Alleged crypto Ponzi schemer ordered to produce private keys or pay a $1,000 fine per day

One of the more interesting cases I've read recently starts with a Ponzi scheme and ends with an order to produce private keys to the Commodity Futures Trading Commission ("CFTC").

If you've been following the Craig Wright/Ira Kleiman bonded courier lawsuit in Florida, you probably recall hearing something about contempt of court. In a nutshell: if you're ordered to do something by a judge and don't do it, you can be held in civil contempt. This is a coercive remedy, intended to cause compliance, and can involve (among other things) monetary penalties and, in some cases, imprisonment. 

This new opinion involving a CFTC enforcement action arising out of an alleged crypto currency Ponzi scheme shows the application of the civil contempt remedy to a defendant ordered to turn over private keys when they failed to do so.

CFTC v. Saffron is a lawsuit that was filed in Nevada federal court in September 2019. The agency sued David Gilbert Saffron and Circle Society, Corp. The lawsuit says Saffron and Circle Society fraudulently solicited members of the public to participate in an unregistered commodity pool for the purported purpose of trading off-exchange, binary option contracts on foreign currency ("forex") and cryptocurrency pairs, among other things." 

According to an earlier filing in the case, the scheme raised $11 million in Bitcoin and dollars from at least 14 people, based on a pitch that they would participate in a commodity trading pool using AI-powered trading bots. As a grace note, Saffron allegedly claimed that people like Marc Cuban were involved and that he had received legal clearance in the form of an opinion letter for the program. 

Saffron claimed to be fabulously wealthy with a portfolio of $717 million and assets under management of $2 billion. He guaranteed returns of up to 300% in three weeks and "also claims that he has pooled more than $100 million worth of Bitcoin, his Circle Society commodity pool has 600–800 participants, and his bots trade cryptocurrency on 16 different exchanges."

The lulling here was intricate, if the CFTC's allegations are true. 

For example, Saffron used lawyers "to provide a veneer of legitimacy to his scheme," the Court explained. After making an investment, an investor would get a letter from Saffron's lawyer saying that it was protected by 1,000 Bitcoin in a wallet to which the lawyer's firm had "unrestricted access." The lawyer didn't actually check to see if he could get into the wallet though and when someone called to ask for their money back it turned out that he didn't actually have the proper credentials. 

Anyway, it turns out (shockingly) that the whole thing was a Ponzi scheme, per the CFTC, and when he stopped being able to pay old investors with new investors the excuses started – solar flares, Russians hackers, agreements to settle that were never honored.

So, the CFTC found out about the whole sordid thing and went to federal court and got an ex parte temporary restraining order and a preliminary injunction. Ex parte means that the defendant didn’t have to be notified, which is something that the government can ask for if there’s a chance that the defendant will run off with the money or destroy documents if notified of the proceeding. Oversimplifying a little bit, the government had to convince the Court that it was pretty likely that it was going to win and the Court agreed. 

As part of the Court's Orders, the defendants were ordered to preserve and produce business records, provide an accounting of assets, and their assets were all frozen as well. Because they apparently failed to comply, the CFTC asked the Court to hold them in civil contempt.

The burden of proof for civil contempt is "clear and convincing evidence," which is more than "a preponderance of evidence" (the burden in a civil case) and less than "beyond a reasonable doubt" (the burden in a criminal case). Here, the Court found that the burden had been met. In order to avoid paying a fine of $1,000 a day, the Court ordered Saffron to provide written answers, under oath, to a series of questions about his virtual currency holdings and transactions, including a requirement that he provides "the address, provide the corresponding private key for any virtual currency address, and provide the date on which you acquired that private key."

Yes, private keys.

In order to comply with this Court order and avoid paying a fine of $1,000 a day, the Defendant has to provide not only information about his virtual currency holdings and transfers, he has to provide the private keys themselves, effectively given the CFTC unrestricted control and dominion over the assets, in advance of a final judgment being entered. Even assuming that the Defendant is ultimately going to be found liable -- which seems almost a forgone conclusion at this point -- you have to wonder at least a little bit about the mechanics and security of this order.  

Adding to all of this, it also looks like the CFTC is probably going to get reimbursed for fees and expenses, including charges for time when the CFTC lawyers were probably asleep, which is a little bit of government overreach in a case where it probably wasn’t really necessary. Kind of an aside, but billing someone for twenty-four hours of your time, including when you’re asleep in a hotel room – I mean, c’mon government lawyers, seriously?  I mean thanks for recovering our tax dollars but don’t push your luck.

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Anyway, once again, we see that while it may be true that you may not be able to  confiscate someone's BTC without them giving up their private keys voluntarily, you can fine them into oblivion in the meantime (also, the Court could throw the defendant in jail too, though here the remedy seems to be limited to money, for now).

Also, a simple heuristic: any time someone promises 300% returns in three weeks, says Marc Cuban is involved in their binary trading bitcoin commodity pool thing and also claims to be a billionaire...whelp, it's prolly a good idea to lock up the smokehouse, hide your wallet, and call the cops.