NEW YORK MERCANTILE EXCHANGE, INC., CHARGED IN CONNECTION WITH DISCLOSURE OF CUSTOMER TRADES CASE

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Charges CME Group’s New York Mercantile Exchange and Two Former Employees with Disclosing Material Nonpublic Information about Customer Trades

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed an enforcement action charging the New York Mercantile Exchange, Inc. (CME NYMEX), which is owned and operated by the CME Group, and two former CME NYMEX employees, William Byrnes and Christopher Curtin, with violating the Commodity Exchange Act and CFTC Regulations through the repeated disclosures of material nonpublic customer information over of period of two and one-half years to an outside commodity broker who was not authorized to receive the information.

The CFTC’s Complaint, filed on February 21, 2013, in the U.S. District Court for the Southern District of New York, alleges that Byrnes and Curtin worked on the CME ClearPort Facilitation Desk and were responsible for facilitating customer transactions reported for clearing through the CME ClearPort electronic system. The Complaint alleges that at least from in or about February 2008 to September 2010, Byrnes knowingly and willfully disclosed material nonpublic information about CME NYMEX trading and customers, including about trades cleared through CME ClearPort, to a commodity broker on at least 60 occasions. The Complaint further alleges that between May 2008 and March 2009, Curtin knowingly and willfully disclosed the same type of information to the same commodity broker on at least 16 additional occasions. The nonpublic customer information unlawfully disclosed by Byrnes and Curtin in conversations — often captured on tape — included details of recently executed trades, the identities of the parties to specific trades, the brokers involved in trades, the number of contracts traded, the prices paid, the structure of particular transactions, and the trading strategies of market participants, according to the Complaint.

The Complaint alleges that the CME NYMEX and the two former employees violated the Commodity Exchange Act and CFTC Regulations, which specifically prohibit the disclosures of this type of customer information.

The CFTC’s Complaint also alleges that in July 2009, a market participant complained to CME NYMEX that the participant believed nonpublic information about trades cleared through CME ClearPort had been disclosed by a CME NYMEX employee named "Billy." Although a CME NYMEX Managing Director who investigated the market participant’s complaint identified "Billy" to be William Byrnes, CME NYMEX did not then question Byrnes, and Byrnes’s illegal disclosures continued for over a year, until at least September 2010. Ultimately, CME NYMEX terminated Byrnes’s employment in December 2010 after yet another market participant complained to CME NYMEX about disclosures of nonpublic customer information. Curtin had previously left CME NYMEX voluntarily.

In its continuing litigation, the CFTC seeks civil monetary penalties, trading and registration bans, and a permanent injunction prohibiting further violations of the federal commodities laws, as charged.

CFTC Division of Enforcement staff responsible for this case include Patrick Daly, James Wheaton, David W. MacGregor, Lenel Hickson, Stephen J. Obie, and Vincent A. McGonagle.

RBS ORDERED TO PAY $325 MILLION TO SETTLE ATTEMPTED INTEREST RATE MANIPULATION

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Orders The Royal Bank of Scotland plc and RBS Securities Japan Limited to Pay $325 Million Penalty to Settle Charges of Manipulation, Attempted Manipulation, and False Reporting of Yen and Swiss Franc LIBOR

With this Order, the CFTC has now imposed penalties of more than $1.2 billion on banks for manipulative conduct with respect to LIBOR and other benchmark interest rates

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced an Order against The Royal Bank of Scotland plc and RBS Securities Japan Limited (collectively, RBS or the Bank), bringing and settling charges of successful manipulation, attempted manipulation, and false reporting relating to LIBOR for Yen and Swiss Franc, which are benchmark interest rates critical to financial markets and the public. The Order requires RBS to pay a $325 million civil monetary penalty, cease and desist from further violations as charged, and take specified steps to ensure the integrity and reliability of LIBOR and other benchmark interest rate submissions, including improving related internal controls.

"The integrity of LIBOR depends on truthful information provided by a select group of some of the world’s most important banks. The public is deprived of an honest benchmark interest rate when a group of traders sits around a desk for years falsely spinning their bank’s LIBOR submissions, trying to manufacture winning trades. That’s what happened at RBS," said David Meister, the CFTC’s Director of Enforcement.

The Order finds that:

• As recently as 2010 and dating back to at least mid-2006, RBS made hundreds of attempts to manipulate Yen and Swiss Franc LIBOR, and made false LIBOR submissions to benefit its derivatives and money market trading positions; RBS succeeded at times in manipulating Yen and Swiss Franc LIBOR;

• At times, RBS aided and abetted other panel banks’ attempts to manipulate those same rates;

• The misconduct involved more than a dozen RBS derivatives and money market traders, one manager, and multiple offices around the world, including London, Singapore, and Tokyo; and

• The unlawful conduct continued even after RBS traders learned that a LIBOR investigation had been commenced by the CFTC.

With this Order, the CFTC has now imposed penalties of more than $1.2 billion on banks for manipulative conduct with respect to LIBOR submissions and other benchmark interest rates, and has required each bank to comply with undertakings specifying the factors upon which submissions should be made, including making the determination of submissions transactions focused, and requiring implementation of internal controls and policies needed to ensure the integrity and reliability of submissions. With the undertakings, each bank represents that its benchmark interest rate submissions "shall be based on a rigorous and honest assessment of information, and shall not be influenced by internal or external conflicts of interest, or other factors or information extraneous to any rules applicable to the setting of a [b]enchmark [i]nterest [r]ate," according to the Order.

According to the CFTC’s Order against RBS, the various ways in which RBS conducted its manipulative scheme all followed a similar pattern. The profitability of RBS’s Yen and Swiss Franc derivatives positions, such as interest rate swaps, depended on Yen and Swiss Franc LIBOR, as did certain of RBS’s money market positions. RBS traders would ask their colleagues to make false LIBOR submissions that were beneficial to RBS’s trading positions. The traders’ requests were either for falsely high submissions or falsely low ones, whatever was needed to turn a profit. The submitters often accommodated those requests by making false submissions. Some of these submitters were even traders themselves, and skewed their LIBOR submissions to drive the profitability of their own money market and derivatives trading positions.

RBS created an environment for a number of years that eased the path to manipulation by placing derivatives traders and submitters together on the same desk, heightening the conflict of interest between the profit motives of the traders and the responsibility of submitters to make honest submissions. When derivatives traders and submitters eventually were separated (for business, not compliance reasons), the misconduct continued through Bloomberg chats and an internal instant messaging system.

According to the Order, RBS derivatives traders also unlawfully worked in concert with a trader from a UBS AG subsidiary (UBS), another LIBOR panel bank, in attempts to manipulate Yen LIBOR, and with a trader at another panel bank in attempts to manipulate Swiss Franc LIBOR. RBS also aided and abetted UBS’s attempts to manipulate Yen LIBOR by executing wash trades (trades that result in financial nullities) to generate extra brokerage commissions to compensate two interdealer brokers for assisting UBS in its unlawful manipulative conduct. On at least one occasion, RBS also requested the assistance of an interdealer broker to influence the submissions of multiple panel banks in an attempt to manipulate Yen LIBOR.

The Order finds that RBS attempted to manipulate Yen and Swiss Franc LIBOR even after questions arose in the media in 2007 and 2008 about the integrity of banks’ LIBOR submissions, LIBOR reviews and guidance by the British Banker’s Association in 2008 and 2009, and the CFTC’s request in April 2010 that RBS conduct an internal investigation relating to its U.S. Dollar LIBOR practices. In fact, certain RBS employees involved in the misconduct were aware of the LIBOR investigation, yet continued their manipulative conduct and tried to conceal the conduct by minimizing their use of written messages to conduct the scheme.

