SEC and CFTC Charge Bitcoin-Funded Securities Dealer and CEO

September 28

On September 27, the US Securities and Exchange Commission (SEC) filed charges against an international securities dealer and its Austria-based CEO for allegedly violating the federal securities laws in connection with security-based swaps funded with Bitcoins.

According to the SEC’s Complaint, 1pool Ltd. a/k/a 1Broker, registered in the Republic of the Marshall Islands, and its CEO Patrick Brunner, solicited investors from the United States and around the world to buy and sell security-based swaps.  Investors could open accounts by simply providing an email address and a user name – no additional information was required – and could only fund their account using bitcoins.  The SEC alleges that a Special Agent with the Federal Bureau of Investigation, acting in an undercover capacity, successfully purchased several security-based swaps on 1Broker’s platform from the U.S. despite not meeting the discretionary investment thresholds required by the federal securities laws.  The SEC also alleges that Brunner and 1Broker failed to transact its security-based swaps on a registered national exchange, and failed to properly register as a security-based swaps dealer. The SEC’s complaint, filed in U.S. District Court for the District of Columbia, seeks permanent injunctions, disgorgement plus interest, and penalties.

In a parallel action, the US Commodity Futures Trading Commission (CFTC) announced charges against 1Broker arising from similar conduct.  According to the CFTC Complaint, starting in at least February 2016, the Defendants offered or engaged in unlawful retail commodity transactions in the form of “contracts for difference” (CFDs) that had as underlying assets commodities such as gold and West Texas Intermediate crude oil.  As explained in the Complaint, a CFD is generally an agreement to exchange the difference in value of an underlying asset between the time at which the CFD trading position is established and the time at which it is terminated.  However, the Complaint alleges, the Defendants did not conduct these transactions on or subject to the rules of any board of trade that has been designated or registered by the CFTC as a contract market, as required by the Commodity Exchange Act (CEA).

The Complaint further alleges that 1pool, through Brunner and its other employees and agents, acted as a Futures Commission Merchant (FCM) by soliciting or accepting orders for retail commodity transactions; acted as a counterparty to these transactions; and in connection with these activities, accepted money, securities, or property in the form of Bitcoin.  Despite acting as an FCM, the Defendants failed to register with the CFTC as an FCM and failed to implement an adequate supervisory system as such registration requires.  This case was also filed in U.S. District Court for the District of Columbia.

David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. He is currently the Chairman of the Litigation Department of the firm’s New York office. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. Since 2008, David has been included in Chambers for his expertise in international arbitration.