Alleged Perpetrator of $100M Crypto Market Manipulation Scheme to Make His First Appearance in the Southern District of New York | USAO-SDNY

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Damian Williams, United States Attorney for the Southern District of New York, Kenneth A. Polite, Jr., Assistant Attorney General for the Justice Department’s Criminal Division, and Michael J. Driscoll, Deputy Field Director for New York Bureau of the Federal Bureau of Investigation (FBI), announced that AVRAHAM EISENBERG will make his first appearance in the Southern District of New York later today as part of an indictment accusing him of fraud on commodities, commodity market manipulation and wire fraud in connection with EISENBERG’s manipulation of the decentralized cryptocurrency exchange Mango Markets. As alleged in the indictment filed on January 9, 2023, EISENBERG engaged in a scheme to fraudulently obtain approximately $110 million worth of cryptocurrency from the Mango Markets cryptocurrency exchange and its clients. and achieved this goal by artificially manipulating the price of certain perpetual futures contracts. EISENBERG had previously been arrested on December 26, 2022 in San Juan, Puerto Rico, following a criminal complaint. EISENBERG will appear in Manhattan federal court today and will appear on the charges before U.S. Magistrate Judge Jennifer E. Willis. The case was assigned to U.S. District Judge Richard Berman.

US Attorney Damian Williams said: As alleged, Avraham Eisenberg manipulated cryptocurrency exchange Mango Markets to obtain over $100 million in illicit profits for himself. Thanks to his scheme, Eisenberg let the others hold the bag. Market manipulation is illegal in any form, and this office is committed to prosecuting such schemes wherever they occur, including in the cryptocurrency markets.

Assistant Attorney General Kenneth A. Polite, Jr. said, The exploitation of decentralized financial platforms is the new frontier of old-school financial crimes in which criminals misuse emerging technologies for their own personal gain. With this lawsuit, the Criminal Division sends the message that whatever mechanism is used to commit market manipulation and fraud, we will strive to hold those responsible to account.

FBI Deputy Director Michael J. Driscoll said: Defendant allegedly executed a scheme whereby he fraudulently acquired over $100 million worth of cryptocurrency. The FBI is dedicated to safeguarding the integrity of all financial markets and will ensure that anyone wishing to operate one is held accountable through the criminal justice system.

As alleged in the indictment and complaint:[1]

Context of mango markets

Mango Markets is a decentralized cryptocurrency exchange that allows investors to, among other things, buy and borrow cryptocurrencies and cryptocurrency-related financial products. Mango Markets is managed by the Decentralized Autonomous Organization Mango (the Mango DAO). The Mango DAO has its own crypto token called MNGO, which investors can buy and sell. MNGO token holders are allowed to vote on changes to the Mango Markets and on matters related to the governance of the Mango DAO.

Investors in Mango Markets can, among other things, buy and sell Perpetuals. When an investor buys or sells a Perpetual for a particular cryptocurrency, the investor is not buying or selling that cryptocurrency, but rather buying or selling exposure to future movements in the value of that cryptocurrency relative to to another cryptocurrency. An investor who buys a Perpetual based on the relative value of the stablecoin USDC and MNGO (an MNGO Perpetual, for short) at a price of 0.02 USDC/MNGO is long on MNGO, and the value of this position will increase if the value of MNGO exceeds 0.02 USDC/MNGO. Conversely, the investor who sold this Perpetual is short on MNGO, and the value of this position will increase if the value of MNGO declines against the USDC. Either party to a perpetual contract can settle the perpetual contract at any time and realize its gain or loss.

To determine the settlement price of perpetuals, Mango Markets uses an oracle, which is a computer program that calculates the relative value of two cryptocurrencies by looking at the exchange rate of those cryptocurrencies on various cryptocurrency exchanges (l ‘Oracle). When the Oracle price changes for a particular cryptocurrency pair, the settlement price of perpetuals based on that cryptocurrency pair also changes on Mango Markets. Each party to a Perpetual on Mango Markets also regularly makes or receives payments called funding payments. Funding payments are calculated based on the average bid and ask price for that Perpetual relative to the Oracle price for that Perpetual. Funding payments are designed to ensure that the purchase price of perpetuals stays close to settlement prices.

Investors can also conduct spot trades on Mango Markets. In a spot transaction, an investor exchanges one cryptocurrency for another, regardless of the prevailing exchange rate between those two cryptocurrencies at the time of the transaction.