The Order further finds that RBS’s traders were able to carry out their many attempts to manipulate Yen and Swiss Franc LIBOR for years because RBS lacked internal controls, procedures and policies concerning its LIBOR submission processes, and failed to adequately supervise its trading desks and traders. RBS did not institute any meaningful controls, procedures or policies concerning LIBOR submissions until on or about June 2011. During this time, RBS was experiencing significant growth on its Yen and Swiss Franc trading desks, generating revenues for RBS that were multiplying over the years.

The CFTC Order also recognizes the cooperation of RBS with the Division of Enforcement in its investigation.

In related actions by the U.S. Department of Justice, RBS Securities Japan Limited agreed to plead guilty to a criminal charge of wire fraud, The Royal Bank of Scotland plc entered into a deferred prosecution agreement whereby it would continue to cooperate with the U.S. Department of Justice in exchange for the deferral of criminal wire fraud and antitrust charges, and RBS collectively accepted a penalty of $150 million. In addition, the United Kingdom Financial Services Authority (FSA) issued a Final Notice regarding its enforcement action against The Royal Bank of Scotland plc and imposed a penalty of £87.5 million, the equivalent of approximately $137 million.

The CFTC thanks and acknowledges the valuable assistance of the FSA, the U.S. Department of Justice, the Washington Field Office of the Federal Bureau of Investigation, the U.S. Securities and Exchange Commission, the Monetary Authority of Singapore, the Financial Services Agency of the Government of Japan, the Australian Securities and Investments Commission, and the Securities and Futures Commission of Hong Kong.

CFTC Division of Enforcement staff members responsible for this case are Jonathan K. Huth, Aimée Latimer-Zayets, Brian G. Mulherin, Maura M. Viehmeyer, Rishi K. Gupta, Timothy M. Kirby, Terry Mayo, Elizabeth Padgett, Anne M. Termine, Philip P. Tumminio, Jason T. Wright, Gretchen L. Lowe, and Vincent A. McGonagle. CFTC Staff from the Division of Market Oversight and Office of the Chief Economist also assisted with the investigation of this matter.

CFTC CHARGES FIRMS AND INDIVIDUALS WITH MAKING ILLEGAL TRANSACTIONS IN PRECIOUS METALS

Photo:  Gold Buddha Of Burma.  Credit:  CIA World Factbook.

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
January 28, 2013

CFTC Charges Four Florida-based Precious Metals Firms and Three Individuals for Engaging in Illegal Retail Off-Exchange Transactions in Precious Metals

CFTC Orders Bar Secured Precious Metals International, Inc., Secured Precious Metals Management, Inc., Barclay Metals, Inc., Universal Clearing, LLC, Linda Laramie, Sean Stropp, and Sylvia Williams from commodities industry for five-years

Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued two Orders filing and settling charges against two Fort Lauderdale, Fla. companies, Secured Precious Metals International, Inc. and Secured Precious Metals Management, Inc., and their sole owner and principal, Linda Laramie (collectively SPM), as well as two West Palm Beach, Fla. companies, Barclay Metals, Inc. and Universal Clearing, LLC, and their owners and principals, Sean Stropp and Sylvia Williams (collectively Barclay), all for engaging in illegal off-exchange financed transactions in precious metals with retail customers.

The Illegal Transactions

The CFTC Orders find that from July 2011 through June 2012, SPM and Barclay solicited retail customers, generally by telephone or through their websites, to buy and sell physical precious metals, such as gold and silver, in off-exchange leverage transactions. According to the Orders, customers paid as little as 20 percent of the purchase price for the metals, and SPM and Barclay purportedly financed the remainder of the purchase price, while charging the customers interest on the amount borrowed. The CFTC Orders state that financed off-exchange transactions with retail customers have been illegal since July 16, 2011, when certain amendments of the Dodd-Frank Wall Street and Consumer Protection Act of 2010 became effective. As explained in the Orders, financed transactions in commodities with retail customers like those engaged in by SPM and Barclay must be executed on, or subject to, the rules of a board of trade that has been approved by the CFTC. Since SPM and Barclay’s transactions were done off-exchange with customers who were not eligible contract participants, they were illegal, the Orders find.

The CFTC Orders also state that SPM and Barclay acted as dealers for Hunter Wise Commodities, LLC (Hunter Wise), a metals merchant. The CFTC filed suit in federal court in Florida against Hunter Wise on December 5, 2012 (see CFTC Release 6447-12). However, as alleged in the CFTC complaint against Hunter Wise and according to the orders entered against SPM and Barclay, neither SPM, Barclay, nor Hunter Wise purchased physical commodities on the customers’ behalf, disbursed any funds to finance the remaining portion of the purchase price, or stored any physical commodities for customers. The Orders find that SPM and Barclay’s customers thus never owned, possessed, or received title to the physical commodities that they believed they purchased.

The CFTC Orders require SPM and Barclay to cease and desist from violating Section 4(a) of the Commodity Exchange Act, as charged, and prohibit them for a five-year period from trading on or pursuant to the rules of any registered entity. The Orders also require SPM and Barclay to comply with certain undertakings, including cooperating fully and expeditiously with the CFTC in related matters. The Orders, which do not impose civil monetary penalties, acknowledge the substantial cooperation of SPM and Barclay.

CFTC’s Precious Metals Fraud Advisory

In January 2012, the CFTC issued a Consumer Fraud Advisory regarding precious metals fraud, saying that it had seen an increase in the number of companies offering customers the opportunity to buy or invest in precious metals (see the Advisory). The CFTC’s Precious Metals Consumer Fraud Advisory specifically warns that frequently companies do not purchase any physical metals for the customer, instead simply keeping the customer’s funds. The Advisory further cautions consumers that leveraged commodity transactions are unlawful unless executed on a regulated exchange.

CFTC Division of Enforcement staff responsible for this matter: David Terrell, Joy McCormack, Jennifer Chapin, Steve Turley, Jeff Le Riche, Elizabeth M. Streit, Scott R. Williamson, Rosemary Hollinger, Rick Glaser, and Richard Wagner.

"iTRADE" STUDENTS LEARN HARD "iLESSON" ABOUT INVESTMENT ADVISOR FRAUD

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Settles Charges against Virginia Resident Alexander Giap for Engaging in Two Fraudulent Commodity Futures Trading Schemes

Federal Court in Virginia orders Giap to pay over $700,000 in restitution and penalties and permanently bars him from the commodities industry

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order requiring defendant Alexander Giap of Falls Church, Va., to pay $456,743 in restitution to defrauded customers and a $250,000 civil monetary penalty for violating the anti-fraud provisions of the Commodity Exchange Act (CEA) (see CFTC Press Release 6191-12, February 27, 2012, as a Related Link). The consent order of permanent injunction, entered on December 17, 2012, by the Honorable Claude M. Hilton of the U.S. District Court for the Eastern District of Virginia, also imposes permanent trading and registration bans against Giap and prohibits him from violating the CEA, as charged.

The order finds that Giap engaged in two schemes in which he acted as an unregistered Commodity Trading Advisor (CTA). In the first scheme, which took place in 2009, Giap solicited customers to participate in iTRADE, a purported "school" that Giap used to conduct his CTA business, according to the order. iTRADE "students" provided Giap with "tuition" ranging from $4,000 to $20,000 and traded under Giap’s direction, the order finds. Giap and iTRADE offered a money back guarantee under which the iTRADE students would retain all profits from trading until they had recovered their initial deposit, the order finds. However, Giap’s trading resulted in substantial losses, losing money seven out of the nine months from January 2009 through September 2009, according to the order.

