A New York federal judge has given the nod to a settlement that holds Voyager Digital and its former CEO, Stephen Ehrlich, accountable for misleading investors about the safety of their funds.
This settlement comes after the U.S. Federal Trade Commission (FTC) reached an agreement with the bankrupt cryptocurrency lender in October, permanently barring it from managing consumer assets.
The FTC is taking legal action against Ehrlich for misrepresenting that customer accounts were insured by the Federal Deposit Insurance Corporation (FDIC), a claim that proved to be false as the FDIC does not insure cryptocurrency assets. This misrepresentation happened while Voyager was on the brink of bankruptcy, which it eventually filed for in July 2022, partly due to the collapse of Three Arrows Capital (3AC) that owed Voyager a substantial sum.
As part of the settlement, Voyager is subject to a $1.65 billion fine, which will be suspended to allow the company to reimburse customers. The Commodity Futures Trading Commission (CFTC) is also pursuing Ehrlich on charges of fraud and registration failures.
The FTC’s complaint detailed that Voyager falsely advertised U.S. dollar deposits as FDIC-insured and assured customers that their funds were securely held. This led to customers losing access to an estimated $1 billion in cryptocurrency when Voyager declared bankruptcy.
Under the settlement, Voyager is banned from providing and marketing various consumer financial products and services. The settlement’s amount of $1.65 billion will be paid after the company compensates the creditors in its bankruptcy proceedings.
The FTC’s charges extend to Ehrlich and his wife, Francine Ehrlich, with the latter named as a relief defendant. Ehrlich has not agreed to the settlement, and thus, the case against him will continue in court.
A complaint was filed against Ehrlich in the U.S. District Court for the Southern District of New York. The Tennessee resident stands accused of fraud and failing to register the operations of Voyager’s crypto brokerage and lending business. Furthermore, he and Voyager are alleged to have misrepresented the platform as a “safe haven” offering high-yield returns, enticing customers to buy and store digital assets.
Ehrlich and Voyager touted Voyager as a “safe haven” for customers’ digital assets in a volatile market environment, promising high-yield returns. However, to generate income for these returns, Voyager loaned billions of dollars’ worth of customers’ assets to high-risk third parties with minimal due diligence. Customers often stored over $2 billion worth of digital asset commodities on the Voyager platform, but it filed for bankruptcy in July 2022, owing customers in the U.S. over $1.7 billion.
One such concerning transaction was when over $650 million of customer assets were transferred to Sam Bankman-Fried’s Alameda Research. Voyager’s association with the failed hedge fund was made on the promise that the latter would generate returns by pooling Voyager’s investments. Such actions led to Voyager effectively acting as a commodity pool operator (CPO) without the requisite CFTC registration, while Ehrlich himself evaded registration as an associated person of a CPO.
