Crypto Trader Eisenberg’s $110M Fraud Trial to Put DeFi Under Microscope

For two weeks is what’s predicted for the duration of the trial. During this time, it will be decided if Eisenberg violated any laws when he implemented a profitable trading strategy in October 2022. This strategy reportedly caused significant damage to Mango Markets, which was previously renowned as a go-to platform for cryptocurrency betting on the Solana blockchain.

The trial signifies a progression in the government’s efforts to regulate suspected offenses in the decentralized finance (DeFi) realm, which operates under the belief that “code governs.” In contrast to traditional financial platforms like Coinbase, Mango Markets functions without strict supervision. Transactions, loans, and borrowings occur through smart contracts instead.

Eisenberg is alleged to have broken the law by influencing the price of Mango Markets’ futures contracts through manipulation of the MNGO token. Subsequently, he was able to borrow almost all of Mango’s deposits using his position. As a result, he gained approximately $110 million in cryptocurrencies that belonged to other users on the platform. Later, he gave back some of this ill-gotten gain, but only under the condition that Mango’s investors would not pursue legal action against him.

That promise was not kept.

Negotiation or extortion?

At the trial on Monday, it was hinted that Mango’s founder, Dafydd Durairaj, would provide significant testimony. According to prosecutors, Durairaj sought the advice of a ransomware negotiator following Eisenberg’s transaction. They believed this detail would help the jury perceive the negotiations as more than just an ordinary business deal between two parties, but rather a delicate situation that could potentially escalate at any moment.

In their argument, Judge Arun Subramanian supported Eisenberg’s lawyers to some extent and instructed the prosecution not to introduce the ransomware negotiator as it might bias the jury. However, if the defense team brought up the negotiations as being “at arm’s length,” the prosecutors could then present their evidence related to this point.

The parties had disagreements regarding the meaning and application of the term “manipulation.” This term was at issue in relation to witnesses testifying and the language used in terms-of-service agreements for online platforms. Additionally, there were conflicts concerning the interpretation of the word “obliged” as applied to traders on Mango Markets. Was this a legal obligation or simply a description of the results from carrying out a transaction through a smart contract?

Disagreements about technical details in the context of crypto misconduct prefigure the intricacies that will emerge during a trial, revealing the challenge for the government in portraying complicated crypto offenses as straightforward instances of deception. The federal authorities employed this approach in last year’s prosecution of Sam Bankman-Fried and in the recent civil fraud case against Terraform Labs and Do Kwon.

Eisenberg’s case raises significant philosophical and practical dilemmas concerning trading cryptocurrencies on decentralized blockchains. He stands as the first federal criminal defendant charged with violating US laws in a realm that previously considered itself untouchable by regulatory authorities.

Inside the courtroom

The potential jurors expressed their displeasure at having to spend Eclipse Day on the fifteenth floor of a federal courtroom instead of at a science museum for the once-in-a-generation event. One juror mentioned she had planned to watch it there, not in a jury box. At one point, the judge suggested turning off the lights during the eclipse’s peak, but he didn’t follow through with it.

A number of individuals were prepared with eclipse glasses, and they had the opportunity to use them for a brief period while the judge and attorneys discussed jury selection issues. Onlookers including prospective jurors, reporters, and even the U.S. Marshal took turns looking out the windows to catch a glimpse of the partially obscured sun.

“You can see it again in 20 years,” the Judge later told the courtroom.