Mango Markets - Case Study in Fractured Frameworks
Avraham “Avi” Eisenberg (“Eisenberg”) is facing charges from the US Department of Justice (DOJ), the US Commodity Futures Trading Commission (CFTC), and the US Securities and Exchange Commission (SEC). Eisenberg allegedly created two anonymous accounts on Mango Markets, a decentralized exchange run by the Mango Decentralized Autonomous Organization (DAO), which he used to establish large leveraged positions in a swap contract. He then rapidly purchased substantial quantities of the token MNGO and caused the price to jump over 13-fold during a 30-minute span, resulting in a temporary spike in the value of Eisenberg's swap positions. He then cashed out his profits and bragged about the attack on social media. The DOJ charged Eisenberg with commodities fraud, commodities manipulation, and wire fraud, the CFTC brought charges for fraudulent and manipulative conduct to obtain digital assets, and the SEC charged him with violating anti-fraud and market manipulation provisions of the securities laws.
The case is a mess, but there are a couple of key takeaways and tensions that jump out:
Who is the New Sherriff When Everyone is Sherriff?
Eisenberg’s case highlights the complexities around the jockeying for regulatory authority between the CFTC and SEC - hinging on whether digital assets are either classified as "commodities" or "securities." While this turf war is underway, the DOJ was the first to bring charges against Eisenberg and relied on its broad wire fraud authority and the Commodity Exchange Act (CEA), which stated that virtual currencies like USDC are commodities subject to the CFTC's anti-fraud and anti-manipulation enforcement authority.
Governance is Entering the Spotlight
In 2018, William Hinman, then-Director of the Division of Corporate Finance at the SEC, made the famous statement that if the network on which a token or coin functions is sufficiently decentralized, it may not represent an investment contract and therefore may not be classified as a security. This was in response to the SEC's "DAO Report". Fast forward to 2023, and the landscape has changed with the emergence of governance tokens, which give token holders voting rights over blockchain projects. The SEC's recent allegations that MNGO is a security shows their skepticism of the concept of decentralization and their belief that Mango Markets is not a decentralized autonomous organization (DAO).
As Always: Be Careful What You Post
Eisenberg’s case serves as a cautionary tale about discussing crypto trading strategies on social media. Eisenberg was highly active on social media and announced on Twitter about his involvement in a highly profitable trading strategy that resulted in the insolvency of Mango Markets. He later gave an interview on a podcast where he discussed the settlement agreement with Mango Markets. The state is expected to use Eisenberg's public statements as evidence of his manipulative intent, which is a crucial element of the charges against him.
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What kind of lawyer would I be without a disclaimer?
Everything I post here constitutes my own thoughts, should only be used for informational purposes, and does not constitute legal advice or establish a client-attorney relationship (though I am happy to discuss if there is something I can help you with). I can be reached via email (dlopezkurtz@crokefairchild.com or david@bsl.group), telegram (@davidlopezkurtz), twitter (@lopezkurtz), and on LinkedIn here.
