

When the site stopped trading, Steynberg reportedly fled South Africa for Brazil, where he hid out until he was arrested in December 2021 in a sting operation. He is currently awaiting an extradition hearing.

Record-setting fraud

Instead of trading forex as represented, CFTS says the defendants misappropriated pool funds, misrepresented their trading and performance, provided fictitious account statements, as well as created a fictitious broker at which trading purportedly took place, and in general operated the pool as a Ponzi scheme.

“As a matter of fact, the little trading that defendants did was unprofitable, and they misappropriated essentially all of the at least 29 421 Bitcoin accepted from participants,” it says.

The CFTC’s complaint seeks full restitution on behalf of defrauded participants, as well as disgorgement, civil monetary penalties, permanent trading and registration bans, and other relief.

Notably, this fraud represents the largest to date charged by the CFTC involving Bitcoin, says the commission.

The commodity pool was controlled by MTI and Steynberg, and purportedly traded off-exchange, retail foreign currency on a leveraged, margined and/or financed basis with participants who were not eligible contract participants (ECPs) through what the defendants falsely claimed was a proprietary ‘bot’ or software program, it adds.

“The timing of this is interesting. It is historic, given that it is the commission’s largest fraud case to date dealing with Bitcoin,” comments Richard Gardner, CEO of Modulus, a US-based developer of trading and surveillance technology.

“At the same time, there are questions about which agency is best equipped to deal with the regulation of digital assets – is it the SEC [Securities and Exchange Commission] or the CFTC?

“That’s been an ongoing question mark in American politics since the launch of the Bill, designed by senators Lummis and Gillibrand, to regulate crypto. Still, there are global implications. Driving inclusion within the fintech arena should be prioritised, not just in Nigeria, but throughout Africa.

“This is a massive amount of money. It even dwarfs hacks which have registered nine-figure losses,” says Gardner.

Preventing future scams

“That Steynberg was able to raise over $1.7 billion from more than 23 000 non-ECPs in America, as well as countless throughout the globe – all without being registered as a commodity pool operator – that’s significant.

“It really indicates, yet again, that we need regulators to take another look at digital assets. Yes, in the United States, but also in South Africa and across the globe. When we don’t have a watchdog, you have people like Steynberg allegedly misappropriating funds.

“In order for the digital assets industry to come out of this recent downturn stronger than ever, it is absolutely critical that bureaucrats and politicians find a way to come together with the industry and hammer out a guidebook to keep these kinds of things from happening,” says Gardner.

“Congratulations to the CFTC, as well as Interpol, for tracking this guy down. He was a fugitive from South Africa, found in Brazil.

“What this really shows, though, is just how global this industry is. Granted, many countries are waiting to see what the United States and the EU do to regulate the sector. However, I think it's fair to say that global vigilance is required, if we want to stop these kinds of things from happening.”