Gemini slams CFTC’s ‘toxic’ culture, fraudulent whistleblower evidence in new complaint

Gemini, the U.S.-based exchange looking to go public, has filed a complaint against the Commodity Futures Trading Commission, arguing the agency unfairly targeted the crypto exchange in a seven-year legal imbroglio that did nothing to protect consumers and wasted taxpayer resources.In a letter to the CFTC Inspector General, Gemini's lawyer Jack Baughman, managing partner at Baughman Kroup Bosse, outlines how the CFTC's division of enforcement built a case around fraudulent whistleblower evidence to accuse the firm of "omitting material information" when Gemini entered into the Bitcoin futures business in 2017.This winding, multi-year legal dispute, Gemini now charges, subjected the company to an "abusive investigation and lawfare," where CFTC staff "abused special governmental privileges" and unconstitutionally hindered Gemini's ability to defend itself.Earlier this year, Gemini agreed to pay a $5 million civil monetary fine to settle the dispute without accepting fault — a situation the exchange argues demonstrates the broken system it is hoping to expose in its complaint."There is something deeply wrong with the DOE and its culture when it not only condones but encourages its staff to engage in lawfare and treat any market participant the way they have treated Gemini Trust," the exchange’s legal team writes in its letter on Wednesday.The move comes amid a period of regulatory change for the crypto industry, including President Donald Trump's pledge to reform the financial watchdogs — including the CFTC — that are said to have previously "regulated through enforcement." Notably, Trump's nominee for new CFTC Chair, Brian Quintenz, said he would bring clarity to crypto classification and jurisdiction for market oversight at a time when the agency is losing commissioners.The dispute's beginningsTo cut an internecine legal dispute short, in 2017, former Gemini Chief Operating Officer Benjamin Small submitted a whistleblower complaint against the exchange, alleging it had made material misrepresentations of Gemini Auction’s susceptibility to manipulation when handling Bitcoin futures contracts issued by CBOE.Small's claims — later determined to be false — stem from an event that summer when two Gemini customers coordinated trading and abused a special fee structure to defraud the exchange of $7.45 million worth of Bitcoin and cash.As it turns out, however, Small had been aware of the rebate scheme and allegedly took steps to hide the mounting losses from his employer. When Gemini co-founders Cameron and Tyler Winklevoss discovered Small's alleged deception, he was fired for "gross negligence."Gemini now argues that Small, motivated by revenge, "embarked on a vindictive campaign to, in his own words, ‘destroy’ Gemini" by claiming the exchange lied to the CFTC’s Division of Market Oversight about its readiness to enter into the Bitcoin futures trade, at the time an emerging market."Mr. Small’s retaliatory reports had their intended effect," Baughman wrote. "The DOE Staff immediately and unquestioningly embraced Mr. Small’s false claims and, in early 2018, initiated an investigation into Gemini Trust."After years of investigation, which Gemini says turned up no signs of wrongdoing, the CFTC filed a complaint against the exchange — a case that was ultimately ended in a "no-admit/no-deny settlement." Now, Gemini is seeking justice.Wrong in the endCore to Gemini’s argument is that between the time CFTC’s investigation began in 2018 and when it filed its complaint in 2022, new details had emerged that should have absolved the exchange of wrongdoing.First, Small was repeatedly shown to be a credulous witness — putting aside his potential conflict of interest after having been fired. In 2022, a JAMS arbitrator rendered a $5 million judgment against Small in favor of Gemini, supporting the idea that he was rightfully terminated. In a "scathing" decision, the arbitrator accused Small of lying repeatedly, not only in his whistleblower testimony, but also when seeking employment at Gemini.The arbitrator's position arguably butressed an earlier ruling from the U.S. Attorney’s Office for the Southern District of New York, which was pursuing a parallel investigation of Gemini based on Small's claims and decided not to bring charges.Second, and perhaps more tellingly, Gemini’s Bitcoin futures product "operated orderly" for 19 months until a third investigation by the U.S. Securities and Exchange Commission prompted Cboe to pull its end of the product. "There were no issues with the contract, no harm to any market participant, no loss of any money, no allegation of contract manipulation, and no victim the DOE Staff could identify during the lifetime of the contract," Gemini's lawyer claimed. Broken culture?Despite settling with the CFTC, Gemini is now arguing that the entire legal embroglio paints a picture of the agency’s "toxic" culture, where staff are encouraged to go after “high-profile” targets.“The DOE Staff was not motivated by a principled application of the law or desire to protect the commodities markets. Rather, these lawyers were driven by a selfish desire to advance their careers by misusing their offices,” Baughman wrote. As Baughman outlines in his letter, some of the criticisms even come from inside the house — namely, from Acting Chairman Pham, who has publicly stated the agency needs reform. He draws repeatedly from Pham’s 2024 statement, "The CFTC Needs to Get Serious: A Strategic Plan for Reform," to describe how the CFTC’s regulation through enforcement "precisely describes Gemini Trust’s experience."Not only did the CFTC’s action harm Gemini’s operations, Baughman argues, but the agency also put clients at risk. Namely, the CFTC never litigated against the rebate fraudsters who kicked off this whole dispute and has wasted years pursuing litigation against crypto startups rather than bad actors."The economic damage the DOE has caused, the innovation it has destroyed, and the American taxpayer money it has incinerated is significant. That the CFTC knew this for years but did little to stop, rein in, or reform this wayward division is deeply disappointing," Baughman writes.In the end, Baughman writes, Pham may be taking proactive steps to fix the DOE, "but this transformation will require serious introspection and long-term commitment from the agency as a whole to ensure that this bad-faith behavior never happens again." Though perhaps change is already underway, with former Commissioner Summer Mersinger saying that crypto perpetual futures could soon begin trading in the United States in one of her final public statements.Disclaimer: The Block is an independent media outlet that delivers news, research, and data. As of November 2023, Foresight Ventures is a majority investor of The Block. Foresight Ventures invests in other companies in the crypto space. Crypto exchange Bitget is an anchor LP for Foresight Ventures. 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