Furthermore, the order finds that Giap made a number of material misrepresentations and failed to disclose material facts when he solicited customers to engage his services, including that he was a convicted felon who still owed restitution relating to his criminal conviction and was subject to Internal Revenue Service liens for delinquent taxes. Giap also failed to disclose the full extent of his history of losses incurred trading commodity futures, that he was not registered with the CFTC as a CTA, and that he had never traded commodity futures prior to January 2009, according to the order.

In Giap’s second commodity futures trading scheme, which began in October 2009, he defrauded three additional customers through the same material omissions as his first scheme, and his trading resulted in substantial financial losses to customers, according to the order.

The CFTC thanks the Virginia Corporation Commission for its assistance.

CFTC Division of Enforcement staff members responsible for this matter are Allison Baker Shealy, Jason Mahoney, Timothy J. Mulreany, George Malas, Rainey Perez, John Einstman, Paul G. Hayeck, and Joan Manley.

CFTC BRINGS COMMODITY POOL FRAUD CHARGES AGAINST CALIFORNIA COMPANY

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Charges Calif. Company Arista LLC and Calif. Residents Abdul Sultan Walji and Reniero Francisco with Fraud in Operating $9.5 Million Commodity Pool

Federal court issues emergency order freezing the defendants' assets, permitting expedited asset discovery, and protecting books and records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Arista LLC, a registered Commodity Pool Operator (CPO) with its principal place of business in Newport Coast, Calif., and its principals Abdul Sultan Walji (a/k/a Abdul Sultan Valji) and Reniero Francisco, both California residents. The CFTC complaint charges the defendants with defrauding investors in connection with operating a commodity pool to trade commodity futures contracts and options, making false statements to pool participants, misappropriating pool funds, and making false statements in filings with the National Futures Association (NFA). The CFTC complaint also charges the defendants with failing to register with the CFTC during Arista’s first year of operating as a CPO.

On December 12, 2012, the same day the complaint was filed, U.S. District Court Judge Paul A. Engelmayer entered an ex parte restraining order freezing the defendants' assets, authorizing expedited discovery by the CFTC, and prohibiting the defendants from destroying or concealing books and records. The judge set a hearing date on the CFTC’s motion for a preliminary injunction for December 21, 2012.

The CFTC complaint alleges that from at least February 2010 through January 2012, the defendants carried out a fraudulent scheme to misappropriate millions of dollars from investors in commodity futures and options. The defendants allegedly collected funds from 39 investors totaling more than $9.5 million, of which the defendants paid themselves $4.125 million in purported fees while losing over $4.8 million trading. In order to perpetuate their scheme, the defendants allegedly provided false quarterly statements to investors and filed false quarterly reports with the NFA. For example, the complaint alleges that the NFA, as a result of its examination, determined that Arista’s September 2011 pool quarterly report (PQR) had falsely reported a positive 99 percent rate of return in September 2011, when in reality Arista’s rate of return was negative 46.98 percent. NFA also determined that Arista’s PQR had falsely reported a net asset value (NAV) of $8,421,139 as of September 30, 2011, when in reality Arista’s NAV as of that date was approximately $523,000, according to the complaint.

In its continuing litigation, the CFTC seeks restitution and a return of ill-gotten gains, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws, as charged.

In a parallel criminal action, on December 12, 2012, the U.S. Attorney’s Office for the Southern District of New York announced that it filed a criminal complaint charging both Walji and Francisco with conspiracy, securities fraud, and wire fraud offenses. Walji is also charged with commodities fraud. Both defendants were arrested in California by agents from the Federal Bureau of Investigation (FBI).

The CFTC appreciates the assistance of the U.S. Department of Justice, U.S. Attorney’s Office for the Southern District of New York, the FBI, and the NFA.

PRECIOUS METALS TRADE THEORY 101 (WHERE IS THE GOLD?)

Credit:  U.S. Marshals Service

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC alleges that defendants conducted illegal, off-exchange commodity transactions, and deceived customers in connection with financed transactions in precious metals

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that on December 5, 2012, it filed a civil injunctive enforcement action in the U.S. District Court for the Southern District of Florida against Hunter Wise Commodities, LLC; Hunter Wise Services, LLC; Hunter Wise Credit, LLC; Hunter Wise Trading, LLC; Lloyds Commodities, LLC; Lloyds Commodities Credit Company, LLC; Lloyds Services, LLC; C.D. Hopkins Financial, LLC; Hard Asset Lending Group, LLC; Blackstone Metals Group, LLC; Newbridge Alliance, Inc.; United States Capital Trust, LLC; Harold Edward Martin, Jr.; Fred Jager; James Burbage; Frank Gaudino; Baris Keser; Chadewick Hopkins; John King; and David A. Moore. The complaint charges these entities and individuals with fraudulently marketing illegal, off-exchange retail commodity contracts. The complaint alleges that Hunter Wise Commodities, the orchestrator of the fraud, has taken in at least $46 million in customer funds since July 2011.

According to the CFTC complaint, the defendants claim to sell physical metals, including gold, silver, platinum, palladium, and copper, to retail customers in retail commodity transactions. Under the defendants’ retail commodity transactions investment contract, customers allegedly make a down payment on certain quantities of physical metals, usually 25 percent of the total purchase price. Defendants allegedly claim to arrange loans for the balance of the purchase price, and advise customers that their physical metals will be stored in a secure depository.

The complaint further alleges that these statements were false, and that the defendants do not purchase any physical metals, arrange loans for their customers to purchase physical metals, or arrange for storage of physical metals for any customers participating in their retail commodity transactions. Instead, all the transactions are just paper transactions, according to the complaint. Defendants allegedly do not own or sell metals to customers; customers are charged storage and insurance fees on metals that do not exist; and are charged interest on loans, which are never made by the defendants

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010 expanded the CFTC’s jurisdiction over transactions like these, and requires that such transactions be executed on or subject to the rules of a board of trade, exchange or commodity market, according to the complaint. This new requirement took effect on July 16, 2011. The complaint alleges that all of the defendants’ financed commodity transactions after July 16, 2011, were illegal. The complaint also alleges that the defendants defrauded customers in all of these financed commodity transactions.

David Meister, the CFTC’s Director of Enforcement stated: "Here is a prime example of how the Dodd-Frank Act provided the Commission with additional strong authority to go after wrong-doers, such as, as alleged in the complaint, individuals who prey on people looking to make retail investments in commodities like gold and silver. We will use this new authority to the fullest extent possible."

In January 2012 the CFTC issued a Consumer Fraud Advisory (see Advisory under Related Links) regarding precious metals fraud, saying that it had seen an increase in the number of companies offering customers the opportunity to buy or invest in precious metals. The CFTC’s Consumer Fraud Advisory specifically warned that frequently companies do not purchase any physical metals for the customer, instead simply keeping the customer’s funds. The Consumer Fraud Advisory further cautioned consumers that leveraged commodity transactions are unlawful unless executed on a regulated exchange.

In its continuing litigation against the defendants, the CFTC is seeking preliminary and permanent civil injunctions in addition to other remedial relief, including restitution to customers.


 

THE CFTC AND INTERNAL CONTROL FAILURES AT GOLDMAN, SACHS & CO.

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Orders Goldman, Sachs & Co., a Commission Registrant, to Pay $1.5 Million for Supervision Failures

By exploiting Goldman’s internal control failures, a former Goldman employee hid an $8.3 billion trading position; Goldman lost in excess of $100 million unwinding the position

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Goldman, Sachs & Co. (Goldman), a registered futures commission merchant (FCM) based in New York, N.Y., has been ordered to pay a $1.5 million civil monetary penalty to settle CFTC charges that it failed to diligently supervise its employees for several months in late 2007. The CFTC Order also requires Goldman to cease and desist from violating a CFTC regulation requiring diligent supervision.

