The former CEO of failed crypto firm Voyager Digital has been charged with fraud and registration violations in connection with a scheme that promised investors high returns with low risk.
The U.S. Commodity Futures Trading Commission (CFTC) filed a complaint against Stephen Ehrlich, the former CEO of Voyager, in the U.S. district court for the Southern District of New York, alleging fraud and registration failures.
The CFTC is seeking restitution, disgorgement, monetary penalties, permanent trading and registration bans, and a permanent injunction.
“The complaint alleges, from at least February 2022 through July 2022, Ehrlich and Voyager engaged in a scheme to defraud customers by misrepresenting the safety and financial health of the Voyager digital asset platform,” the regulator said in a release.
Among other things, the CFTC said Ehrlich and Voyager touted the platform as a “safe haven” for digital assets, while also promising high returns, of as much as 12%, on digital assets stored on the platform.
To generate those returns, Ehrlich and Voyager pooled customers’ assets and transferred billions of dollars’ worth of those assets as “loans” to risky third parties, it said.
“In early 2022, following grossly inadequate due diligence, Ehrlich and Voyager transferred over US$650 million in customer digital asset commodities to [a digital assets hedge fund] on an unsecured basis,” it said, adding that the firm required CFTC registration to pool clients’ assets this way.
“Instead of providing a ‘safe haven,’ Ehrlich and Voyager transferred customer digital assets to risky counterparties, such as [the hedge fund], to fuel the high-yield returns used to attract and retain customers,” it said.
Yet, when trying to withdraw those assets, the fund defaulted, creating “dire operational liquidity issues” at Voyager, the CFTC said.
“Ehrlich and Voyager lied to Voyager customers,” said Ian McGinley, director of enforcement with the CFTC, in a release.
“While representing they would treat customers’ digital asset commodities safely and responsibly, behind the scenes, they took shockingly reckless risks with their customers’ assets, leading to Voyager’s bankruptcy and huge customer losses.” he said. “When their business began to collapse, they continued lying to their customers, concealing Voyager’s true financial health.”
In a parallel action, the U.S. Federal Trade Commission (FTC) announced a settlement with Voyager that permanently banned it from handling consumers’ assets, and it also sued Ehrlich in U.S. federal court, alleging violations of the FTC Act’s prohibition on deceptive practices and the Gramm-Leach-Bliley Act.
The FTC said its complaint also alleged that Ehrlich transferred millions of dollars to his wife Francine, including funds that can be traced directly to the alleged misconduct. She was named as a relief defendant in the FTC’s suit.
None of the regulators’ allegations have been proven.