Prosecutors appeal acquittal of Mango Markets exploiter Avraham Eisenberg

Prosecutors have appealed the acquittal of Mango Markets exploiter Avraham Eisenberg, arguing a judge’s decision to overturn Eisenberg’s wire fraud conviction last year “would unsettle traditional understandings of fraud.”

If successful, prosecutors’ appeal will undo a rare courtroom victory for proponents of the theory that “code is law” — that any activity on blockchain-based software is permissible as long as it follows the logic set out in the underlying code.

Eisenberg currently serves a four-year sentence for possession of child sexual abuse material that was discovered when he was arrested in connection with the exploit of Mango Markets in 2022.

Although he pleaded guilty to possession of child sexual abuse material, Eisenberg fought charges of fraud and market manipulation — and lost.

Eisenberg maintained the $110 million heist in October 2022 was a “successful and legal trading strategy” that exploited a flaw in Mango Markets’ design.

But jurors sided with the prosecutors, who argued that Eisenberg’s actions amounted to old-fashioned fraud and market manipulation, even if they took place on a blockchain. In 2024, they found him guilty of commodities fraud, commodities market manipulation, and wire fraud.

In a remarkable twist last year, federal judge Arun Subramanian vacated Eisenberg’s conviction on the commodities charges and acquitted him of the wire fraud charge.

The judge said Eisenberg couldn’t have defrauded Mango, a self-executing DeFi protocol, because he had merely taken advantage of a flaw in its design, and the service lacked any terms that forbade his behaviour.

The exploit and the judge

Eisenberg exploited a flaw in Mango Markets’ design by trading with himself to inflate the value of the protocol’s token, MNGO.

Prosecutors say he was then able to use MNGO perpetuals as collateral to borrow crypto worth about $110 million from the protocol’s users with “no intention of repaying them.”

“There was no evidence at trial that Mango Markets required any user to promise that they would repay funds as a condition of borrowing against their assets, so this isn’t a case where ‘a contractual promise was made,’” the judge wrote.

Moreover, “there was no evidence that the ‘borrow’ function on Mango Markets entailed an obligation to repay — or any other obligation for that matter — even if that’s how the term is conventionally understood.”

That is, in part, because Mango Market had no terms of service, according to the judge.

“There was just the word ‘borrow.’ That word could have been ‘access collateral,’ ‘utilise assets,’ or anything else for that matter.”

The government argued that by hitting the “borrow” button, Eisenberg created the impression his collateral was valuable.

Subramanian dismissed that argument.

“As Eisenberg points out, the platform automatically measured the actual value of his collateral, so he didn’t represent anything untrue,” the judge wrote.

The appeal

Prosecutors say Subramanian “ignored critical evidence” and used an overly-narrow reading of the law to reach his conclusion.

“To begin, the plain meaning of the word ‘borrow’ itself conveys an intent to repay, typically with interest, prosecutors wrote in a document filed on December 22.

“And the proof at trial went far beyond the word ‘borrow.’ The Mango Markets user guide defined what borrowing entailed, including stating that borrowers must pay interest and ‘maintain a Health Ratio above 0%” until repaying the loan.’”

Subramanian conveniently ignored those requirements, according to prosecutors.

Moreover, no written loan agreement or formal negotiations — in other words, no contract — is needed to find that one party engaged in fraud, the prosecutors argue.

“Indeed, [Subramanian’s] stilted view of the facts in this case would unsettle traditional understandings of fraud,” they wrote.

“This Court routinely upholds convictions when defendants convince others to invest … even when those promises are not in contracts.”

Prosecutors said the judge’s decision was apparently influenced by the “unconventional context” of the alleged fraud having occurred on a self-executing, blockchain-based application.

But there was nothing unusual about Eisenberg’s alleged fraud, they argue.

“The algorithm was just computer code, which was not meaningfully different from software programmes that people use every day across all facets of the modern economy, such as automated computer programmes used by banks to approve loan applications, or traditional brokerage firms that use computer programs to approve transactions,” prosecutors wrote.

“And just like the programmes used by other entities, the Mango Markets algorithm was controlled by humans who could change or pause the platform — as they did in response to Eisenberg’s scheme.”

Aleks Gilbert is a DeFi Correspondent with DL News. Got a tip? Email him at aleks@dlnews.com.