According to the CFTC’s Order, for several months, Goldman failed to ensure that certain aspects of its risk management, compliance, and supervision programs comported with its obligations to supervise diligently its business as a Commission registrant. During November and December 2007, Goldman further failed to supervise diligently the trading activities of an associated person and former Goldman trader, Matthew Marshall Taylor, whose trading activities on seven days in mid-November and mid-December 2007 in the e-mini S&P 500 futures contract traded on the Chicago Mercantile Exchange’s (CME) Globex platform resulted in a substantial loss to Goldman.

Specifically, in violation of Commission Regulation 166.3, Goldman failed to have policies or procedures reasonably designed to detect and prevent the manual entry of fabricated futures trades into its front office systems, which aggregated manually entered and electronically executed trades in the same product. As a result, on seven trading days in November and December 2007, Taylor circumvented Goldman’s risk management, compliance, and supervision systems, by entering fabricated e-mini S&P 500 sell trades into its manual trading system, which artificially offset and thereby camouflaged e-mini S&P 500 buy trades Taylor had executed in the market. In particular, Taylor established an $8.3 billion e-mini S&P 500 position in a Goldman trading account on December 13, 2007. Goldman suffered a loss of over $118 million in unwinding Taylor’s position.

Separately, the Order states that after Taylor was discharged, Goldman orally notified the CME and the Financial Industry Regulatory Authority (FINRA). Goldman’s ensuing regulatory filings with the National Futures Association (NFA) and FINRA stated that Taylor had been accused of "violating investment-related statutes, regulations, rules, or industry standards of conduct" for "conduct related to inappropriately large proprietary futures positions in a firm trading account." Thereafter, in response to FINRA’s follow-up inquiries, Goldman provided additional important information only to FINRA, i.e., that Taylor attempted to conceal his trading via fabricated trades. Goldman never provided that additional important information to the NFA or the Commission until after the CFTC’s Division of Enforcement commenced the investigation leading to today’s settlement.

The Order states that Goldman has represented in its settlement offer that it has made changes in light of the events discussed in the Order, including implementing written enhancements to its U.S. futures-related trading and risk management controls and supervision policies and procedures. Goldman has also undertaken to implement a written procedure to enhance its provision of information to the NFA and the Commission about misconduct or alleged misconduct of terminated Goldman employees that relates to trading on a Commission-regulated market to ensure that termination notifications of associated persons, including follow-up disclosures, are provided to the NFA and the Commission.

On November 8, 2012, in a related action, the CFTC filed an enforcement action in the Federal District Court for the Southern District of New York, charging Taylor with defrauding Goldman by intentionally concealing from Goldman the true size, as well as the risk and potential profits or losses associated with the S&P e-mini futures contracts positions traded by Taylor in the Goldman account (see CFTC Press Release 6409-12, November 8, 2012 under Related Links).

CFTC staff members responsible for this case are Janine Gargiulo, Trevor Kokal, Judith Slowly, David Acevedo, Lenel Hickson, Stephen Obie, and Vincent McGonagle.

COURT PERMANENTLY BARS DEFENDANTS FROM COMMODITIES INDUSTRY

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

Federal Court in New York Orders Defendants Forex Capital Trading Group, Forex Capital Trading Partners, and Highland Stone Capital Management to Pay over $1.8 Million for Fraud in Off-Exchange Foreign Currency Scheme

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Katherine B. Forrest of the U.S. District Court for the Southern District of New York entered a default judgment and permanent injunction order against defendants Forex Capital Trading Group, Inc. (Forex Group), Forex Capital Trading Partners, Inc. (Forex Partners), both of New York, N.Y., and Highland Stone Capital Management, L.L.C. (Highland Stone) of Rutherford, N.J. The order requires these defendants to pay a civil monetary penalty of $1,352,293 and to disgorge $450,764 of ill-gotten gains for the benefit of defrauded customers. The order also imposes permanent trading and registration bans against the defendants and prohibits them from violating the Commodity Exchange Act and CFTC regulations, as charged.

The order stems from a CFTC anti-fraud enforcement action filed on July 27, 2011 against these three companies and their principals (see CFTC Press Release 6083-11, July 28, 2011). The order finds that Forex Group, Forex Partners, and Highland Stone fraudulently solicited 106 customers who invested more than $2.8 million to trade retail foreign currency (forex). In soliciting customers, the defendants falsely claimed, on their websites and elsewhere, that their forex trading for customers was profitable for a period of several years, the order finds. The defendants’ claims included a falsely reported customer gain of 51.94 percent in 2010, a year, in fact, in which their customers lost more than $1.2 million. Overall, customers lost more than 93 percent of their total invested principal through the defendants’ forex trading, the order finds.

The order also finds that the defendants distributed false account statements to prospective customers showing profitable trading and acted in capacities requiring registration with the CFTC, but were not registered.

The CFTC’s litigation is continuing against the principals of Forex Partners and Forex Group, namely Susan G. Davis of Jersey City, N.J., and David E. Howard II, of New York, N.Y., and against the principal of Highland Stone, Joseph Burgos, of Rutherford, N.J.

The CFTC appreciates the assistance of the U.K. Financial Services Authority in this matter.

CFTC Division of Enforcement staff members responsible for this action are Susan B. Padove, Joy McCormack, Elizabeth Streit, Michael Geiser, Janine Gargiulo, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.

PONZI SCHEME DEFENDANT ORDERED TO RETURN $20.6 MILLION TO VICTIMS

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

December 5, 2012

Federal Court in Idaho Orders CFTC Defendant Trigon Group, Inc. to Return More than $20.6 million of Ill-Gotten Gains to Victims of its Fraud

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Edward J. Lodge of the U.S. District Court for the District of Idaho entered a consent order of permanent injunction that requires defendant Trigon Group, Inc. (Trigon), an Idaho-based business, to disgorge more than $20.6 million of ill-gotten gains to the victims of its fraud. The consent order also imposes permanent trading and registration bans against Trigon and prohibits it from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.

The consent order stems from a CFTC complaint filed on February 27, 2009, that charged the defendant Trigon as well as defendant Daren L. Palmer with solicitation fraud and misappropriation in operating a commodity pool Ponzi scheme (see CFTC Press Release 5623-09, February 27, 2009, under Related Links). Earlier, on October 4, 2010, Judge Lodge entered a summary judgment order requiring Palmer to disgorge more than $20.6 million and to pay a civil monetary penalty of more than $20.6 million. The order also permanently bars Palmer from engaging in any commodity-related activity, including trading, and from registering or seeking exemption from registration with the CFTC (see CFTC Press Release 5919-10, October 6, 2010, under Related Links).

The consent order finds that, from at least September 2000 to date of the complaint, defendants directly and indirectly solicited at least $40 million from at least 57 individuals or entities to invest in Trigon entities. Pool participants understood that their funds would be used for trading commodity futures on their behalf, among other things, S&P 500 index futures contracts. Defendants made repeated misrepresentations that the pool was profitable and growing. In fact, defendants misappropriated the vast majority of the funds invested by pool participants. The consent order also finds that the defendants violated registration requirements as charged.

The CFTC appreciates the assistance of the Securities and Exchange Commission (SEC) and the Idaho Department of Finance. The SEC filed a related action against Palmer and Trigon that also resulted in sanctions against them.

The CFTC Division of Enforcement staff members responsible for this case are Alison Wilson, John Dunfee, Mary Kaminski, A. Daniel Ullman, Paul G. Hayeck, and Joan Manley.

