N.D. Cal.: New fraud action alleges ‘brazenly lawless’ conduct by BitMEX crypto trading platform - 26 May 2020

Rampant fraud at the Seychelles-based crypto trading platform causes artificial prices that "spread like forest fires" through the cryptocurrency ecosystem, a new lawsuit alleges.

A complaint filed in the Northern District of California alleges that BitMEX, a cryptocurrency products trading platform based in the Seychelles, has engaged in a "truly staggering" amount of unlawful activity, spreading artificial prices to other trading platforms and "wreaking havoc on the entire cryptocurrency ecosystem, costing traders and investors billions of dollars in losses." According to the plaintiff BMA LLC, the trading platform was "designed from ground up" to profit from illegal activities including racketeering, wire fraud, money laundering, interstate transportation of stolen property, and cryptocurrency market manipulation. Although U.S. investors are restricted from using BitMex, BMA alleges that the platform and its founders maintain close ties to the U.S. and nearly 15 percent of its trading volume last year came from U.S. traders (BMA LLC v. HDR Global Trading Limited (A.K.A. BitMEX), May 16, 2020).

The complaint was filed against the platform’s parent company, HDR Global Trading Limited. The suit joins another fraud action filed against HDR in April.

"Brazenly lawless." According to its website, BitMEX is a "P2P crypto-products trading platform" owned and operated by HDR Global Trading Limited, a Republic of Seychelles incorporated entity, or its relevant authorized affiliates. The website states that all profit and loss is handled in Bitcoin, and offers futures contracts and "perpetual contracts," which it describes as contracts that are similar to futures but do not have an expiry. The website features a prominent warning that users located in restricted jurisdictions, including the United States, are prohibited from using BitMEX services.

The complaint was filed by BMA LLC, described as a limited liability company organized in Puerto Rico. BMA alleges that HDR Global Trading and its founders Arthur Hayes, Ben Delo, and Samuel Reed, designed BitMEX to operate in a "brazenly lawless" manner and financially benefit from "a myriad of illegal activities," earning the defendants billions of dollars in illicit profits.

Detailing its claims of racketeering, wire fraud, money laundering, interstate transportation of stolen property, and cryptocurrency market manipulation, BMA alleges that various misconduct makes BitMEX "an exquisite designer tool for unsavory actors to manipulate cryptocurrency markets," including:

  • Allowing manipulators and money launderers to avoid detection by offering extremely high trading leverage of up to 100x, using BXBT index price for highly liquid derivatives calculated based on prices of two or three illiquid spot exchanges, and enabling users to open unlimited anonymous document check-free trading accounts without any trading and withdrawal limits;
  • "Weaponizing" deliberate server freezes;
  • Using fraudulent "system overload" events to accept some trading orders and reject others during large market moves to exacerbate price fluctuations and cause the most liquidations.

"Because of the very high derivatives trading volume on BitMEX, the artificial prices caused by the BitMEX manipulations spread, like forest fires, from BitMEX to other exchanges wreaking havoc on the entire cryptocurency [sic] ecosystem, costing traders and investors billions of dollars in losses and resulting in a domestic injury in the United States," states the complaint.

U.S. ties. The complaint alleges that the platform and its founders have close connections to the United States and that U.S. users are able to use the platform, despite the warning that users located in the U.S. are prohibited from using BitMEX.

According to the complaint, "several sources close to the company" have disclosed to media sources that nearly 15 percent of the BitMEX’s 2019 trading volume—or about $138 billion worth—is attributable to traders located in the United States. The complaint alleges that the defendants make this possible by deliberately and knowingly using utterly ineffective IP address check, which they know is uniformly subverted by very simple, inexpensive and widely available virtual private network (VPN) software that masks traders’ geographical location.

The complaint further alleges that HDR maintains a San Francisco office as one of three offices worldwide, and that HDR operates in the United States through its California-based wholly owned subsidiary and alter ego, co-defendant ABS Global Trading Limited. The defendants allegedly use ABS as a "false shell company" to manage BitMEX’s engineering, security, and back-office operations.

Damages. The thrust of the damages argument is that the alleged misconduct causes widespread artificial prices that spread to other trading platforms, causing widespread economic damage. The complaint alleges that the misconduct has caused BMA "concrete and certain monetary cryptocurrency trading losses" to be proven at trial. In particular, BMA alleges both price manipulation and use of a manipulative or deceptive device in violation of the Commodity Exchange Act.

The complaint demands a jury trial.

The case is No. 3:20-cv-3345.

Attorneys: Pavel I. Pogodin (Consensus Law) for BMA LLC.

Companies: BMA LLC; HDR Global Trading Ltd.; ABS Global Trading Ltd.

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