Thursday, January 12, 2023

CFTC brings its first oracle manipulation case on decentralized exchange

By Elena Eyber, J.D.

The CFTC filed an enforcement action in the federal district court in New York charging Avraham Eisenberg with a fraudulent and manipulative scheme to unlawfully obtain over $110 million in digital assets from a purported decentralized digital asset exchange. This is the CFTC’s first enforcement action for a fraudulent or manipulative scheme involving trading on a purported decentralized digital asset platform, and its first involving a scheme called “oracle manipulation” (CFTC v. Eisenberg, January 9, 2023).

“The CFTC will use all available enforcement tools to aggressively pursue fraud and manipulation regardless of the technology that is utilized,” said Acting Director of Enforcement Gretchen Lowe. “The CEA prohibits deception and swap manipulation, whether on a registered swap execution facility or on a decentralized blockchain-based trading platform.”

Oracle manipulation. The complaint alleges that on October 11, 2022, Eisenberg unlawfully misappropriated over $110 million in digital assets from Mango Markets, a purported decentralized digital asset exchange, through oracle manipulation. Eisenberg created two anonymous accounts on Mango Markets, which he used to establish large leveraged positions in a swap contract whose value was based upon the relative price of MNGO, the “native” token of Mango Markets, and USDC, a stablecoin. Eisenberg then artificially pumped up the price of MNGO by rapidly purchasing substantial quantities of MNGO on three digital asset exchanges that were the inputs for the oracle, or data feed, that Mango Markets used to determine the value of Eisenberg’s swap positions.

As a result of Eisenberg’s manipulative trading, the price of MNGO as reported by the oracle, jumped over 13-fold during a 30-minute span, resulting in a temporary, artificial spike in the value of Eisenberg’s swap positions. Eisenberg then cashed out his illicit profits by using the artificially inflated value of his swaps as collateral to withdraw over $110 million in digital assets from Mango Markets, essentially bankrupting the platform. Subsequently, in an attempt to evade liability, Eisenberg agreed to return a portion of the misappropriated digital assets on the condition that Mango Markets agreed to not pursue any criminal investigations or freezing of funds. Eisenberg ultimately returned $67 million to Mango Markets, while retaining $47 million worth of digital assets.

Relief sought. The CFTC seeks civil monetary penalties, disgorgement of any ill-gotten gains, restitution, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act (CEA).

Statement of Commissioner Johnson. “It is imperative that all market participants understand that conduct like Eisenberg’s will be subject to enforcement action in accordance with our mandate. While there are many benefits to responsible innovation, customers must remain vigilant. Fraudsters who seek to take advantage of an unsuspecting public will exploit popular interest in innovative financial technology and perpetrate scams that separate investors from their hard-earned money. This case illustrates these dangers, underscores the ever-present threats, and demonstrates that—no matter the asset class—effective enforcement and customer protections must be among our highest priorities” said Commissioner Johnson in her statement.

Statement of Commissioner Pham. “This complaint makes clear that ‘perpetual futures’ can constitute swaps. A swap is a swap, even by any other name. I commend the relentless efforts of the Division of Enforcement staff to use the CFTC’s broad Dodd-Frank authority to aggressively pursue fraud and manipulation. Although some things—like technology—change, some things stay the same—like the CFTC’s mandate to protect the public and market integrity against wrongdoing” said Commissioner Pham in her statement.

The case is No. 1:23-cv-00173.