The fallout continued last week for embattled crypto trader Avraham Eisenberg, as Mango Labs filed litigation in the Southern District of New York to recover $47 million Eisenberg drained from decentralized crypto lending platform Mango Markets by manipulating the value of the Mango Markets native token. The lawsuit from Mango Labs is just the latest in a series of actions against Eisenberg, who was arrested by U.S. law enforcement officials in Puerto Rico in December, and charged by the Department of Justice (“DOJ”) with commodities fraud and commodities manipulation. Following his arrest, the Commodity Futures Trading Commission (“CFTC”), U.S. Securities and Exchange Commission (“SEC”), and now Mango Labs have proceeded to bring parallel claims against Eisenberg.
Eisenberg’s alleged scheme essentially involved taking advantage of the fact that the Mango Markets decentralized platform allowed investors to borrow cryptocurrency based on the value of the investor’s assets posted as collateral on the platform. Eisenberg allegedly took advantage of this feature by selling large amounts of the Mango Markets native token, MNGO, to another account he controlled, which artificially increased the value of the token by more than 2,200%. Eisenberg used the inflated value of the token to borrow and withdraw approximately $114 million worth of various cryptocurrencies from Mango Markets, effectively draining all of the assets from the platform and harming other investors. Shortly after, Eisenberg publicly defended his actions, which he referred to as a “highly profitable trading strategy,” as “legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.” The DOJ, SEC, CFTC, and Mango Markets disagree, and are alleging Eisenberg’s conduct constitutes illegal market manipulation.
The dispute regarding whether Eisenberg’s conduct is actionable fraud or market manipulation seems poised to turn on whether Eisenberg made any false statements, or failed to disclose any material facts, which made his actions misleading under the circumstances. The actions taken by Eisenberg that potentially fit this criteria include, selling MNGO tokens to himself in order to artificially inflate the price, as well as borrowing and withdrawing assets using the artificially inflated MNGO tokens as collateral, knowing that he would not repay the borrowed assets and would surrender the artificially overvalued MNGO tokens.
The case has significant implications for the cryptocurrency trading markets, and decentralized exchanges, which have seen numerous “pump and dump” schemes over the years. In many ways, Eisenberg’s scheme resembles a traditional “pump and dump” scheme in that he deceptively profited from artificially inflating the value of a token at the expense of other investors. What separates Eisenberg’s conduct from the standard “pump and dump” scheme was that he was able to inflate the value of the MNGO token by trading it amongst accounts he controlled (without luring any unsuspecting investors into participating in the “pump” portion of the scheme), and was able to cash out on his scheme by converting the inflated value of his MNGO tokens into other cryptocurrencies by exploiting the design of the platform. The fact that Eisenberg appears to have operated within the parameters of the Mango Market exchange will likely not help him avoid liability for fraud or market manipulation. Like “pump and dump” or other market manipulation schemes, the potential criminal violation does not come from breaking the rules of the platform, but from operating within those rules deceptively in a way that causes harm to others.
Thus, the resolution of these cases will go a long way towards drawing a line between opportunistic trading strategies and illegal market manipulation.