The co-founder and former chief executive officer of Voyager Digital broke derivatives rules while at the helm of the crypto lender, leading to its bankruptcy and $1.7 billion in customer losses, U.S. regulators alleged Thursday.
The Commodity Futures Trading Commission filed a lawsuit against Stephen Ehrlich in U.S. federal court in New York, claiming he and Voyager "fraudulently solicited participation in and operated a digital asset trading and custody platform." The agency accused the firm of luring customers with promises of returns as high as 12% on certain crypto holdings and making misleading statements about the platform's safety.
Through those enticements, Voyager facilitated billions of dollars worth of transactions involving digital assets that were commodities, including bitcoin and Circle's USD Coin, according to the CFTC.
Voyager was one of the dominoes to fall in 2022's crypto chaos. The industry is still reeling from the tumult, which culminated in the collapse of crypto trading giant FTX. The criminal trial of FTX's co-founder, Sam Bankman-Fried, began last week in New York.
Separately, Ehrlich was also sued by the Federal Trade Commission for allegedly making false claims about the availability of Federal Deposit Insurance Corp. protection to Voyager's former customers. The FTC said in a news release Thursday that Ehrlich assured customers that their deposits were safe even as the firm approached bankruptcy.
Voyager settled with the agency and agreed to a permanent ban from handling consumers' assets with admitting or denying allegations. Representatives for Voyager and Ehrlich didn't immediately provide comment.
Bloomberg News previously reported that CFTC investigators had concluded that Ehrlich broke agency rules and that the attorney administering Voyager's wind-down had signed off on a settlement with the FTC.
At the time, Ehrlich said that any allegations from the CFTC "appear to be one of those times where the referees are making new rules and calling foul after the game has ended." He said he looked forward to being vindicated in court.
'Excessive risks'
On Thursday, the CFTC accused Ehrlich and Voyager of making false statements to encourage customers to store, but not withdraw, their assets.
"Behind the scenes, at Ehrlich's direction and approval, Voyager took excessive risks with customer assets," the agency said. "Voyager's reckless transfers led to its own demise."
Voyager filed for bankruptcy in July 2022, citing volatility in the crypto markets and the collapse of Three Arrows Capital, a hedge fund that defaulted on a loan of more than $650 million from Voyager.
The CFTC said Voyager transferred more than $650 million worth of customer assets to a digital-assets hedge fund — referred to as "Firm A." The company carried out the transaction, despite warnings about high risk and very little financial disclosure from the hedge fund.
The regulator said Firm A refused to provide any financial statements, instead sending a one-sentence letter titled "AUM Letter," claiming to list its net asset value, without any supporting documentation. AUM stands for assets under management.