CFTC CHARGES FIRM BASED IN IRELAND WITH VIOLATING OFF-EXCHANGE OPTIONS TRADING BAN

Photo Credit:  CFTC

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Charges Ireland-based "Prediction Market" Proprietors Intrade and TEN with Violating the CFTC’s Off-Exchange Options Trading Ban and Filing False Forms with the CFTC

CFTC also charges TEN with violating a 2005 CFTC cease and desist order

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil complaint in federal district court in Washington, DC, charging Intrade The Prediction Market Limited (Intrade) and Trade Exchange Network Limited (TEN), Irish companies based in Dublin, Ireland, with offering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers, all in violation of the CFTC’s ban on off-exchange options trading. The CFTC’s complaint also charges Intrade and TEN with making false statements concerning their options trading website in documents filed with the CFTC, and charges TEN with violating a 2005 CFTC cease and desist order (see CFTC Press Release 5124-05, October 4, 2005).

Intrade and TEN jointly operate an online "prediction market" trading website, through which customers buy or sell binary options which allow them to predict ("yes" or "no") whether a specific future event will occur, according to the CFTC’s complaint.

Specifically, according to the complaint, from September 2007 to June 25, 2012, Intrade and TEN operated an online "prediction market" trading website, which allowed U.S. customers to trade options products prohibited by the CFTC’s ban on off-exchange options trading. Through the website, Intrade and TEN allegedly unlawfully solicited and permitted U.S. customers to buy and sell options predicting whether specific future events would occur, including whether certain U.S. economic numbers or the prices of gold and currencies would reach a certain level by a certain future date, and whether specific acts of war would occur by a certain future date.

The CFTC’s complaint also charges Intrade and TEN with knowingly filing false "Annual Certification" forms with the CFTC stating that Intrade limited its options offerings to eligible market participants. Contrary to these representations, the complaint alleges that Intrade unlawfully solicited and permitted retail U.S. customers to buy and sell off-exchange options on the website.

In addition, the complaint alleges that TEN violated an order issued by the CFTC in 2005 that found that TEN had previously engaged in similar conduct and ordered TEN to cease and desist from violating the Commodity Exchange Act and CFTC regulations, as charged.

David Meister, the Director of the CFTC’s Division of Enforcement, stated: "It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called ‘prediction’ contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt. The requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity. Today’s action should make it clear that we will intervene in the ‘prediction’ markets, wherever they may be based, when their U.S. activities violate the Commodity Exchange Act or the CFTC’s regulations."

In its continuing litigation the CFTC seeks civil monetary penalties, disgorgement of ill-gotten gains, and permanent injunctions against further violations of federal commodities law, as charged, among other relief.

The CFTC acknowledges the Central Bank of Ireland for its assistance in the CFTC’s investigation of Intrade and TEN.

CFTC Division of Enforcement staff members responsible for this case are Kathleen Banar, David Slovick, Jessica Harris, Erica Bodin, Girum Tesfaye, Elizabeth Padgett, Rick Glaser, and Richard Wagner.

ALLEGED EMBEZZLEMENT IN PONZI SCHEME

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Charges North Carolina Resident Michael Anthony Jenkins and his Company, Harbor Light Asset Management, LLC, with Solicitation Fraud, Misappropriation, and Embezzlement in Ponzi Scheme

Defendants charged with fraudulently soliciting and accepting at least $1.79 million from approximately 377 persons

In a related criminal action, Jenkins was indicted for securities fraud and is in custody awaiting trial

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a federal civil enforcement action in the U.S. District Court for the Eastern District of North Carolina, charging Michael Anthony Jenkins of Raleigh, N.C., and his company, Harbor Light Asset Management, LLC (HLAM), with operating a Ponzi scheme for the purpose of trading E-mini S&P 500 futures contracts (E-mini futures). From at least January 2011 through January 2012, the defendants fraudulently solicited at least $1.79 million from approximately 377 persons, primarily located in Raleigh, N.C., in connection with the scheme, according to the complaint.

The CFTC complaint also charges Jenkins, the owner and President of HLAM, with embezzlement and failure to register with the CFTC as a futures commission merchant. Furthermore, Jenkins allegedly misappropriated $748,827 of investors’ funds to trade gold and oil futures, stock index futures, and E-mini futures in his personal accounts. Jenkins also used misappropriated funds to pay for charges at department and discount stores and gasoline stations, and for cellular phone bills and airline tickets, according to the complaint.

The CFTC complaint, filed on November 20, 2012, alleges that HLAM’s Investment Agreement falsely represented to investors that their investment was solely for investing in E-mini futures and that investors’ funds would be immediately wired to a specific trading account. However, according to the complaint, most of investors’ funds were misappropriated by HLAM and Jenkins. To conceal and continue the fraud, Jenkins allegedly sent trading spreadsheets and statements to investors that falsely reported trades and profits earned and inflated the value of investments. The defendants’ fraudulent conduct resulted in a loss of approximately $1.3 million in investor funds, consisting of $1.16 million in misappropriated and embezzled funds and $140,000 in trading losses, according to the complaint.

In its continuing litigation, the CFTC seeks restitution, return by Jenkins and HLAM of all ill-gotten gains received, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the Commodity Exchange Act, as charged.

In a related criminal action by the Securities Division of the North Carolina, Department of the Secretary of State, Jenkins was indicted on August 20, 2012 on three counts of securities fraud in The General Court of Justice, State of North Carolina, Wake County, and is in custody awaiting trial.

The CFTC appreciates the assistance of the Securities Division of the North Carolina Department of the Secretary of State.

CFTC Division of Enforcement staff members responsible for this action are Xavier Romeu-Matta, Nathan B. Ploener, Christopher Giglio, Manal Sultan, Lenel Hickson, Stephen J. Obie, and Vincent A. McGonagle.

MAN AND HIS COMPANY TO PAY OVER $3 MILLION FOR ROLE IN FOREX COMMODITY POOL FRAUD SCHEME

Media Credit:  CFTC Website.

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

Federal Court in Idaho Orders Brad Lee Demuzio and Demuzio Capital Management, LLC, to Pay over $3 Million in Connection with CFTC Commodity Pool Forex Fraud Action

In related criminal action, Demuzio pleaded guilty to one count of wire fraud, sentencing set for November 5

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge B. Lynn Winmill of the U.S. District Court for the District of Idaho entered a consent order for permanent injunction against defendant Brad L. Demuzio and an order of default judgment against his company, Demuzio Capital Management, LLC (DCM), both of Chubbuck, Idaho, charged by the CFTC with operating a fraudulent $1.8 million commodity pool and foreign currency (forex) Ponzi scheme (see CFTC Press Release 6229-12, April 12, 2012).

The consent order and order of default judgment (final orders) impose a permanent injunction against Demuzio and DCM, respectively, finding that the defendants violated the anti-fraud provisions of the Commodity Exchange Act and failed to register with the CFTC as Commodity Pool Operators (CPOs). In addition to the permanent injunction, the final orders each impose permanent trading and registration bans against Demuzio and DCM and order them to jointly pay restitution of $805,273. In addition, under terms of the final orders Demuzio is required to jointly pay a $1 million civil monetary penalty, and DCM is ordered to jointly pay a civil monetary penalty of $2,415,819.

The final orders find that from at least June 18, 2008 through November 2011, Demuzio, through DCM, solicited and accepted approximately $1.8 million from at least 16 investors to trade forex through a pooled investment vehicle. The final orders find that the defendants misappropriated investor funds to pay Demuzio’s personal expenses and sent emails to investors that falsely represented that their principal remained intact and was earning profits. The final orders also find that the defendants acted as a CPO without being registered as such.

