CFTC Files Complaint Against Voyager’s Former CEO Stephen Ehrlich Alleging Fraud and Registration Failures

By Cliff Histed, Cheryl Isaac, Eden Rohrer, and Josh Durham

On 12 October, the Commodity Futures Trading Commission (CFTC) filed a complaint against Stephen Ehrlich, the former CEO of the now-defunct cryptocurrency platform, Voyager Digital (Voyager), in the US District Court for the Southern District of New York. In its 55-page complaint, the CFTC asserts both fraud and registration failures by Ehrlich in connection with the Voyager platform and Voyager’s operation of an unregistered commodity pool.

The CFTC alleges that Ehrlich acted fraudulently by soliciting participation in the Voyager platform, touting it as a “safe haven to hedge [ ] assets,” operating with the “same level of rigor and trust” as traditional financial institutions, including US$250,000 in FDIC insurance. According to the complaint, Voyager offered a high-yield “rewards” program, in which customers were promised returns up to 12% on their stored digital assets, while Voyager nevertheless took undisclosed “excessive risks” with customer assets. Additional fraud charges revolve around Voyager (at Ehrlich’s “direction and approval”) lending billions of dollars of customer assets to counterparties at high risk of default, after conducting “grossly insufficient due diligence” on these counterparties, and then “embark[ing] on an intentional effort to conceal from its customers its exposure” to a bankrupt counterparty. Ultimately, Voyager’s exposure to risky counterparties resulted in Voyager’s bankruptcy, in which it owed its customers more than US$1.7 billion.

The CFTC further alleges that Voyager operated an unregistered commodity pool because it solicited, accepted, or received customer assets (including “digital asset commodities” such as Bitcoin (BTC) and USD Coin (USDC)) for the purpose of trading derivatives. And, because he solicited members of the public to participate, Ehrlich is alleged to have operated as an unregistered associated person (AP) of Voyager (itself alleged by the CFTC to be an unregistered CPO). In contrast, the SEC has alleged that similar rewards programs were securities offerings because they were investment contracts under the Howey test and the platforms that offered them were unregistered brokers or investment companies. 

In a statement, CFTC Commissioner Pham cautioned that the complaint’s interpretation of a CPO  seemed to include traditional lending activity, which she called “an overreach beyond our statutory authority” that would disrupt well-established, separate regulatory frameworks. Commissioner Pham’s observations may have merit. It is well understood that a CPO solicits, receives, or accepts funds or property for the purpose of trading in commodity interests. The facts alleged in the complaint state that Voyager turned over customer funds to other companies as loans for which it expected to be paid interest, and those other companies may have used the loan proceeds to trade derivatives.  It will be for the District Court to decide whether these facts would render Voyager an unregistered CPO (and Ehrlich an unregistered AP of such CPO).

The CFTC is seeking a broad range of remedies, including fines, disgorgement, and permanent trading and registration bans against Erhlich. As noted in a statement by CFTC Commissioner Johnson, the Federal Trade Commission filed simultaneous charges against Voyager and Ehrlich. We will be monitoring these proceedings closely. 

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