Crypto market chaos: CLS Global manipulation case and market makers’ predatory behavior regulatory implications

CLS Global FZC LLC is a UAE-based cryptocurrency market maker that claims to support new project token trading by providing liquidity. From August 23 to September 18, 2024, CLS Global was accused of implementing market manipulation against "NexFundAI" crypto assets, creating false trading volume through wash trading, and inducing investors to buy. The SEC determines "NexFundAI" as a securities, and its behavior violates the anti-fraud and market manipulation provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.

According to the SEC survey, CLS Global used 30 wallets to conduct 740 wash transactions, creating nearly $600,000 fake transaction volume, accounting for 98% of the total transaction volume in the same period. These transactions are powered by algorithms and robots, aiming to create the illusion of market activity and attract retail investors to enter the market. Even more ironic, this manipulation was a "market service" hired by the promoters of "NexFundAI", from which CLS Global made profits, while the project parties 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). Meanwhile, the Massachusetts District Attorney’s Office filed a criminal lawsuit against the two, accusing market manipulation and wire transfer fraud. The operation is part of the FBI's "fishing" campaign, aiming to combat chaos in the crypto market.

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

• Payment of fines: $425,000 civil fines, $3,000 illegal income and $80.39 pre-judgment interest;
• Conduct 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;
• Fines offset: If a fine is paid in a criminal lawsuit, a civil fine can be deducted.

Andrey Zhorzhes' civil penalties are not yet clear and may still be handled in criminal proceedings, increasing 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 model to market washing

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CLS Global's wash trading is just the tip of the iceberg of predatory behavior by market makers in crypto markets. The chaos of "Lending Options Model" analyzed by Aiying's article is similar to this case, and both take advantage of the market opacity and the weaknesses of project parties' lack of experience.

Predatory Operations of Loan Options Models

In the crypto market, market makers provide liquidity for new projects through the “loan option model”. The project party lends to the token to the market maker, who buys and sells on the exchange to stabilize the price, and the contract usually contains option terms, allowing the market maker to return or purchase the token at a specific price in the future. However, some bad market makers abuse this model:

• Smash the market for profit: sell large amounts of borrowed tokens to lower the price, triggering panic selling of retail investors, and then buy and return at a low price to earn the difference;
• Option manipulation: use option terms to return tokens at price troughs to maximize their own profits;
• Information asymmetry: The project party lacks understanding of contract risks, signs opaque agreements, and becomes the "prey" of market makers.

These actions are devastating to small projects: token prices plummeted, community trust collapsed, exchanges could remove them due to insufficient trading volume, and project financing and survival were in trouble.

CLS Global 's Wash Trading

CLS Global's wash trading has similarities with the predatory behavior of the loan option model, and the core lies in using the role of market makers to create market illusions:

• False trading volume: By buying and selling by yourself, CLS Global makes "NexFundAI" seem to be active in trading, attracting retail investors to enter;
• Trust damage: After the false boom collapses, investors suffer losses and project reputation damage;
• Regulatory loopholes: Wash trading exploits the weakness of the crypto market's lack of real-time monitoring and transparency, which is exactly the same as the opaque contracts in the loan option model.

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

3. Experience in traditional finance: "textbook" for crypto markets

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

The way to deal with traditional finance

Strict regulation: The US SEC's "Rules SHO" restricts naked short selling and requires ensuring that stocks can be borrowed before selling; the "upper price rules" prevent malicious price reduction. Article 10b-5 of the Securities Exchange Act severely punishes market manipulation, and the EU's Market Abuse Regulations (MAR) also has similar effects.

Information transparency: The agreement between listed companies and market makers must be reported to the regulatory authorities, transaction data can be publicly verified, and large-scale transactions must be reported to reduce opaque operation space.

Real-time monitoring: The exchange uses algorithms to monitor abnormal fluctuations and triggers investigations; the circuit breaker mechanism pauses trading when prices fluctuate violently to prevent panic from spreading.

Industry norms: The US Financial Industry Regulatory Authority (FINRA) sets ethical standards for market makers, and the designated market makers (DMMs) on the New York Stock Exchange must meet strict requirements.

Investor Protection: Class Action and Securities Investor Protection Corporation (SIPC) provides investors with channels for accountability and compensation.

These measures form a multi-level protection network, effectively restricting the market maker behavior in traditional markets. For example, during the 2008 financial crisis, the malicious short selling of bank stocks was quickly investigated by the SEC, and several institutions were fined and improved supervision.