The CLS Global Manipulation Case and the Regulatory Implications of Predatory Market Makers’ Behavior

Source: AiYing Compliance

CLS Global FZC LLC is a cryptocurrency market maker headquartered in the UAE, claiming to support new project token transactions by providing liquidity. From August 23 to September 18, 2024,CLS Global was accused of market manipulation of "NexFundAI" crypto assets, creating false trading volume through wash trading, and inducing investors to buy. The SEC determined that "NexFundAI" was a security and that 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 Globalused 30 wallets to conduct 740 wash trades, creating nearly $600,000 in fake trading volume, accounting for 98% of the total trading volume during the same period. These transactions are driven by algorithms and robots, aiming to create the illusion of market activity and attract retail investors. Even more ironic is that this manipulation was a "market service" hired by the promoters of "NexFundAI", from which CLS Global profited, while the project parties and investors suffered losses.

I. Legal Actions and Judgments

On October 9, 2024, the SEC filed a civil lawsuit against CLS Global and its employee Andrey Zhorzhes (Case No. 1:24-cv-12590-AK). Meanwhile, the Massachusetts District Attorney’s Office filed a criminal complaint against the two, alleging market manipulation and wire fraud. The action was part of the FBI’s “sting operation” to combat crypto market chaos.

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

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

• Behavioral restrictions : ensure that customers are not US individuals or entities within 30 days, implement compliance policies within 45 days, and submit compliance reports every year for the next three years;

• Fine offset

  text="">：If a fine is paid in a criminal lawsuit, it can be deducted from the civil fine.

Andrey Zhorzhes' civil penalty has not yet been determined and may still be handled in the criminal lawsuit, adding to the uncertainty of the case. The CLS Global case is one of the SEC's landmark enforcement actions against crypto market manipulation in recent years.

2. Market maker chaos: from loan option models to wash trading

CLS Global's wash trading is just the tip of the iceberg of predatory behavior by crypto market makers.

• Predatory Operations of the Loan Option Model

In the crypto market, market makers provide liquidity for new projects through the "loan option model". The project lends tokens to market makers, who buy and sell on exchanges to stabilize prices. The contracts usually contain option clauses that allow market makers to return or purchase tokens at a specific price in the future. However, some bad market makers abuse this model:

• Dumping for profit: Selling a large number of borrowed tokens to lower the price, triggering panic selling by retail investors, and then buying them back at a low price to earn the difference;

• Option manipulation

• : Taking advantage of option clauses, returning tokens at the bottom of the price and maximizing their own profits;

• Information asymmetry

: Project parties lack understanding of contract risks, sign opaque agreements, and become the “prey” of market makers.

These actions are devastating to small projects: token prices plummet, community trust collapses, exchanges may delist them due to insufficient trading volume, and project financing and survival are in trouble.

• CLS Global’s wash trading

CLS Global’s wash trading is similar to the predatory behavior of the loan option model. The core of both is to use the role of market makers to create market illusions:

• False trading volume

  : By buying and selling by itself, CLS Global made “NexFundAI” appear to be actively trading and attracted retail investors to enter the market;

• Trust destruction

: After the collapse of the false prosperity, investors suffered losses and the reputation of the project was damaged;

In addition, other market maker routines mentioned in the article, such as "invisible knife" contracts, liquidity "kidnapping", and false "family bucket" services, are also common in the industry. These behaviors have jointly led to the evaporation of the market value of small projects, the dissolution of the community, and seriously eroded the trust of the industry.

3. The experience of traditional finance: the "textbook" of the crypto market

The traditional financial market has also faced similar market manipulation problems, but through mature supervision and transparent mechanisms, the harm of predatory behavior has been significantly reduced. The CLS Global case has sounded the alarm for the crypto industry, and it is imperative to learn from the experience of traditional finance.

• The response of traditional finance

1. Strict supervision: The US SEC's "Rule SHO" restricts naked short selling and requires that stocks be borrowed before short selling; the "upward price rule" prevents malicious price suppression. Section 10b-5 of the Securities Exchange Act severely punishes market manipulation, and the EU's Market Abuse Regulation (MAR) has a similar effect.

2. Information transparency: Listed companies must report their agreements with market makers to regulators, trading data is publicly available, and large transactions must be reported to reduce the space for opaque operations.

3. Real-time monitoring: Exchanges monitor abnormal fluctuations through algorithms and trigger investigations; the circuit breaker mechanism suspends trading when prices fluctuate violently to prevent panic from spreading.

4. Industry regulations: The U.S. Financial Industry Regulatory Authority (FINRA) sets ethical standards for market makers, and the NYSE's designated market makers (DMMs) must meet strict requirements.

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

These measures form a multi-layered protection network, which effectively constrains the behavior 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, and many institutions were fined and improved their supervision.

Information source: https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26287