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.
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