(April 9): A jailed trader accused of stealing US$110 million (RM522.56 million) on the Mango Markets exchange faces a criminal trial this week that will test the reach of a US crackdown on cryptocurrencies.

Prosecutors charged Avraham Eisenberg with manipulating Mango Markets futures contracts on Oct 11, 2022, to boost the price of swaps by 1,300% in 20 minutes. He then “borrowed” from the exchange against the inflated value of those contracts, a move the government claims was a theft.

A jury was selected on Monday in the New York Federal Court, where groundbreaking crypto cases have played out. FTX co-founder Sam Bankman-Fried was sentenced there last month to 25 years in prison for orchestrating a multibillion-dollar scheme, while Terraform Labs Pte Ltd and co-founder Do Kwon were found liable last Friday for fraud in civil trial over the firm’s 2022 collapse, which wiped out US$40 billion in investor assets.

Eisenberg’s jury includes a Millennium Partners employee who formerly worked at Goldman Sachs, a chief investment officer of a family office, a Broadway performer and choreographer, and a line producer for films and television.

Eisenberg, a self-described “applied game theorist”, claims his actions weren’t theft at all. Rather, he says, he legally exploited a weakness in the decentralised finance (DeFi) application. The trial will apparently be the first time a US criminal jury will weigh what type of “DeFi” transactions are legal.

In the crypto world, where digital blockchains govern who owns what, the virtual ecosystem is built around the notion that “code is law”. It means that if something isn’t explicitly forbidden by terms of a crypto platform, then government can’t intercede. But prosecutors say those rules can’t protect traders against possible criminal charges for market manipulation or fraud.

“It touches on the big argument within crypto — is code law?” said Chris Janczewski, the head of global investigations at TRM Labs. “If the code allows somebody to do that, does the actual law? Obviously, the government took a different approach that code is not law. Just because there is an opportunity to exploit it does not mean that it’s legal.”

Eisenberg targeted Mango Markets, a decentralised autonomous organisation that lets people borrow, lend and trade cryptocurrencies and sets its own rules for participants. The theft alleged by prosecutors in this week’s trial is one of the largest in criminal cases involving a DAO.

Four days after his transactions on the exchange, Eisenberg posted on Twitter: “I was involved with a team that operated a highly profitable trading strategy last week.” He also said he believed “all of our actions were legal open market actions, using the protocol as designed.”

I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.
— Avraham Eisenberg (@avi_eisen) Oct 15, 2022

In a deal with the Mango DAO, Eisenberg agreed to return US$67 million of what he’d gotten from depositors in exchange for them agreeing to release him from legal claims and not pursuing his prosecution.

Eisenberg left Puerto Rico, where he was living, the day after his Mango trades and flew to Israel. When he returned to Puerto Rico on Dec 26, 2022, US agents arrested him. He’s been in jail ever since, as a judge ruled he poses a risk of fleeing before trial. He was indicted on charges of commodities fraud, commodities manipulation and wire fraud. He’s pleaded not guilty.

The US Securities and Exchange Commission and the Commodity Futures Trading Commission also sued Eisenberg, as did Mango Labs LLC, which claimed his deal with depositors was unenforceable and made under duress. All of those civil lawsuits are on hold pending the criminal trial before US district judge Arun Subramanian.

In screening potential jurors, Subramanian dismissed one woman who said she had “very negative views of crypto”. The judge has scheduled opening statements for Tuesday.

Jurors will have to digest a complex set of facts about crypto trading, market manipulation and decentralised finance protocol.

Anonymous accounts

Prosecutors allege Eisenberg deceptively used two anonymous accounts at Mango markets to buy and sell himself futures contracts. Those contracts were based on the relative value of Mango’s token, known as MNGO, and a stablecoin called USDC. The price of the futures sales was set by computer programmes, known as oracles, that looked at exchange rates on various crypto platforms.

On the afternoon of Oct 11, 2022, Eisenberg funded each of his anonymous accounts with US$5 million in USDC, prosecutors allege. He used one account to sell MNGO futures contracts, and another to buy them. He then bought a large number of MNGO tokens, which boosted their value relative to USDC, sending the futures contracts up by 1,300%.

Eisenberg then exploited a feature of the exchange that allowed participants to “borrow” against their holdings, withdrawing US$110 million in cryptocurrencies from Mango Markets, but he had “no intention of repaying them”, the US charges. The price of MNGO futures contracts immediately collapsed.

An attorney for Eisenberg and a spokesman for federal prosecutors in the Southern District of New York declined to comment.

Eisenberg, who grew up in Suffern, New York, had a bail hearing in Puerto Rico in December 2022. The lawyer said Eisenberg was a “very bright” crypto trader who was a math major at Yeshiva University.

“He specialises in game theory and these cryptocurrency markets are a lot about that,” said his attorney at the time, Manuel San Juan Demartino. Eisenberg, who lived in Puerto Rico, flew to Israel the day after the alleged theft, a prosecutor said. Eisenberg, a US citizen, also got Israeli citizenship before returning to Puerto Rico, the prosecutor said.

The criminal case is US versus Eisenberg, 23-cr-00010, US District Court, Southern District of New York (Manhattan).