Landmark case involving a $110 million cryptocurrency scheme

On the 18 April 2024, a jury in New York (U.S.) unanimously convicted Avraham Eisenberg guilty of “a scheme to fraudulently obtain approximately $110 million worth of cryptocurrency from Mango Markets and its customers”.

Given the sheer number of scandals, crashes and frauds in the cryptocurrency markets, one would be forgiven for forgetting the Mango Markets incident from 2022. Mango is a Solana-based decentralised finance hub.

When Mango Markets’ wallets were drained of their entire contents, Mr Eisenberg tweeted swiftly that he had not hacked or compromised any systems but had executed a “high-profit trading strategy”. This strategy used two accounts (“A” and “B”), each funded with five million USD Coin (USDC).

Account “A” was used to short (i.e. offer to sell) 483m MNGO (Mango’s native coin). Account “B” used five million USDC to buy 483 million MNGO. This caused a move upwards in the price of MNGO. As the price went up, Account “B” had sufficient excess collateral that it could be used to take out a loan of $116m across a number of other tokens. Once the loans were taken, the amount of MNGO was in deficit and there was no liquidity. As the price of MNGO dropped, Account “B” went into deficit while Account “A” accumulated a nominal profit of about $12m. Although there were no MNGO left to pay-out Account “A”’s profit, Mr Eisenberg still had the $116m he had borrowed. Mr Eisenberg did later return some of the missing funds ($67m).

What Mr Eisenberg did, had he done it on the traditional securities or derivative market, would have been a breach of market abuse and manipulation rules. However, Mr Eisenberg executed this strategy on the spot cryptocurrency markets. These traditional rules do not apply to the spot markets (even fiat spot markets), yet Mr Eisenberg was prosecuted for and convicted of the crimes of wire fraud, commodities fraud, and market manipulation.

The US Department of Justice itself called this prosecution “ground-breaking”.

Similar arguments were given in the English court’s decision to extradite Navinder Sarao to the U.S. for his role in the 2010 Flash Crash.

Whatever one thinks of Mr Eisenberg’s individual case/actions, the question we should ask ourselves is whether this approach to criminal statutes and liability is a thing to be celebrated.

There are a number of (seemingly absurd) examples: when does “tax avoidance/planning” become “tax evasion”; when would a proprietary or exclusive data feed become “market manipulation” or “front-running”; when would a trading strategy not explicitly prohibited become a crime?