On 3 September, 2024, the Commodity Futures Trading Commission (CFTC) announced the penalty imposed by Judge Mary Rowland of the United States District Court for the Northern District of Illinois in the case of Commodity Futures Trading Commission v. Jafia LLC, Sam Ikkurty (a/k/a Sreenivas I. Rao), and Ravishankar Avadhanam. The final judgment was delivered on 22 July 2024 in the above mentioned matter related to a Ponzi scheme disguised as crypto and carbon investment funds. The court imposed permanent injunction on the defendants from engaging in any commodity interests or digital asset transactions, and imposed financial penalties, including a restitution obligation of $83,757,249, disgorgement of $36,967,285, and a civil monetary penalty of $110,901,855, for violations of the Commodity Exchange Act (CEA).
The case was lodged by CFTC against the defendants for operating fraudulent investment schemes involving commodities and digital assets. The defendants, Sam Ikkurty, Jafia LLC, and Ravishankar Avadhanam, along with their associated entities, were accused of soliciting funds from investors under the premise of investing in commodity interests and digital assets through investment vehicles such as Rose City Income Fund I, Rose City Income Fund II LP, and Seneca Ventures, LLC. Instead of utilizing these funds for their stated purpose, the defendants were found to have misappropriated the investments for personal expenses, including salaries and loans.
The primary issue in this case was the fraudulent solicitation of investments by the defendants. They promised investors high returns through investments in commodity interests and digital assets. However, instead of using the funds for legitimate trading, as claimed, the defendants misappropriated the money for personal use. This violated Section 6o(1)(A)-(B) of the CEA, which prohibits making false statements or engaging in deceptive practices in connection with the offer and sale of commodity interests. Investors were led to believe their funds were secure and being invested properly, but the reality was that they were diverted for improper purposes.
Another issue was the defendants’ failure to register with the CFTC. Under Section 6m(1) of the CEA, commodity trading advisors and commodity pool operators are required to register with the CFTC to ensure they are subject to regulatory oversight. The defendants’ failure to register allowed them to operate outside of these regulations, reducing transparency and accountability in their operations. Without proper registration, investors were denied the protections that come from dealing with regulated entities.
The case also raised concerns about the defendants’ use of manipulative and deceptive devices, in violation of Section 9(1) of the CEA. The court found that the defendants engaged in a pattern of misrepresentation and deceit, making false claims about the nature of their investments. Instead of using the funds for the promised commodity interests or digital assets, they either misused the money for personal gain or failed to make the investments altogether. The case also involved the unauthorized transfer of digital assets. Defendant Sam Ikkurty was found to have transferred assets from court-ordered receivership accounts, which violated previous orders from the court. This action not only breached the court’s directives but also violated CFTC Regulation 180.1(a), which prohibits the use of fraudulent schemes in connection with commodities or digital assets. This specific issue led to contempt of court charges and additional financial penalties for Ikkurty, underscoring the seriousness of the unauthorized asset transfers.
The court issued a permanent injunction against Sam Ikkurty, Jafia LLC, and Ravishankar Avadhanam, along with their affiliates, agents, and associates. This injunction prevents them from participating in any activities related to commodity interests or digital assets. This includes prohibition from trading, soliciting funds, or controlling any transactions related to these areas. They are also barred from applying for registration or claiming any exemptions with CFTC.
The court ordered the defendants to pay $83,757,249 in restitution, to compensate all investors who suffered financial losses due to the defendants’ fraudulent actions. The restitution payments will be managed by a court-appointed receiver, who will oversee the collection and distribution of these funds to the affected parties. The receiver will act under the supervision of the court to ensure fair and equitable disbursement to all eligible claimants.
The court further ordered the defendants to disgorge $36,967,285, for the profits they wrongfully gained from their fraudulent activities. This amount includes all salaries, fees, and revenues earned through their misconduct. The disgorgement amount is set to ensure that the defendants do not retain any financial benefit from their violations. Importantly, any payments made toward the restitution obligation will be credited against the disgorgement amount, preventing duplicate penalties.
In addition to restitution and disgorgement, the court imposed a civil monetary penalty of $110,901,855 as a punitive measure for their violations of the Commodity Exchange Act. The penalty is immediately due and payable to the CFTC.
The court took a strong stance against the unauthorized transfer of digital assets by Sam Ikkurty, which constituted a violation of previous court orders. As a result, Ikkurty was found in contempt of court and ordered to pay an additional fine of $13,817,000 corresponding to the value of the digital assets transferred out of the court-ordered receivership accounts. A daily fine of $254,000 was imposed on Ikkurty, increasing by $1,000 for each day he fails to comply with the court’s orders.
(Source: Judgment: https://www.cftc.gov/media/11181/enfikkurtyjafiarosecityincomefundsenecajudgment072224/download, CFTC: https://www.cftc.gov/PressRoom/PressReleases/8959-24)
