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Showing posts with label COMMODITY EXCHANGE ACT. Show all posts
Showing posts with label COMMODITY EXCHANGE ACT. Show all posts

Friday, September 25, 2015

CFTC ORDERS CARGILL DE MEXICO TO PAY $500,000 FOR ROLE IN WASH SALES SCHEME

FROM:  COMMODITY FUTURES TRADING 
CFTC Orders Cargill de México SA De CV to Pay $500,000 for Unlawfully Executing Wash Sales on the CBOT and KCBT

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against commodities trading company Cargill de México SA De CV (Cargill de México) for executing wash trades involving corn, soybean, and wheat futures contracts on the Chicago Board of Trade (CBOT) and wheat futures contracts on the Kansas City Board of Trade (KCBT). The CFTC order requires that Cargill de México pay a $500,000 civil monetary penalty.

The Order finds that on multiple occasions between March 2010 and August 2014 Cargill de México engaged in wash sales and unlawful non-competitive transactions in certain agricultural futures products, including corn, soybeans, and wheat on the CBOT, as well as in hard red wheat traded on the KCBT. Before orders for these trades were entered on an exchange, Cargill de México employees, either acting alone or with another employee, entered equal and opposite transactions in the same futures contract for another account that was also owned by Cargill de México, and matched the product, quantity, price, and timing of those orders and trades. The Order finds that by so prearranging, structuring, and entering these orders, which negated the risk incidental to an open and competitive marketplace, Cargill de México also engaged in noncompetitive transactions.

In addition to imposing the $500,000 civil monetary penalty, the Order also requires Cargill de México to comply with certain undertakings. First, the Order requires Cargill de México to conduct training for certain personnel addressing the ethics, compliance, and legal requirements of the Commodity Exchange Act (CEA) and CFTC regulations with regard to prearranged, fictitious, or noncompetitive trading. Second, the Order requires Cargill de México to submit a report to the CFTC’s Division of Enforcement representing (i) that Cargill de México has adopted policies and procedures designed to prevent any potential prearranged, fictitious, or noncompetitive trading in violation of the CEA and CFTC regulations, (ii) that Cargill de México has conducted certain training sessions for relevant personnel, and (iii) that Cargill de México has begun using the self-match prevention technology available on the front end system provided by its primary clearing firm. Finally, the Order requires Cargill de México to cease and desist from further violations of Section 4c(a)(1) of the CEA and CFTC Regulation 1.38(a), as charged.

The CFTC thanks the CME Group, Inc. for its assistance in this matter.

CFTC Division of Enforcement staff members responsible for this case are Trevor Kokal, James G. Wheaton, Lenel Hickson Jr., and Manal M. Sultan.

Friday, September 11, 2015

CFTC ANNOUNCES COMMODITY POOL FRAUDSTER SENT TO PRISON FOR 17 YEARS

FROM:  U.S. JUSTICE DEPARTMENT 
September 9, 2015
Commodity Pool Operator Sentenced to 17 Years’ Incarceration for Fraud

Washington, DC — Donovan Davis Jr., one of three Principal Defendants charged by the CFTC for the fraudulent operation of Capital Blu Management, LLC of Melbourne, Florida, was sentenced to 17 years in a federal prison on August 27, 2015.

Davis was convicted on May 14, 2015 of multiple counts of criminal conspiracy, mail fraud, wire fraud, and money laundering in connection with the operation of a fraudulent $17 million commodity pool. The two other Co-Defendants in the CFTC action, Blayne Davis and Damien Bromfield, earlier pleaded guilty to similar criminal charges. B. Davis was sentenced to 9 years in prison; Bromfield’s sentencing is scheduled for September 24.

CFTC Enforcement Director, Aitan Goelman, said “These sentences serve as a strong reminder that those who engage in fraud in the commodities markets face the very real possibility of criminal prosecution and jail time in addition to the civil sanctions sought by the CFTC.”

In 2011, the U.S. District Court for the Middle District of Florida found these same Defendants liable for civil violations of the Commodity Exchange Act and CFTC Regulations and ordered them to pay more than $7 million each in restitution and civil monetary penalties and permanently barred them from engaging in any commodity-related activity (see CFTC Press Release, Order, and Judgment 6054-11, June 15, 2011, and CFTC Press Release and Complaint 5643-09, April 7, 2009).

The CFTC subsequently provided material assistance to the U.S. Attorney’s office responsible for the criminal prosecution of these Defendants.

Monday, August 10, 2015

NY RESIDENT AND COMPANY CHARGED BY CFTC WITH MAKING FALSE STATEMENTS TO NFA

FROM:  U.S. COMMODITIES FUTURES TRADING COMMISSION 
CFTC Charges New York Resident Gary Creagh and his Company, Wall Street Pirate Management, LLC, with Making False Statements to the National Futures Association

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of an enforcement action charging Defendants Gary Creagh and Wall Street Pirate Management, LLC (Wall Street Pirate), both of New York, New York, with making false, fictitious, or fraudulent statements or omissions to the National Futures Association (NFA) in statutorily required reports and during an NFA audit, in violation of the Commodity Exchange Act (CEA). Both Wall Street Pirate and Creagh, the managing member and sole employee of Wall Street Pirate, were registered with the CFTC at the time of the conduct.

The CFTC Complaint, filed on August 5, 2015, in the U.S. District Court for the Southern District of New York, charges that, from at least December 2011 through September 2013, Creagh willfully made false statements or representations to the NFA and concealed material information from the NFA. Specifically, Creagh falsely represented to the NFA on multiple occasions that the commodity pool he operated on behalf of Wall Street Pirate was not active, despite the fact that he had accepted funds from prospective pool participants and actively traded commodity futures on behalf of the commodity pool, according to the Complaint. The CFTC Complaint also charges that Wall Street Pirate, by and through Creagh, failed to maintain required books and records and provide account statements and privacy notices to pool participants.