Mango Markets also allows investors to use their deposits and positions as collateral to borrow and withdraw cryptocurrency from the Mango Markets exchange. To borrow through Mango Markets, an investor goes to the Mango Markets website and clicks on a button labeled borrow which allows the investor to borrow cryptocurrency. The investor can then withdraw the borrowed cryptocurrency by clicking on another button labeled withdraw. The borrowed cryptocurrency comes from cryptocurrency that other investors have deposited in Mango Markets accounts. The amount an investor in Mango Markets can withdraw is determined by a formula that looks at, among other things, the value of cryptocurrency deposited in the investor’s account, the value of investors’ positions in Mango Markets, and the amount of the cryptocurrency which the investor has already borrowed via Mango Markets. Mango Markets uses a formula to track the relationship between these assets and liabilities, which Mango Markets refers to as account health. If the health of a Mango Markets account falls below a certain threshold, investors’ positions in Mango Markets may be liquidated

EISENBERG’s market manipulation scheme

EISENBERG engaged in a scheme to steal approximately $110 million by artificially manipulating the price of MNGO Perpetuals in the mango markets. To achieve this goal, EISENBERG has taken several measures. First, EISENBERG used an account he controlled on Mango Markets to sell a large amount of MNGO Perpetuals and used a separate account on Mango Markets to buy those same MNGO Perpetuals. An account controlled by EISENBERG held a long position, the value of which would increase if the value of MNGO against USDC exceeded the threshold of 0.0382 USDC/MNGO (the MNGO perpetual long position). The second account controlled by EISENBERG held a short position, the value of which would increase if the value of MNGO against USDC fell below 0.0382 USDC/MNGO (the perpetual MNGO short position). EISENBERG owned both positions and self-sold the MNGO Perpetuals.

Second, EISENBERG made a series of large purchases of MNGO using the stablecoins USDC and USDT on several cryptocurrency exchanges with the aim of artificially increasing the price of MNGO against USDC and, therefore, the price of MNGO Perpetuals on Mango Markets. EISENBERG’s manipulative trades drove the price of MNGO Perpetuals on Mango Markets up by around 1300% in a period of around 20 minutes.

Finally, as the price of MNGO Perpetuals on Mango Markets increased due to EISENBERG’s manipulative purchase, the apparent value of the MNGO Perpetuals that EISENBERG purchased for himself also increased. Because Mango Markets allows investors to borrow and withdraw cryptocurrency based on the value of their assets on the platform, the artificial increase in value of the MNGO Perpetuals that EISENBERG had bought himself -even allowed him to borrow, and then withdraw, approximately $110 million of various cryptocurrencies from Mango Markets, which came from deposits of other investors in the Mango Markets exchange. EISENBERG withdrew almost all then available funds from Mango Markets. When Eisenberg borrowed and withdrew this cryptocurrency, he did not intend to repay the borrowed funds but rather to steal those funds.

After EISENBERG stopped buying MNGOs with USDC as part of its fraudulent scheme, the price of MNGO Perpetuals on Mango Markets which was no longer artificially supported by EISENBERG crashed.

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AVRAHAM EISENBERG, 27, of San Juan, Puerto Rico, is charged with one count of commodity fraud, which carries a maximum sentence of 10 years in prison; one count of manipulating goods, which carries a maximum sentence of 10 years in prison; and one count of wire fraud, which carries a maximum sentence of 20 years in prison.

The maximum legal penalties are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the accused will be determined by a judge.

Mr. Williams praised the FBI’s investigative work and also thanked the Department of Homeland Security’s Homeland Security Investigations and the Internal Revenue Service-Criminal Investigation for their assistance in the investigation. Mr. Williams also thanked the Commodity Futures Trading Commission and the Securities and Exchange Commission, both of which filed civil lawsuits against EISENBERG, for their cooperation and assistance in the investigation.

This case is being handled by Assistant U.S. Attorneys Thomas Burnett and Noah Solowiejczyk of the Securities and Commodities Fraud Task Force and Jessica Peck of the National Cryptocurrency Enforcement Team (NCET).

The NCET was created by the Criminal Division to combat the growing illicit use of cryptocurrencies and digital assets. Under the oversight of the Criminal Division, the NCET conducts and supports investigations of individuals and entities that enable the use of digital assets to commit and facilitate a variety of crimes, with a particular focus on virtual currency exchanges, blending and tumbling services, and infrastructure providers.

The allegations contained in the indictment and the complaint are only accusations and the accused is presumed innocent until proven guilty.

[1] As the introductory sentence indicates, the entire text of the Indictment and Complaint, and the description of the Indictment and Complaint set forth therein, constitute allegations only. , and each fact described should be treated as an allegation.

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