Hefty Monetary Penalties – Accompanied by the Possibility of No Prison Time
The legal saga involving the civil and criminal cases against the entity and former individual owners of the Bitcoin Mercantile Exchange, or BitMEX—a large and well-known online trading platform dealing in futures contracts and other derivative products tied to the value of cryptocurrencies (see here, here, and here)—continues unabated.
Most recently, BitMEX co-founder and former CEO, Arthur Hayes, a high-profile leader in the cryptocurrency industry, settled his civil charges with the CFTC and pleaded guilty to criminal charges brought by the DOJ. He now faces sentencing in the criminal case, currently scheduled for the end of this week. As we will discuss, Hayes and the government take very different views regarding his appropriate sentence.
These cases emerged publicly in October 2020 when: (1) the Commodity Futures Trading Commission (“CFTC”) filed a civil complaint against the entities operating the BitMEX trading platform and its three individual owners for allegedly failing to register with the CFTC and violating various laws and regulations under the Commodity Exchange Act (“CEA”); and (2) the Department of Justice obtained an indictment against the three individual owners and another individual, including Hayes, charging each with violating, and conspiring to violate, the Bank Secrecy Act (“BSA”) by failing to maintain an adequate anti-money laundering (“AML”) program.
The cases have raised novel legal questions concerning which, if any regulatory regimes, apply to participants in the cryptocurrency market. Moreover, Hayes’ upcoming sentencing raises the question of whether an offense is so novel that it can merit probation, despite the high dollar value of the alleged scheme at issue.
The CFTC Consent Order
On May 5, 2022, the CFTC announced that it entered into separate consent orders with Hayes and the other individual defendants. These consent orders follow the August 2021 consent orders between the BitMEX entity defendants and the CFTC and the Financial Crimes Enforcement Network (“FinCEN”).
The consent order between the CFTC and the entity defendants found that BitMEX allegedly violated the CEA by operating a facility to trade or process swaps in the U.S. without being approved as a Designated Contract Market (“DCM”) or a Swap Execution Facility (“SEF”). BitMEX also allegedly violated the CEA by operating as a Futures Commission Merchant (“FCM”), accepting bitcoin to margin digital asset derivative transactions and acting as a counterparty to leveraged retail commodity transactions, without CFTC registration. Further, BitMEX allegedly violated CFTC regulations by failing to implement an adequate AML program, which it was required to do under the BSA because it was a FCM. The entity defendants were permanently enjoined against further violations of the CEA. The entity defendants were likewise ordered to pay regulators up to a combined $100 million civil monetary penalty (“CMP”). Hayes’ counsel has argued in his criminal proceedings that Hayes in effect will be funding one-third of this company settlement based on his one-third interest in BitMEX, in addition to his personal $10 million civil penalty resulting from his individual consent order with the CFTC, discussed below.
The May 5, 2022 consent order between the CFTC and Hayes finds Hayes liable for the same violations as the entity defendants, based on allegations that he (along with the other individual defendants) controlledBitMEX but failed to implement and enforce effective controls to prevent or detect this conduct. Per the consent order, Hayes—like the entity defendants—agreed to a permanent injunction against future violations of the CEA, including offering derivatives products in the U.S. or operating a swaps facility without first receiving approval from the CFTC. Hayes also agreed to personally pay a $10 million CMP. The consent orders between the CFTC and the other individual defendants are substantially similar and also contain individual $10 million CMPs.
Meanwhile, on February 24, 2022, the Department of Justice announced that Hayes pleaded guilty to one count of violating the BSA. The indictment charged Hayes with violating, and conspiring to violate, the requirement under 31 U.S.C. § 5318(h) of the BSA that certain financial institutions—including FCMs—maintain an adequate AML program, including by filing Suspicious Activity Reports (“SARs”) as appropriate and implementing a proper Know Your Customer (“KYC”) program.
Hayes’ sentencing is set for May 20, 2022. Both Hayes and the government recently have filed sentencing memoranda. While one count of violating the BSA carries a maximum statutory penalty of five years’ imprisonment, the parties previously stipulated (in Hayes’ plea agreement) to a Sentencing Guidelines Range in Zone B, producing a recommended Guidelines range of six to twelve months’ incarceration with an option for probation. The Court, of course, retains discretion to determine the sentence, regardless of the range recommended by the Guidelines.
Not surprisingly, the parties seek starkly different sentences. On the one hand, Hayes’ lawyers have asked the Court (in a 65-page sentencing submission) to impose a sentence of probation with no home detention or community confinement and freedom to travel abroad (primarily so that Hayes can seek immigration status in Singapore). Hayes’ lawyers cite his voluntary surrender, acceptance of responsibility, and remorse for his actions, as well as his extremely low risk of recidivism, lack of a criminal record, accomplished background, and philanthropic efforts. His lawyers also identify several “mitigating factors,” including the novelty of the proceedings, the fact that Hayes was navigating newly-emerging guidelines in the cryptocurrency market, and the fact that Hayes did attempt to implement some AML programs for BitMEX, including attempts to block U.S. participants (notwithstanding admitted shortcomings) and other remedial steps.
Finally, his lawyers stress that neither the CFTC nor the DOJ “ever alleged that BitMEX’s business practices were unfair to customers or to other market participants, or that  Hayes ever participated in or condoned any illegal transactions on the BitMEX platform (including money laundering, sanctions violations, or any other transaction-specific offense).” Hayes also submitted ten character letters from family, friends, and colleagues to support this sentencing recommendation.
In contrast, the government has asked the court to impose “[a] significant sentence of incarceration above the applicable Sentencing Guidelines range of 6 to 12 months” to promote respect for /the law and foster general deterrence. The government acknowledges Hayes’ “positive qualities,” but insists that, like other white-collar defendants, he “chose to break the law for personal advantage.” Among other things, the government argues that Hayes “[o]perated a massive offshore financial marketplace that openly proclaimed its lack of any AML program,” and cites several examples of Hayes making public statements flouting CFTC regulations. The government likewise contends that it “has seen BitMEX surface repeatedly in [other, unrelated] criminal investigations,” which appear to reflect “BitMEX’s failure to implement any AML controls.” In addition, the government describes Hayes’ proffered efforts to implement an AML program as a “sham” and contends that the $10 million penalty he agreed to pay—while substantial—constitutes only a fraction of his allegedly illegal gains. The government maintains that incarceration is needed to send the message that such conduct carries consequences. Although the government obviously is requesting now a “significant” sentence above the recommended Guidelines range, that Guidelines range flows directly from the stipulations in the parties’ plea agreement – into which the government entered, while knowing full well that its own view was that the financial scope of the offense was very significant.
In addition to the parties, the U.S. Probation Office also has the opportunity to recommend a sentence. Sometimes, these recommendations are not public. However, as the government notes in its sentencing submission, the Probation Office (like Hayes) is recommending a non-incarceratory sentence in this case, with two years’ probation, based on the technical nature of the violation, novel nature of the proceedings, and the $10 million civil penalty Hayes already has agreed to pay the CFTC. It is not everyday that the Probation Office sides with the defense.
The circumstances surrounding the criminal indictment and conviction of Hayes are unusual, and certainly “send a message” to crypto businesses who in fact do business in the U.S. but fail to obtain proper regulatory approval to do so. However, Hayes’ criminal case, coupled with his personal circumstances, may be so unusual that he does not receive a prison sentence. If so, that outcome will not necessarily apply to the next case – which, by definition, will not be so unique.