Coin Drop Markets: Crypto Fraud Proved at Trial

The CabbageTech CFTC judgment ordered the company, doing business as Coin Drop Markets, and its owner to repay $290,429 to customers and pay a separate $871,287 civil penalty for virtual-currency trading fraud. Customers paid for expert advice, then entrusted money and coins to the same operator for trading. The court found an imaginary team, fictitious profits and customer money used for the owner’s benefit.

The Commodity Futures Trading Commission brought this CFTC fraud action against CabbageTech, Corp. and its owner. The federal court in the Eastern District of New York entered its final judgment on August 23, 2018. Its findings show how an inexpensive membership became an invitation to hand over much more.

What Coin Drop Markets Promised

Coin Drop Markets sold access to supposed trading expertise, with more expensive memberships promising closer guidance. In early 2017, its offers ranged from Bronze to Diamond. Bitcoin and Litecoin trading groups promised entry and exit prices for day trades. An annual turnkey service offered mentorship and access to the operator’s supposed expertise for an up-front fee.

The promised service was specific. Customers were buying continuing trading signals through the website, social media and chatrooms, including guidance about when to buy and when to sell. The court’s trial findings describe one customer who received a direction to buy a coin but never received the promised exit signal and suffered substantial losses.

Once customers had paid an initial fee, the operator pitched lifetime access to an elite group. He also solicited coins to trade on their behalf and money to buy virtual currency at supposedly discounted prices. One trading pitch promised 300% returns in less than three days. The court found that he never achieved those results for customers and instead misappropriated their funds.

That progression mattered. The low entry price gave the operator a customer relationship to work on. The court found that the memberships were designed to position customers for further solicitations involving greater and greater amounts. Buying advice became trusting the adviser with the assets themselves.

The Wall Street Office and Expert Team Were Invented

Coin Drop Markets presented a staffed trading business where the court found a sole operator working from his home basement in Staten Island. The advertised Wall Street office did not exist. Promotional material described “a dedicated team of digital asset trading specialists trend spotting.” There was nobody else in the company.

The operator also posed as a separate company representative who supposedly answered to a boss. At trial, a customer recognized the representative’s voice as the owner’s. Telephone records connected calls to the owner’s number, and the court accepted the voice identification as credible. The salesman and his supposed boss were the same person.

The appearance of a larger business extended into the paperwork. FedEx labels used multiple company names. Customers encountered different email addresses, telephone numbers and social-media accounts. Those details helped sell the impression of an established operation while the same person controlled the business.

We see the deception before a coin changes hands: the office, staff and expertise were themselves part of what customers were being sold. The promised trading desk was a fiction.

Profits on the Screen, Cash Out of the Account

Customer money went into accounts the operator controlled while customers received false reports of successful trading. Website links directed membership payments to a Coin Drop Markets PayPal account. The business also took customer money through bank accounts and virtual currency through exchange accounts.

The court followed customer deposits into the CabbageTech account at TD Bank. It found that the owner withdrew funds at ATMs soon after receipt and used customer money to pay his rent. Meanwhile, account statements on the Coin Drop Markets website and updates sent by email or telephone created the impression that customers’ investments were earning profits. As refund demands mounted, the court found that the operator moved customer Litecoin into another Bittrex account opened in his wife’s name to hide the assets abroad. The account reports kept telling customers a different story.

The Commodity Futures Trading Commission’s complaint described a customer asking for the money back. It alleged:

The later trial findings supplied the excuses: investments had supposedly been reinvested, a secretary had forgotten to send a check, or a hack had made the money unavailable. The court found those explanations false. A company with no other staff was blaming the secretary.

In June and July 2017, the operator shut down the website and chatroom, deleted social-media accounts and stopped answering customers. He admitted under oath that he had deleted the website and the Coin Drop Markets Twitter account. The court found that the shutdown and destruction of records were part of the fraud.

The same gap between a displayed balance and the actual assets appears in the Debiex trading-fraud allegations. In its Debiex complaint, the Commodity Futures Trading Commission alleged that customer-service staff controlled fictitious trading and balance information, then demanded invented tax payments before withdrawals. Customers sent additional money and still could not withdraw. In both accounts, the customer-facing story concealed what had happened to the funds.

Why the CFTC Could Bring a Spot-Crypto Fraud Case

The court held that virtual currencies could be commodities and that the Commodity Futures Trading Commission could pursue fraud connected with their sale across state lines even without a futures transaction. Its March ruling explained that the Commodity Exchange Act reached fraud in purchases of the coins themselves, in the spot market.

Neither CabbageTech, operating as Coin Drop Markets, nor its owner had ever registered with the Commission. The Commission’s fraud authority reached unregistered operators too.

What Evidence Is Required to Prove Fraud?

In the Coin Drop Markets case, the evidence connected the trading promises to customer transfers, false account reports, withdrawal requests and the person controlling the receiving accounts. Customers explained what they had been sold. Payment, bank, exchange and communications records showed how the operation worked.

Account control was especially revealing. The operator controlled two Bittrex accounts, including one opened in his wife’s name. The court cited a shared telephone number, logins from the same IP addresses and transfers between the accounts. Subscriber information also connected account logins to his home.

A later paper explains why that connection matters when following digital assets. The 2022 GI-ACE paper Merchants of Integrity? Commodity Trading and Corruption Research for a World in Transition describes the distinction between a transaction record and a person’s identity:

In this case, the court connected exchange activity to the operator through account and communications evidence. That is where a customer, payments employee or exchange specialist may have a useful view: the explanation of who directed a transfer, what it was supposed to buy and who controlled its destination. We examine those connections with the person who knows the transactions.

What the Civil Judgment Ordered

CabbageTech never answered the case, so the court ruled against it. After hearing the owner’s case at trial, the court also found him responsible for the fraud.

The court set the civil penalty at three times the monetary gain it identified. It permanently banned the company and its owner from trading virtual currencies for themselves or others and from taking customer money to buy or sell them.

Customer Knowledge and Whistleblower Rewards

Customers and fraud victims can qualify as CFTC whistleblowers, as can employees and other people with qualifying information. A customer’s sales messages and transfer history may help explain a scheme that an account statement alone cannot.

Under the Commodity Exchange Act’s whistleblower provision, the CFTC program provides an aggregate award of 10% to 30% of qualifying sanctions collected, shared when more than one whistleblower qualifies. We assess the information and the award questions with you.

The False Claims Act is a separate program. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What the Trading Promise Concealed

If you saw the membership sales, account movements or withdrawal excuses, speak with our whistleblower experts about the crypto trading operation you know. We build the case around the connections your information reveals and bring in CFTC whistleblower lawyers who understand trading fraud and customer-asset diversion. We stay beside you as the case develops, from the first account of the sales pitch through the pursuit of a whistleblower reward.