In a related criminal proceeding based on substantially the same facts, Demuzio pleaded guilty in the U.S. District Court for the District of Idaho to one count of wire fraud. Sentencing is scheduled for November 5, 2012.

The CFTC appreciates the assistance of the U.S. Attorney’s Office for the District of Idaho and the Federal Bureau of Investigation.

CFTC Division of Enforcement staff members responsible for this action are Lara Turcik, Christopher Giglio, Manal M. Sultan, Lenel Hickson, Jr., Stephen J. Obie, and Vincent A. McGonagle.

ILLINOIS RESIDENT SETTLES FRAUD CHARGES FOR $1.8 MILLION

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Orders Illinois Resident Joshua T.J. Russo to Pay More than $1.8 Million in Restitution and Penalties for Futures and Options Fraud and Unauthorized Trading

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and settling charges against Joshua T.J. Russo of Chicago, Ill., for fraudulently soliciting at least one customer to participate in a fictitious commodity futures and options pool, engaging in unauthorized trading, and issuing false account statements.

The CFTC order requires Russo to pay restitution of $960,000, a $645,000 civil monetary penalty, and disgorgement of $215,000. The order permanently prohibits Russo from engaging in any commodity-related activity, including trading, and from registering or seeking exemption from registration with the CFTC. The order also permanently prohibits Russo from further violations of the Commodity Exchange Act and CFTC regulations, as charged.

The CFTC order finds that, from around March 2007 through April 2011, Russo, as a registered Associated Person of an independent Introducing Broker (IB), fraudulently solicited at least one of the IB’s customers by telling the customer that he would be a general partner in a fictitious pool called Peak Performance Fund, LP (PPF). According to the order, Russo issued false statements to the PPF customer in the form of purported PPF audited financial statements and in the form of weekly spreadsheets that Russo represented were summaries of the customer’s account values. In fact, however, the statements grossly overinflated the value of the customer’s accounts, the order finds.

In addition, the order finds that Russo provided at least five other customers with similar spreadsheets that grossly inflated the value of the customers’ accounts. Russo also engaged in a significant amount of unauthorized trading in these customers’ accounts, and in the accounts of three other customers, the order finds. Russo engaged in speculative trading for at least one customer, contrary to the hedging strategy that Russo represented he would utilize, according to the order.

According to the order, Russo’s eight customers deposited at least $3 million into trading accounts to trade commodity futures and options in managed and self-directed accounts. Russo, through his false statements to the eight customers, concealed his unauthorized trading and overall trading losses of approximately $1.7 million, the order finds.

On October 25, 2012, Russo was charged with a single count of commodities fraud in a related criminal action (USA v. Russo, 1: 12-cr-00836). His arraignment is currently scheduled for November 1, 2012.

The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Illinois and the National Futures Association.

CFTC Division of Enforcement staff members responsible for this case are Katherine S. Driscoll, Michael Solinsky, Michelle Bougas, Kassra Goudarzi, Melanie Bates, Gretchen L. Lowe, and Vincent A. McGonagle

TWO FORMER OFFICERS OF STERLING FINANCIAL CORP. SUBSIDIARY SENTENCED TO LENGTHY PRISON TERMS AND ORDERED TO PAY $53 MILLION

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
The Securities and Exchange Commission announced that on September 11 and 12, 2012, Joseph M. Braas, of Lititz, Pennsylvania, and Michael J. Schlager, of Lancaster, Pennsylvania, were sentenced in a criminal action for orchestrating a sophisticated financial fraud that lasted over five years. Braas and Schlager were two senior officers at Equipment Finance, LLC ("EFI"), formerly a commercial lender to the soft pulp logging industry and wholly-owned subsidiary of Sterling Financial Corp. ("Sterling"), a publicly traded bank holding company based in Lancaster, Pennsylvania. Judge Paul S. Diamond of the United States District Court for the Eastern District of Pennsylvania sentenced Braas to 15 years in federal prison, and Schlager to 20 years in prison, each followed by five years of supervised release. Braas and Schlager were also each ordered to pay $53 million in restitution. Braas and Schlager had each previously pleaded guilty to one count of conspiracy to commit mail fraud, and two counts of mail fraud, all affecting a financial institution.

On January 6, 2011, the Commission filed a civil action against Braas and Schlager based on the same conduct alleged in the criminal case. Without admitting or denying the Commission’s allegations, Braas and Schlager agreed to settle the matter, and Final Judgments were entered as to each. The Commission’s complaint alleged that, from at least February 2002 until April 2007, Braas, EFI’s Vice President and Chief Operating Officer, and Schlager, EFI’s Executive Vice President, orchestrated a pervasive and wide-ranging scheme using fraudulent underwriting and reporting practices to hide mounting losses and defaults within EFI’s commercial loan portfolio from Sterling’s senior management and auditors.

The Commission further alleged that Braas and Schlager were able to subvert virtually every aspect of EFI’s loan process and internal controls. They created fictitious loans for the purpose of making monthly payments on delinquent loans, altered loan documents to hide delinquent and fictitious loans, granted excessive deferrals and resets of delinquent loans to make them appear current, reassigned loan payments to unrelated accounts to fund payments on delinquent loans, and used aliases for borrowers to circumvent EFI’s maximum lending limitations. They also deceived Sterling’s internal and independent auditors through fraudulent accounting entries, false collateral descriptions and appraisals, fabricated UCC filings, and by recruiting vendors to assist in the circumvention of loan confirmation procedures.

As alleged in the complaint, Braas and Schlager caused EFI to report false financial information to Sterling which, in turn, from 2002 through 2006, filed quarterly and annual reports with the Commission containing materially false and misleading financial statements. As a result of the fraud, Sterling ultimately charged off $281 million of EFI finance receivables, which represented a large majority of EFI’s loan portfolio, and approximately 13 percent of Sterling’s total loan portfolio during the period of the fraud.

ALLEGED FOREX FRAUD UNCOVERED

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Charges Florida Resident William Jeffery Chandler with Forex Fraud and Misappropriation

Federal court enters emergency order freezing defendant’s assets and protecting books and records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that on September 11, 2012, Judge James D. Whittemore of the U.S. District Court for the Middle District of Florida entered an emergency order freezing the assets of defendant William Jeffery Chandler of Ft Myers, Fla. The court’s order also prohibits Chandler from destroying or altering books and records. The judge set a hearing on the CFTC’s motion for a preliminary injunction for September 26, 2012.

The court’s order arises out of a civil enforcement action filed by the CFTC on September 10, 2012, charging Chandler with foreign currency (forex) fraud and misappropriation. Chandler has never been registered with the CFTC in any capacity, according to the complaint.

The CFTC complaint alleges that, since at least July 2010, and continuing to the present, Chandler has solicited at least six individuals to contribute at least $773,100 to a pooled account to trade off-exchange forex contracts in Chandler’s account at Dukascopy Bank SA, a Switzerland-domiciled bank. To entice prospective pool participants to invest, Chandler allegedly guaranteed a two percent to 12.5 percent monthly return on participants’ principal.

However, according to the complaint, Chandler’s Dukascopy Bank account was closed on or about July 15, 2011, due to changes in U.S. regulations. The Dukascopy Bank account was transferred to Alpari US LLC, a U.S.-based registered Retail Foreign Exchange Dealer, on August 8, 2011, according to the complaint. At that time, the pooled account allegedly had a balance of only $292.49, far less than the amount contributed by pool participants.

