NFA Fines CPO Over Misuse of Pool Funds

A commodity pool operator ("CPO") and its principal settled National Futures Association charges for (i) improperly using pool assets to benefit an affiliated company, (ii) commingling funds between separate pools, (iii) failing to provide necessary disclosures and (iv) failing to maintain accurate records.

Based on the allegations in the Complaint, the CPO loaned 134.27 Bitcoin (the equivalent of $2.5 million) from a Master Fund to a crypto lending company in two separate transactions to secure a line of credit for an affiliate owned by the principal. The NFA found that this action violated NFA Compliance Rule 2-45 ("Prohibition of Loans by Commodity Pools to CPOs and Affiliated Entities"), which prohibits CPOs from advancing pool assets to affiliated entities. 

The NFA found that over $2 million in cash and digital assets were improperly transferred between funds the CPO operated and that the commingled funds were then used to cover expenses and process redemptions unrelated to the Master Fund. As a result, the NFA found that the CPO violated NFA Compliance Rule 2-13 ("CPO/CTA Regulations"), which mandates the segregation of assets across different pools. 

The NFA also found that the CPO and its principal failed to disclose these issues to pool participants, and only disclosed the Bitcoin loan months after the transaction had taken place. The NFA found that the firm did not timely file required quarterly reports ("Form PQR") and delayed the submission of audited financial statements for its pools. As a result, NFA determined that the firm failed in its duty to disclose and failed to maintain accurate books and records for its pools during the relevant period, in violation of CFTC Regulation 4.23 ("Recordkeeping") and NFA Compliance Rule 2-46 ("CPO and CTA Quarterly Reporting Requirements").

To settle the charges, without admitting or denying the allegations in the Complaint, the CPO and its principal agreed to jointly and severally pay a $150,000 fine.