FTC Settles with Voyager, Banning Consumer Asset Handling
The Federal Trade Commission (FTC) has reached a settlement with the bankrupt cryptocurrency firm Voyager, instituting a permanent ban on the company from managing consumers’ assets. Additionally, the FTC is pursuing legal action against Voyager’s former CEO, Stephen Ehrlich, for allegedly misleading customers by claiming their accounts were insured by the Federal Deposit Insurance Corporation (FDIC) and deemed “safe” during a time when the company was nearing bankruptcy. The lawsuit also identifies Ehrlich’s spouse, Francine Ehrlich, as a relief defendant.
FTC Complaint Allegations
The FTC’s federal court complaint asserts that from at least 2018 until its bankruptcy declaration in July 2022, Voyager lured consumers to invest by promising the security of their deposits. Following the company’s collapse, many consumers found themselves locked out of significant savings, which included salary deposits, college tuition funds, and home down payments. The complaint indicates that individuals were unable to access their accounts for over a month, resulting in losses exceeding $1 billion in cryptocurrency assets.
FTC’s Warning to Consumers
“In the past year, consumers have reported losses exceeding $1.4 billion due to cryptocurrency scams, and the FTC is committed to holding accountable those who mislead consumers regarding these high-risk investments,” stated Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. He emphasized that this action serves as a cautionary reminder to companies and individuals against making reckless claims regarding FDIC insurance.
Settlement Details and Future Proceedings
The proposed settlement with Voyager and its affiliates will impose a permanent ban on the companies from offering, marketing, or promoting any product or service related to the deposit, exchange, investment, or withdrawal of assets. Additionally, they have consented to a judgment of $1.65 billion, which will be suspended to allow Voyager to return its remaining assets to consumers through bankruptcy proceedings. Stephen Ehrlich has not accepted a settlement, and the FTC’s case against him will continue in federal court.
Deceptive Marketing Practices
According to the complaint, Voyager attracted consumers to deposit both cash and cryptocurrency by providing assurances of the safety of their assets. The company incentivized users to convert their cash into USD Coin, a “stablecoin” designed to maintain parity with the U.S. dollar. Voyager’s marketing included explicit promises regarding the security of consumer deposits, with one statement claiming, “YOUR USD IS FDIC INSURED.” However, Voyager does not operate as a bank or financial institution, and consequently, consumer deposits were not eligible for FDIC insurance. The complaint clarifies that the FDIC does not provide insurance for cryptocurrency assets, and consumers’ cash deposits were only safeguarded in the event of a failure of the traditional bank maintaining those funds.
Misleading Claims and Regulatory Responses
The complaint reveals that Voyager was aware of the misleading nature of its claims. In 2021, the bank where Voyager deposited consumer funds alerted the company that its marketing assertions were “potentially misleading.” A representative from the bank warned that a reasonable consumer might believe their USDC held with Voyager was FDIC-insured. Although Voyager amended its cardholder agreement, the company continued with misleading advertisements until it received a cease-and-desist letter from the FDIC.
CEO’s Reassurances Amid Financial Instability
In a letter to customers dated June 2022, Ehrlich attempted to reassure them about the company’s financial health, stating Voyager was “well-capitalized and positioned to weather the bear market,” and that their funds were “as safe with us as at a bank.” However, just two weeks later, Voyager froze consumer access to their accounts.
FTC’s Legal Allegations Against Voyager and Ehrlich
The FTC’s staff complaint accuses Voyager and Stephen Ehrlich of violating the FTC Act’s ban on deceptive practices as well as the Gramm-Leach-Bliley Act, which prohibits obtaining customer financial information through false statements. Furthermore, the complaint alleges that Ehrlich transferred millions of dollars to his wife, Francine, with funds traceable to these alleged unlawful activities.
Settlement Provisions and Legal Outcomes
Alongside the prohibition on Voyager and its affiliated companies from managing consumer assets, the proposed settlement also prohibits them from misrepresenting product benefits and from making fraudulent representations to customers in order to obtain their financial information. Additionally, it restricts the disclosure of consumers’ nonpublic personal information without their explicit consent. The Commission voted unanimously to file the complaint against Voyager, its affiliates, Stephen Ehrlich, and relief defendant Francine Ehrlich, subsequently approving a stipulated order with Voyager. This complaint was submitted to the U.S. District Court for the Southern District of New York.
Parallel Charges from the CFTC
In a separate but related action, the Commodity Futures Trading Commission (CFTC) has also charged Ehrlich with fraud and failure to register as required. It is important to note that the Commission may authorize the filing of a complaint when it believes that there has been a violation of the law and that the proceeding aligns with public interest. Stipulated orders carry the force of law once they are approved and signed by a judge in the District Court.
