CLS Global case serves as a wake-up call for the cryptocurrency industry, making it imperative to learn from the experiences of traditional finance.

Written by: Aiying

Cryptocurrency company fined $428,000 for wash trading scheme exposed by FBI raid. CLS Global FZC LLC, a cryptocurrency market maker based in the UAE, claims to support new project token trading by providing liquidity. From August 23 to September 18, 2024, CLS Global was accused of market manipulation concerning the "NexFundAI" crypto asset, creating false trading volume through wash trading to entice investors. The SEC determined that "NexFundAI" is a security, and its actions violated the anti-fraud and market manipulation provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.

According to the SEC investigation, CLS Global used 30 wallets to conduct 740 wash trades, generating nearly $600,000 in false trading volume, accounting for 98% of the total trading volume during the same period. These trades were driven by algorithms and bots, aimed at creating a false appearance of market activity to attract retail investors. Ironically, this manipulation was profited from by CLS Global, hired by the promoters of "NexFundAI," while the project team and investors suffered losses.

1. Legal Actions and Judgments

On October 9, 2024, the SEC filed a civil lawsuit against CLS Global and its employee Andrey Zhorzhes (case number 1:24-cv-12590-AK). At the same time, the Massachusetts District Attorney's Office filed criminal charges against the two, accusing them of market manipulation and wire fraud. This action is part of the FBI's "sting" operation aimed at combating chaos in the cryptocurrency market.

On April 7, 2025, a final judgment was reached in the civil case, requiring CLS Global to:

• Pay fines: $425,000 civil penalty, $3,000 in illegal gains, and $80.39 in pre-judgment interest;

• Behavioral restrictions: Ensure that clients are non-U.S. individuals or entities within 30 days, implement compliance policies within 45 days, and submit annual compliance reports for the next three years;

• Fine offset: If fines are paid in the criminal case, they can be offset against the civil penalty.

The civil penalties for Andrey Zhorzhes have not been clarified and may still be handled in the criminal proceedings, adding uncertainty to the case. The CLS Global case is one of the SEC's landmark enforcement actions against cryptocurrency market manipulation in recent years.

2. Market Maker Malpractices: From Loan Option Models to Wash Trading

CLS Global's wash trading is just the tip of the iceberg of predatory behavior by cryptocurrency market makers. The "Loan Option Model" malpractices analyzed in a previous article by Aiying share similarities with this case, both exploiting the weaknesses of market opacity and inexperienced project teams.

Predatory Operations of the Loan Option Model

In the cryptocurrency market, market makers provide liquidity for new projects through the "Loan Option Model." Project teams lend tokens to market makers, who trade on exchanges to stabilize prices, with contracts typically including option clauses allowing market makers to return or purchase tokens at a specific price in the future. However, some unscrupulous market makers abuse this model:

• Dumping for profit: Massively selling borrowed tokens to drive down prices, triggering panic selling among retail investors, then buying back at low prices to return, profiting from the difference;

• Option manipulation: Using option clauses to return tokens at price lows, maximizing their own profits;

• Information asymmetry: Project teams lack understanding of contract risks, signing opaque agreements, becoming "prey" for market makers.

These behaviors can be devastating for small projects: token prices plummet, community trust collapses, and exchanges may delist them due to insufficient trading volume, putting project financing and survival in jeopardy.

CLS Global's Wash Trading

CLS Global's wash trading bears similarities to the predatory behaviors of the Loan Option Model, both fundamentally relying on the market maker's role to create a false market appearance:

• False trading volume: Through self-buying and selling, CLS Global made "NexFundAI" appear to be actively traded, attracting retail investors;

• Trust destruction: After the false prosperity collapses, investors suffer losses, and the project's reputation is damaged;

• Regulatory loopholes: Wash trading exploits the lack of real-time monitoring and transparency in the cryptocurrency market, akin to the opaque contracts of the Loan Option Model.

Additionally, other market maker tricks mentioned in the text, such as "invisible knife" contracts, liquidity "kidnapping," and false "all-in-one" services, are also prevalent in the industry. These behaviors collectively lead to the evaporation of small project market values, community dissolution, and severely erode industry trust.

3. Lessons from Traditional Finance: The "Textbook" for the Cryptocurrency Market

Traditional financial markets have also faced similar market manipulation issues, but through mature regulatory and transparency mechanisms, the harms of predatory behavior have been significantly reduced. The CLS Global case serves as a wake-up call for the cryptocurrency industry, making it essential to learn from the experiences of traditional finance.

Responses from Traditional Finance

• Strict regulation: The SEC's Rule SHO restricts naked short selling, requiring assurance of stock availability before shorting; the "up-tick rule" prevents malicious price suppression. Section 10b-5 of the Securities Exchange Act imposes severe penalties for market manipulation, and the EU's Market Abuse Regulation (MAR) has similar effects.

• Information transparency: Agreements between listed companies and market makers must be reported to regulatory agencies, trading data is publicly accessible, and large transactions must be reported, reducing the space for opaque operations.

• Real-time monitoring: Exchanges monitor abnormal fluctuations through algorithms, triggering investigations; circuit breakers pause trading during severe price volatility to prevent panic from spreading.

• Industry standards: The Financial Industry Regulatory Authority (FINRA) sets ethical standards for market makers, and designated market makers (DMM) on the NYSE must meet strict requirements.

• Investor protection: Class action lawsuits and the Securities Investor Protection Corporation (SIPC) provide channels for accountability and compensation for investors.

These measures create a multi-layered safety net, effectively constraining the behaviors of market makers in traditional markets. For example, during the 2008 financial crisis, malicious short selling of bank stocks was quickly investigated by the SEC, resulting in fines for several institutions and improvements in regulation.

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