Chandler allegedly continues to solicit and receive funds from pool participants to trade in his Dukascopy Bank account, even after it had closed, and continues to represent to pool participants that their funds remain in the pool in his Dukascopy Bank account. Although Chandler has received requests from many pool participants to return their funds, he refuses to refund participant’s principal, instead asserting a litany of fabricated excuses, according to the complaint. Chandler has misappropriated the vast majority of the pool’s funds for his personal use, the complaint charges.

Furthermore, pool participants received statements from a purported accounting firm named A.R. Watkins; however, upon information and belief, A.R. Watkins is a fictitious entity controlled by Chandler, according to the complaint.

In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and preliminary and permanent injunctions against further violations of the Commodity Exchange Act and CFTC regulations, as charged.

The CFTC appreciates the assistance of the Pasco County Sheriff’s Office.

CFTC Division of Enforcement staff responsible for this case are Jo Mettenburg, Jeff Le Riche, Stephen Turley, Rick Glaser, and Richard Wagner.

TEXAS RESIDENT TO PAY $17 MILLION FOR ROLE IN FOREIGN CURRENCY FRAUD SCHEME

FROM U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court in Texas Orders Christopher B. Cornett to Pay over $17 Million in Sanctions in Foreign Currency Fraud Action

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order of default judgment and permanent injunction requiring defendant Christopher B. Cornett of Buda, Texas, to pay $10.16 million in restitution and a $6.78 million civil monetary penalty in connection with a foreign currency (forex) pooled investment fraud. The order, entered on August 24, 2012, by Judge Lee Yeakel of the U.S. District Court for the Western District of Texas, also imposes permanent trading and registration bans against Cornett and permanently prohibits him from further violations of federal commodities law, as charged.

The court’s order stems from a CFTC complaint filed on February 2, 2012, charging Cornett with solicitation fraud, issuing false account statements, misappropriating pool participants’ funds, and failing to register with the CFTC as a commodity pool operator.

The order finds that, from at least June 2008 through at least October 2011, Cornett solicited prospective pool participants to invest in a pooled forex investment and that he acted as the manager and operator of the pool. The pool was referred to at various times as ITLDU, ICM, International Forex Management, LLC, and/or IFM, LLC, according to the order. In his solicitations, Cornett falsely told prospective pool participants that, while there were weeks when he either lost money or broke even trading forex, he had never experienced a losing month or a losing year trading forex, the order finds.

The order also finds that, from June 18, 2008 through September 2010, Cornett solicited approximately $7.07 million from pool participants, participants redeemed approximately $1.64 million, and Cornett lost approximately $4.17 million of the pool’s funds trading forex. During this period, Cornett had only one profitable month trading forex and earned little, if any, fees for acting as the pool’s operator, the order finds. Thus, during this period, Cornett misappropriated approximately $1.26 million of the pool’s funds and for most, if not all of the period, provided participants with false weekly reports/account statements, the order finds.

The court’s order further finds that, from October 2010 through October 2011, Cornett solicited an additional approximately $6.95 million from pool participants. Cornett transferred approximately $3.37 million to forex trading accounts at six foreign brokers and lost approximately $2.3 million at five of the brokers, and likely lost an additional $905,000 at the sixth broker trading forex with pool funds, the order finds. As of October 2011, Cornett had misappropriated approximately $1 million of the pool’s funds and less than $520,000 remained in bank accounts in the names of the pool, according to the order.

The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Western District of Texas, Internal Revenue Service Criminal Investigation, and the Federal Bureau of Investigation.

The CFTC also appreciates the assistance of the U.K. Financial Services Authority, the British Virgin Islands Financial Services Commission, the Ontario Securities Commission, Germany’s BaFin, the Swiss Financial Market Supervisory Authority, the Eastern Caribbean Securities Regulatory Commission, and St. Vincent and the Grenadines’ International Financial Services Authority.

CFTC Division of Enforcement staff members responsible for this action are Patrick M. Pericak, Daniel Jordan, Jessica Harris, Rick Glaser, and Richard B. Wagner.

CFTC CHARGES CALIFORNIA RESIDENT IN ALLEGED COMMODITY POOL FRAUD SCHEME

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a complaint in the U.S. District Court for the Northern District of California, charging defendant Jeffrey Gustaveson of Carlsbad, Calif., with fraud, misappropriation, and issuing false statements in an approximate $2.5 million commodity pool scheme.

According to the CFTC complaint, filed on August 29, 2012, from at least January 2010 through approximately July 2010, Gustaveson accepted at least $2,495,000 million from at least four individuals to invest in a commodity futures pool. However, rather than trade pool participants’ funds as promised, Gustaveson allegedly only used approximately $400,000 of the funds to trade commodity futures, which resulted in a net loss. Gustaveson kept the remaining funds in a checking account from which he used at least $400,000 of pool funds to pay his personal expenses, including hotels, restaurants, and online gambling, according to the complaint.

Furthermore, to conceal his fraud, Gustaveson allegedly distributed false trading account statements to pool participants that misrepresented the value of the pool, reported false profits, and failed to disclose Gustaveson’s misappropriation of pool participants’ funds. When his fraud was exposed, Gustaveson allegedly repaid a portion of pool participants’ funds, but, despite repeated requests to do so, Gustaveson allegedly has not returned $415,000 of pool participants’ money. According to the CFTC complaint, Gustaveson admitted in a California state court proceeding that he had misappropriated investor money and falsified financial statements in connection with the acts described in the CFTC complaint.

In its continuing litigation, the CFTC seeks restitution to defrauded customers, a return of ill-gotten gains, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of federal commodities laws, as charged.

CFTC Division of Enforcement staff members responsible for this case are Lindsey Evans, Mary Beth Spear, Diane Romaniuk, Ava M. Gould, Scott R. Williamson, Rosemary Hollinger, and Richard B. Wagner.

CFTC SEEKS TO REVOKE TRADING ADVISOR'S REGISTRATION DUE TO MASSIVE FRAUD JUDGEMENT

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
August 24, 2012

CFTC Seeks to Revoke Registration of Growth Capital Management LLC Based on CFTC Anti-Fraud Action

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed a notice of intent to revoke the registration of Growth Capital Management LLC (GCM) of Rockwall, Texas. GCM is a registered Commodity Pool Operator and Commodity Trading Advisor.

The CFTC’s notice alleges that GCM is subject to statutory disqualification from CFTC registration based on a default judgment order and an order of permanent injunction entered by the U.S. District Court for the Northern District of Texas on March 15, 2011, and June 26, 2012, respectively (see CFTC News Release 6299-12, July 9, 2012). The permanent injunction order requires GCM jointly and severally to make restitution to defrauded customers, disgorge ill-gotten gains, and pay a civil monetary penalty, together totaling over $9.3 million, for fraudulently soliciting over $30 million from customers to trade commodity futures contracts and foreign currency (forex). The order also permanently bans GCM from further violations of the anti-fraud provisions of the Commodity Exchange Act and permanently bans GCM from engaging in certain commodities related activity, including trading and seeking registration in any capacity with the CFTC.

The court’s order arises out of a CFTC complaint filed on July 27, 2010, against GCM, Robert Mihailovich, Sr., and Robert Mihailovich, Jr., the son of Mihailovich, Sr. (see CFTC Press Release 5863-10, July 28, 2010). Mihailovich, Sr. was convicted and incarcerated on federal wire fraud charges, served 27 months and, while on a three-year supervised release, fraudulently solicited and accepted more than $30 million from approximately 93 customers to open managed trading accounts, according to the complaint. Mihailovich, Jr., at the time of GCM’s initial registration, failed to disclose Mihailovich, Sr.’s involvement with GCM and failed to disclose in CFTC registration filings that his father was a controlling principal of GCM, the complaint alleged.

