Default ruling in favor of CFTC may not garner restitution from Diamonds Trading Investment House

Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes.

As always, Rosario summaries are “NMR” and Palley summaries are “SDP".

[related id=1] CFTC v. Diamond Trading Investment House, et al., Case №4:18-cv-00807-O (N.D. Tex. filed June 28, 2019) [NMR]

You miss 100% of the shots you don’t take. In life, in sports, in business, and, yep you guessed it, in law. This recent order and default judgement out of the Northern District of Texas is a… well, it’s about what we’ve come to expect in this space. Before we dig in to the facts of the case let’s talk a little about default judgments.

You can probably infer from the name that a default judgment is a judgment that is entered by… default. This sort of thing happens when one party in a case moves for judgment in their favor, and the other party, typically, doesn’t respond. The Court metaphorically shrugs it’s shoulders and says “Cool, I guess you win. Next!” That last part doesn’t really happen, but it would be funny.

This case started on Sept. 28, 2018, with the Commodities and Futures Trading Commission (CFTC) filing a complaint against Defendants John Doe 1 aka Morgan Hunt dba Diamonds Trading Investment House (“Hunt”) and John Doe 2 aka Kim Hecroft dba First Options Trading (“Hecroft”). The CFTC attempted to serve the defendants via their email addresses, and then when they never responded to the complaint the CFTC filed a motion, which the court has now granted, giving the CFTC everything they wanted. There is one catch in all this. It appears that no one knows where the defendants are, or if it is multiple defendants, or just one person. What? How did this even get started then? Well, an aggrieved buyer alerted the CFTC to what the defendants were up to, and they were up to a lot.

Given that this is a default judgment, the following alleged facts are taken as true by the Court. An individual referred to as L.M. in the order was a victim of fraud perpetuated by Hunt. Starting in 2017, Hunt took a variety of steps to create a fake forex trading business. One such step was a Facebook post that said “It’s the bitcoins diamonds exchange. Awesome profits generated from it.” A message that Hunt sent to L.M. described his investment strategy as “the Bitcoins Diamonds Trust” and that it “guarantees a passive investment return of 40–60% after a 30 day trading cycle.” L.M., who was on Social Security disability decided this was too good to pass up, and agreed to invest with Hunt.

Hunt directed L.M. to start purchasing bitcoin, which he of course then had L.M. transfer to Hunt’s own bitcoin wallet. Hunt sent a series of fake trading return documents to L.M. showing profits. Then L.M. wanted to withdraw some cash, and things started to go south.

Hunt claimed that L.M. shouldn’t withdraw, because of tax implications related to the CFTC. Hunt apparently forged a CFTC document, using their logo and letterhead, to try and convince L.M. that he shouldn’t make a withdrawal. L.M. eventually got suspicious and contacted the CFTC himself, which set all of this in motion. What about Hercroft?

Well, Hunt is probably Hercroft. Why? Well, for one thing “[d]uring the Relevant Period, Hecroft used some of the same IP addresses to log
into his [gmail] account that Hunt used when logging into his [gmail] account and his “Morgan Hunt” Facebook page.” Hecroft ran a similar scam on a person named D.P. From the get go D.P. was suspicious of Hecroft and demanded proof of his identity, which Hecroft satisfied by providing a forged California driver’s license, and a fake trading license. Hecroft also produced a fake “Certified CryptoCurrency Expert” license he claimed was issued by the Blockchain Council. The Blockchain Council does not do licensing. D.P. was apparently satisfied and started transferring some bitcoin to Hecroft.

Eventually, D.P. wanted to withdraw funds and Hecroft sent the same forged CFTC document he sent to L.M. making the same false tax argument. As D.P. pressed the issue, Hecroft started sending letters purporting to be from the General Counsel for the CFTC to dissuade D.P. from contacting the CFTC directly.

What happens now? The Court permanently enjoined Hunt/Hercroft, and anyone else who helped them, from engaging in these sorts of activities again. Hunt/Hercroft are also ordered to pay restitution and civil penalties. A process is laid out for them to comply with the order. Will Hunt/Hercroft comply? Probably not, and unfortunately the odds of L.M. and D.P. seeing their funds again seem to be pretty low.

The Block is pleased to bring you expert cryptocurrency legal analysis courtesy of Stephen Palley (@stephendpalley) and Nelson M. Rosario (@nelsonmrosario). They summarize three cryptocurrency-related cases on a weekly basis and have given The Block permission to republish their commentary and analysis in full. Part III of this week's analysis, Crypto Caselaw Minute, is above.