The Commodity Futures Trading Commission ("CFTC") recently filed a novel civil enforcement action against Avraham "Avi" Eisenberg in the U.S. District Court for the Southern District of New York, charging Eisenberg with a fraudulent or manipulative scheme involving trading on a supposed decentralized digital asset platform (also known as a decentralized crypto exchange or "DEX"). The case is also the agency's first enforcement action involving this type of scheme known as "oracle manipulation."

The CFTC's complaint alleges that on October 11, 2022, Eisenberg illegally misappropriated over $110 million in digital assets from Mango Markets, a decentralized digital asset exchange. Mango Markets is built on the Solana blockchain and offers spot margin trading and perpetual futures traded on an order book. Mango Markets is governed by token holders via its decentralized autonomous organization ("DAO").

Eisenberg supposedly perpetrated the misappropriation by creating two anonymous accounts on Mango Markets and using the accounts to establish large leveraged positions in a swap contract, the value of which was based upon the relative price of Mango Market's native token, MNGO, and the stablecoin USDC. Eisenberg then allegedly engaged in a classic "pump and dump" scheme by artificially driving up the price of MNGO through rapid purchases of substantial amounts of the token on three digital asset exchanges. The three digital asset exchanges served as the inputs for the oracle (also known as the data feed) used by Mango Markets to determine the value of Eisenberg's swap positions.

Eisenberg's scheme caused the price of MNGO, as reported by the oracle, to artificially increase over 13 times in value over the course of only 30 minutes. Eisenberg then dumped his position and withdrew over $110 million in digital assets from Mango Markets. The $110 million withdrawal represented the majority of the assets deposited into Mango Markets by its other customers. In an unusual step, Eisenberg publicly acknowledged what he had done and used his real name, claiming that he was trading using the protocol as designed, and that his activity had left the platform insolvent. And in another unusual step, Mango Markets token holders then entered into negotiations with Eisenberg, who ultimately agreed to return approximately $67 million to Mango Markets in exchange for an agreement that he would be able to keep the rest and that the token holders would not pursue criminal action against Eisenberg or freeze his funds. The platform's DAO would then vote on how to refund users.

While some commentators initially speculated that Mango Markets' contractual resolution with Eisenberg would end the matter, the CFTC clearly did not share that view. Neither did the Department of Justice ("DOJ") or the U.S. Securities and Exchange Commission ("SEC"). In addition to the CFTC's civil enforcement action, the U.S. Attorney's Office for the Southern District of New York also indicted Eisenberg on multiple commodities and wire fraud counts on January 9, 2023, the same day the CFTC filed its action. The SEC followed up with its own charges on January 20, 2023, relating to Eisenberg's alleged manipulation of a "so-called governance token that was offered and sold as a security."

The coordinated civil and criminal actions serve as a stark reminder that contractual agreements, like the one entered into by Mango Markets token holders, even if they would be binding on the holders, are not binding on federal regulators like the CFTC, SEC, or the DOJ. Participants in decentralized digital asset exchanges would be wise to remember that regulatory and criminal enforcement authorities take market manipulation very seriously and are not likely stand down and look kindly upon allegations of attempts to seemingly extort what could be construed to be ransom payments from other token holders.

Further, the CFTC's action also shows that a swap is a swap, even if called something else. In this case, the trading product was called "perpetual futures," but the CFTC views these products, as other products not necessarily called swaps, as swaps, and subject to their jurisdiction.