The CFTC Division of Enforcement staff members responsible for this case are Alison B. Wilson, Boaz Green, Stephen T. Tsai, Maura M. Viehmeyer, Philip Tumminio, Michelle Bougas, Anne Termine, Gretchen L. Lowe, and Vincent A. McGonagle.

CFTC CHARGES COLORADO MAN WITH COMMODITY POOL FRAUD

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Charges Colorado Resident Michael Bruce Gale with Commodity Pool Fraud
Gale also charged with misappropriation, commingling investor funds, false statements, and failure to register
Federal court issues emergency order freezing Gale’s assets and protecting books and records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a civil anti-fraud enforcement action against Michael Bruce Gale (Gale) of Littleton, Colo., individually and doing business as Capital Management Group (CMG). The CFTC complaint charges Gale with defrauding investors in connection with operating a commodity pool to trade commodity futures contracts, making false statements to pool participants, misappropriating pool funds, commingling investor funds with pool funds, and failing to register as a commodity pool operator with the CFTC.

The complaint alleges that from at least the summer of 2007 through the present, Gale, individually and doing business as CMG, fraudulently solicited and accepted at least $742,606 from at least three individuals to trade commodity futures on the pool’s behalf.

The CFTC’s complaint was filed under seal on July 25, 2012, in the U.S. District Court for the District of Colorado, and subsequently Senior U.S. District Judge John L. Kane entered an emergency order freezing Gale’s assets and prohibiting the destruction or alteration of books and records.

According to the complaint, while soliciting and accepting funds, Gale allegedly misrepresented his past trading success and the pool’s profitability and value. For example, Gale allegedly represented to prospective and actual pool participants that 1) participants earned an approximate 100 percent return on their investments over the prior five years, 2) that Gale made profits over $2.4 million trading commodity futures for himself and others each year between 2006 and 2008, and 3) that the pool’s value exceeded $3.5 million. In reality, according to the complaint, Gale traded commodity futures contracts in two accounts into which he deposited less than $300,000 and lost over $62,000 trading between approximately June 3, 2009, and September 15, 2011. In addition, the complaint charges Gale with misappropriating a significant portion of pool participants’ funds between at least February 9, 2008 and the present rather than trade those funds in the pool as promised.

To conceal and perpetuate the fraud, Gale allegedly provided false tax records to prospective and actual participants, issued at least one fictitious trading account statement, reported false profits to participants, and failed to disclose trading losses and his misappropriation of pool participants’ funds.

In its continuing litigation, the CFTC seeks a civil monetary penalty, restitution, disgorgement of ill-gotten gains, trading and registration bans, and preliminary and permanent injunctions against further violations of the federal commodities laws, as charged.

The CFTC appreciates the assistance of the Department of Justice for the District of Colorado and the Federal Bureau of Investigation.

CFTC Division of Enforcement staff members responsible for this case are Allison Passman, Mary Elizabeth Spear, Ava Gould, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

CFTC CHAIRMAN GENSLER OP-ED REGARDING INTEREST RATES

Photo:  CFTC Chairman Gary Gensler.  Credit:  CFTC
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
"Libor, Naked and Exposed – New York Times OP-ED"
Opinion by Chairman Gary Gensler

August 7, 2012AMERICANS who save for the future, use credit cards or borrow money for tuition, cars and homes deserve assurance that the interest rates on their savings and loans are set in a reliable and honest way.

That’s why the revelation that the British bank Barclays attempted to manipulate the London interbank offered rate, or Libor — one of the benchmark rates used to determine the cost of borrowing around the world — is so disturbing. But the Barclays case isn’t only about misconduct by large financial institutions. It also raises questions about the reliability and accuracy of these key interest rates, which are largely determined by the private sector, without significant government oversight.

When you save money in a money market fund or short-term bond fund, or take out a mortgage or a small-business loan, the rate you receive or pay is often based, directly or indirectly, on Libor. It’s the reference rate for nearly half of adjustable-rate mortgages in the United States; for about 70 percent of the American futures market; and for a majority of the American swaps market, where businesses hedge risks from changes in interest rates.

Libor is supposed to be the average rate at which the largest banks honestly believe they can borrow from one another unsecured (that is, without posting collateral). Libor was set up in the 1980s when banks regularly made loans to other banks on that basis.

However, the number of banks willing to lend to one another on such terms has been sharply reduced because of economic turmoil, including the 2008 global financial crisis, the European debt crisis that began in 2010, and the downgrading of large banks’ credit ratings this year.

Banks have shifted toward secured borrowing and, on occasion, borrowing from central banks like the Federal Reserve and the European Central Bank. As Mervyn King, the governor of the Bank of England, said of Libor in 2008: "It is, in many ways, the rate at which banks do not lend to each other."

These changes in the markets raise questions about the integrity of this important benchmark.

First, why is Libor so different from another benchmark interest rate for borrowing in United States dollars — Euribor, or euro interbank offered rate? Both rates are calculated on the basis of banks’ answers to roughly the same question. For Libor, a bank is asked at what rate it thinks it can borrow, while for Euribor, a bank is asked at what rate it thinks other banks are able to borrow. And yet the Euribor for dollar borrowings is about twice as high as the comparable Libor.

Second, why have Libor and other benchmark rates typically not been aligned, since 2008, with the borrowing rates that would be implied by foreign exchange markets? A long-established financial theory known as interest rate parity says that the difference in interest rates between two countries should be roughly in line with the expected change in exchange rates between the countries’ currencies. (If it isn’t, that opens an opportunity for arbitrage, the practice of taking advantage of price differences.)

Until 2007, as the theory predicted, the difference between the borrowing rate in one currency and the lending rate in another could typically be derived from foreign currency exchange rates. In the last few years, that hasn’t been the case, and this divergence between theory and practice has yet to be adequately explained.

Third, why is the volatility of the dollar-denominated Libor so much lower than the volatility of other short-term credit market rates? Just like stocks and bonds, short-term interest rates experience a certain volatility. But Libor has less severe swings than comparable rates.

In addition, the variation in rates that some banks submit to the British Bankers’ Association — the private group that oversees Libor — don’t seem to match the variation in the rates for their credit default swaps (financial instruments that are similar to insurance and are one measure of a bank’s credit risk). There have been times when the swap rates have widened for particular banks (suggesting a growing credit risk) even as their Libor submissions have remained stable (suggesting that the banks’ borrowing costs haven’t changed).

Anyone saving or borrowing for the future has a real stake in the integrity of Libor and in the answers to these questions.

When the Commodity Futures Trading Commission, which oversees derivatives markets, began looking into interest-rate setting in 2008, we were guided not only by questions about the decline of actual unsecured lending among banks, the supposed basis of Libor, but also by our founding statute, the Commodity Exchange Act. The law prohibits attempts to manipulate and falsely report information that tends to affect the price of a commodity — including interest rates like Libor.

Markets work best when benchmark rates are based on observable transactions. The public is shortchanged if Libor, the emperor of rates, is not clothed in such transactions.

One solution might be to use other benchmark rates — like the overnight index swaps rate, which is tied to the rate at which banks lend to one another overnight — that are based on real transactions. There are also benchmark rates based on actual short-term secured financings (loans in which collateral is pledged) between banks and other financial institutions.

For any new or revised benchmark to be broadly accepted by the financial markets, borrowers, lenders and hedgers who rely on Libor would benefit from a process for an orderly transition.

The Barclays case demonstrates that Libor has become more vulnerable to misconduct. It’s time for a new or revised benchmark — an emperor clothed in actual, observable market transactions — to restore the confidence of Americans that the rates at which they borrow and lend money are set honestly and transparently.

Gary Gensler is the chairman of the Commodity Futures Trading Commission.