At a Glance

• The U.S. District Court for the Northern District of Illinois recently granted the Commodity Futures Trading Commission (CFTC) summary judgment in its first enforcement action addressing fraudulent activities relating to voluntary carbon credits.
• This decision marks a pivotal moment for the CFTC’s Environmental Fraud Task Force, signaling the agency’s commitment to expanding its antifraud and antimanipulation oversight in carbon markets.
• Carbon market participants (particularly project developers, carbon registries/platforms, sellers, brokers and marketers) should take proactive steps to enhance their CFTC compliance programs to prepare for heightened regulatory scrutiny in the near term.
• The decision is also a signal to purchasers of carbon credits to “raise their diligence antennas” when dealing in the voluntary carbon markets.

The Commodity Futures Trading Commission (CFTC) has taken a significant step in its oversight of the voluntary carbon markets with a recent enforcement action against defendants who misappropriated funds through a carbon credit program. In the case of CFTC v. Ikkurty, the U.S. District Court for the Northern District of Illinois granted summary judgment after finding that the defendants violated the Commodity Exchange Act (CEA) by engaging in fraudulent conduct through a voluntary carbon credit program and crypto-related investment scheme. The court ordered more than $83 million in restitution and nearly $37 million in disgorgement. This case marks the first major action by the CFTC’s Environmental Fraud Task Force — which was established in 2023 to combat fraud in environmental markets, including voluntary carbon credits and related derivatives — and underscores the CFTC’s growing focus on policing and regulating carbon markets.

Unpacking the CFTC’s Enforcement Action

Defendant Sam Ikkurty, who operated several companies and “crypto hedge funds,” solicited investments by overstating returns and misleading investors about the financial health of the funds. Ikkurty invested clients’ funds heavily in crypto assets like Bitcoin, Ethereum, OHM and Klima. In addition, Ikkurty used manipulated data to entice investors to buy the carbon offset bonds (COBs) and crypto savings notes (CSNs) that Ikkurty created, then misappropriated COB and CSN purchasers’ funds to distribute inflated returns to other fund participants. When the funds started losing value, Ikkurty offered misleading buyouts to participants, further perpetuating the fraud.

Here are the key aspects of the court’s summary judgment findings:

1. Ikkurty’s misrepresentations about the fund’s performance and misappropriation of investors’ funds through the carbon offset program violated the CEA’s antifraud provisions, which make it illegal for any person to intentionally or recklessly employ, or attempt to use or employ, any manipulative device, scheme or artifice to defraud in connection with a “contract of sale ... of any commodity in interstate commerce.” First, the court determined that cryptocurrencies fall within the CEA’s broad definition of a “commodity” and cited prior judicial precedent, which clarified that “the CEA only requires the existence of futures trading within a certain class … in order for all items within that class to be considered commodities.” The court then found that the CFTC presented sufficient evidence to establish that Ikkurty’s conduct qualified as fraud under the CEA.
2. Ikkurty also violated the CEA by acting as a commodity pool operator (CPO) without satisfying the CPO registration requirements, and for committing commodity pool operator fraud. Notably, despite not proving that Ikkurty actually traded commodity derivative contracts, the court upheld that soliciting funds for commodity trading was enough to trigger the CPO registration requirement.

Key Implications for the Carbon Market

This landmark enforcement action highlights the growing importance of compliance and veracity in environmental markets. The CFTC’s focus on carbon markets continues to intensify, with recent guidance proposed to enhance transparency and integrity in carbon credit derivatives. Looking ahead, we anticipate further CFTC enforcement actions targeting various types of carbon market fraud, such as double-counting, ghost credits and unsubstantiated environmental benefit claims. Carbon market participants should prioritize strengthening their CFTC compliance programs and risk assessment processes to mitigate the risk of becoming targets in future enforcement actions. This involves conducting thorough due diligence on carbon credit projects and purchases/sales, implementing robust verification processes for greenhouse gas reduction or removal projects, vetting environmental benefit claims, and ensuring that all marketing and sales practices comply with relevant regulatory standards.

Furthermore, entities seeking to procure voluntary carbon credits should increase their awareness and diligence processes to help mitigate risks associated with unscrupulous participants in the carbon markets. Entities that purchase impaired, double-counted, or otherwise impaired carbon credits may face a spectrum of regulatory exposure associated with impaired credits.