Last week, the Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the US District Court for the Central District of California against California resident Cunwen Zhu and his California-based company Justby International Auctions.
The complaint alleges that Zhu and Justby fraudulently misappropriated over $1.3m in customer funds intended for digital asset commodity and forex trading.
The CFTC said this was its first case involving a romance scam, commonly known as “pig butchering”, a type of fraud the agency said is growing in popularity. The CFTC’s complaint alleges Zhu and Justby, with other individuals and entities, cultivated a friendly or romantic relationship with potential customers, using false promises and soliciting them to participate in a fraudulent financial opportunity.
$1.3m misappropriated
The complaint alleges that from approximately April 2021 through March 2022, Zhu and Justby accepted and misappropriated over $1.3m from at least 29 customers as part of this scheme.
The CFTC brought this action because digital asset commodities such as bitcoin and ether are encompassed in the definition of a “commodity” under Section 1a(9) of the Act, 7 U.S.C. § 1a(9).
The CFTC’s order describes how Zhu and his cohorts (called “solicitors”) misappropriated more than $1.3m in connection with the sale of leveraged, margined, or financed agreements, contracts or transactions in off-exchange retail foreign currency (forex) contracts and/or digital asset commodities, such as bitcoin, to US customers who were not eligible contract participants.
Zhu and other individuals misappropriated all of the $1.3m they received from customers by transferring the funds from Justby’s bank accounts to Zhu’s personal bank accounts. Once in his personal bank account, some of the funds were misappropriated by Zhu to pay for his personal expenses while the majority of the funds were further transferred to other bank accounts, digital asset commodity trading accounts, and digital wallet addresses controlled by the defendants.
This type of scheme is referred to as “pig butchering” because it involves cultivating a friendly or romantic relationship with a potential investor and “fattening” them up with falsehoods, then getting them to invest in a fraudulent financial opportunity.
Initially, customers were able to withdraw small amounts of their funds. In fact, they were initially encouraged to withdraw some of their funds as proof that the trading firm was legitimate. If customers attempted to close their account or withdraw large amounts from their trading accounts, however, they were met with great resistance.
In the end, customers lost nearly all of their trading funds. Other than the small withdrawals they may have made initially, they were unable to withdraw their funds or purported profits from their fictitious trading accounts
Fraudulent scheme
This type of fraudulent scheme is commonly referred to as a “Sha Zhu Pan” or “pig butchering” scheme by fraudsters, because it involves cultivating a friendly or romantic relationship with a potential investor and “fattening” them up with falsehoods in order to gain the potential customer’s trust and eventually solicit them to invest in a fraudulent financial opportunity.
In April, the Department of Justice brought charges and seized virtual currency worth an estimated $112m in a round-up of cryptocurrency investment scams labeled “pig butchering.”
In the Zhu/Justby case, Zhu and his cohorts spent time cultivating a friendly or romantic relationship with customers; at least one customer was in contact with a solicitor for over a year before being convinced to open and fund a forex trading account.
Established rapport
Solicitors established a rapport with such customers by messaging them frequently, sharing purported pictures of themselves in expensive locales or with expensive items such as luxury cars. They always claimed to be highly successful traders and usually attributed their success to an “uncle” or an “insider” who provided them with the inside knowledge they were now kindly passing on.
To demonstrate their trading success, the solicitor typically provided phony screen shots of their purported trading accounts showing incredible trading results.
The trading firms instructed customers to download an application on their mobile phone or device in order to gain access to a forex and/or digital asset commodity trading platform. Although the trading platforms recommended to customers were legitimate, the app did not actually provide the customers with access to a legitimate trading platform.
In fact, the app only allowed the customers to interface with individuals who were also part of the fraudulent scheme and merely mimicked the features of trading forex and/or digital asset commodities on a live trading platform.
Penalties
In its continuing litigation against Zhu and Justby, the CFTC seeks restitution to defrauded customers, disgorgement of ill-gotten gains, civil monetary penalties, trading bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations.
“As people sought to escape the isolation of the pandemic and form a connection to others online, fraudsters saw a new venue to prey on and to take advantage of the public,” said Director of Enforcement Ian McGinley. “Today’s action, which is the first of its type for the CFTC, shows that the CFTC will hold unscrupulous individuals who defrauded customers accountable and protect the public from internet fraud.”