'The Commodity Futures Trading Commission appears to have revived a version of Major League Baseball’s “neighborhood play,” as evidenced by its allegations in a recently filed enforcement action, CFTC v. Stephen Ehrlich. There, the CFTC claimed that Voyager Digital Ltd. and certain of its affiliates (collectively, “Voyager”), defunct crypto asset entities, should have been registered as a commodity pool operator (and were not) when they lent customers’ crypto assets to unrelated borrowers that engaged in commodity interest transactions (e.g., futures or swaps). In the complaint, there was no allegation that Voyager itself directly engaged in any such transactions or invested in any pooled investment vehicle that engaged in such transactions.

Prior to 2016, MLB tacitly authorized infielders who endeavored to initiate double plays not to physically touch the base where the lead runner was headed in order to cause the runner to be out. Instead, an infielder was allowed solely to be near the relevant base to achieve a force out before pivoting to throw the hitter out at first base. This was to avoid injury to the relevant infielder that might be caused by the lead runner sliding into him to try to break up the double play.

The “neighborhood play” was effectively disallowed by MLB following the 2015 season; instead, certain restrictions on runners sliding into infielders in a manner that might cause injury were enacted.

In the CFTC’s enforcement action against Mr. Ehrlich, a co-founder and former Chief Executive Officer of Voyager, the Commission alleged that Voyager pooled its customers’ crypto assets and “conveyed” them to various unrelated third parties as loans, including “Firm A,” to generate interest income. According to the CFTC, Voyager was aware that Firm A (as well as other borrowers) would further pool Voyager’s customers’ assets with other customers’ assets and generate interest income by engaging in commodity interest transactions. The CFTC said that “by choosing to structure its business in [this] manner, … Voyager operated a commodity pool and failed to register with the Commission as a CPO.” Claiming he directly or indirectly controlled Voyager, the CFTC charged Mr. Ehrlich for Voyager’s violation (Voyager itself was not charged in the CFTC’s Complaint).

Additionally, the CFTC alleged that Voyager failed to provide its customers pool disclosure documents and that Mr. Ehrlich failed to register as an associated person of Voyager while soliciting customers for Voyager. The CFTC also claimed that Voyager engaged in acts that constituted schemes or artifices to defraud, as well as made or attempted to make untrue or misleading statements to its customers. The CFTC likewise charged Mr. Ehrlich (but not Voyager) with these additional alleged violations.

Generally, applicable law requires all persons that operate a pooled investment vehicle that trades commodity interests register as a CPO unless otherwise exempt. Registered CPOs generally have multiple obligations, including providing disclosure documents to customers and making periodic reports to regulators.

The CFTC has traditionally held that pooled investment vehicles that invest in other investment vehicles that transact in commodity interests are commodity pools. However, this appears to be the first instance where the CFTC has alleged that a pooled investment vehicle that lends customer assets to another investment vehicle (even where it is unrelated) is also a commodity pool where the third party engages in commodity interest transactions. Apparently, the CFTC is now applying its version of the “neighborhood play,” claiming that lending of customers’ assets by Voyager to third parties that traded in commodity interests was close enough to investing to substantiate charging Mr. Ehrlich with acting as a CPO without registration.  

The CFTC’s legal theory in this case has already been questioned by one CFTC commissioner. According to Commissioner Caroline D. Pham in a Statement issued in conjunction with this matter,

…I caution that the CFTC’s interpretation of a commodity pool operator in this enforcement action would seem to include commonplace lending activity – like taking deposits and providing loans. Such an interpretation is an overreach beyond our statutory authority and would disrupt well-established legal and regulatory frameworks for lending and consumer finance. There is a significant difference between managing investor money for the purpose of trading derivatives and taking deposits and providing loans to others.

Without addressing the specific charges of the Complaint, another Commissioner – Kristin N. Johnson – bemoaned the purported lack of transparency in Voyager’s lending activities to third parties. According to Ms. Johnson in a separate Statement,

It is astounding that Voyager failed to exert pressure on the firms where it invested its customers’ assets. Instead of demanding that investment firms that received customer assets offer greater levels of transparency, Voyager shirked the long-established expectations for custodians and simply dispatched customer funds with little effort to preserve the same.”

Separately, on the same day that the CFTC filed its complaint against Mr. Ehrlich, the Federal Trade Commission entered into a settlement with Voyager that precludes it from ever handling customer assets, and also sued Mr. Ehrlich for publicly claiming that Voyager’s customer accounts were insured by the Federal Deposit Insurance Corporation, when they were not.