The NFA is a Chicago-based futures association, which is registered with the CFTC and serves as an industry self-regulatory organization. Pursuant to the CEA, the NFA is responsible, under CFTC oversight, for certain aspects of the regulation of futures entities and their associated persons.

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

CFTC Division of Enforcement staff members responsible for this case are Jonah E. McCarthy, Timothy J. Mulreany, Patricia Gomersall, and Paul G. Hayeck.

The CFTC would like to thank the NFA for its cooperation in this matter.

Sunday, May 17, 2015

CFTC CHARGES NEVADA-BASED COMPANY WITH MAKING ILLEGAL OFF-EXCHANGE PRECIOUS METALS TRANSACTIONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
April 27, 2015
CFTC Charges Nevada-Based My Global Leverage, LLC and Toney Blondo Eggleston with Engaging in Illegal, Off-Exchange Precious Metals Transactions with Retail Customers

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced the filing of a civil injunctive enforcement action in the U.S. District Court for the District of Nevada against Defendants My Global Leverage, LLC (MGL) and its owner and managing member Toney Blondo Eggleston, who resides in Newport Coast, California. The CFTC Complaint charges the Defendants with engaging in illegal, off-exchange transactions in precious metals with retail customers on a leveraged, margined, or financed basis. The Complaint further alleges that Eggleston, as controlling person for MGL, is liable for MGL’s violations of the Commodity Exchange Act (CEA).

According to the Complaint, since at least July 16, 2011 and continuing through at least November 2012, MGL, by and through its employees including Eggleston, solicited retail customers by telephone to engage in leveraged, margined, or financed precious metals transactions. During that period, approximately 12 of MGL’s customers paid approximately $786,000 to MGL in connection with precious metals transactions, and MGL received commissions and fees totaling approximately $257,680 in connection with these precious metals transactions, according to the Complaint.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, leveraged, margined, or financed transactions such as those conducted by MGL, are illegal off-exchange transactions unless they result in actual delivery of metal within 28 days. The Complaint alleges that metals were never actually delivered in connection with the leveraged, margined, or financed precious metals transactions made on behalf of MGL’s customers.

The Complaint further alleges that MGL executed the illegal precious metals transactions through Hunter Wise, LLC (Hunter Wise). The CFTC filed an enforcement action against Hunter Wise, among others, in December 2012, charging the defendants with engaging in illegal, off-exchange precious metals transactions, and charging Hunter Wise with fraud and other violations (see CFTC Press Releases 6447-12 and 6655-13).

On February 19, 2014, the court found that Hunter Wise had no actual metal to deliver to customers and held that Hunter Wise engaged in illegal precious metals transactions and was required to register as a Futures Commission Merchant but did not do so and therefore violated Sections 4(a) and 4d of the CEA (see CFTC v. Hunter Wise Commodities, LLC, et al., 12-81311 (Order on the Parties’ Motions for Summary Judgment)). On April 15, 2014, the U.S. Court of Appeals for the Eleventh Circuit affirmed the court’s issuance of a preliminary injunction and held that the CFTC’s jurisdiction under Section 2(c)(2)(D) of the CEA extends to the precious metals transactions at issue in the case and that no exception to the CFTC’s jurisdiction applied. And, on May 16, 2014, after a bench trial on the remaining claims, including fraud, the District Court entered an Order finding that Hunter Wise fraudulently misrepresented the nature of precious metals transactions that resulted in millions of dollars in customer losses (see CFTC Press Release 6935-14).

In its continuing litigation against MGL and Eggleston, the CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and a permanent injunction from future violations of the CEA, as charged.

CFTC Division of Enforcement staff members responsible for this action are Glenn Chernigoff, Michelle Bougas, Alison B. Wilson, and Rick Glaser.

Saturday, May 16, 2015

CFTC CHARGES TELEPHONE SOLICITOR WITH ENGAGING IN ILLEGAL, OFF-EXCHANGE PRECIOUS METALS TRANSACTIONS

FROM:  U.S. COMMODITY FUTURES 
April 21, 2015
CFTC Charges Florida-Based Sentry Asset Group, LLC and its Owner, John Pakel, with Engaging in Illegal, Off-Exchange Precious Metals Transactions

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 Florida against Defendants Sentry Asset Group, LLC (SAG) of Boca Raton, Florida, and its owner and manager, John Pakel of Del Ray, Florida. The CFTC Complaint charges the Defendants with engaging in illegal, off-exchange transactions in precious metals with retail customers on a leveraged, margined, or financed basis. The Complaint further alleges that as controlling person for SAG, Pakel is liable for SAG’s violations of the Commodity Exchange Act (CEA).

According to the Complaint, since at least March 2012 and continuing through at least July 2013, SAG, by and through its employees including Pakel, solicited retail customers by telephone to engage in leveraged, margined, or financed precious metals transactions. During the period, SAG’s customers paid more than $1.1 million to SAG in connection with precious metal transactions, and SAG received commissions and fees totaling $278,767 in connection with these precious metals transactions. In addition, the Complaint alleges that SAG accepted customer orders and funds and thus acted as a Futures Commission Merchant without registering with the CFTC as such.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, leveraged, margined, or financed transactions such as those conducted by SAG, are illegal off-exchange transactions unless they result in actual delivery of metal within 28 days. The Complaint alleges that metals were never actually delivered in connection with the leveraged, margined, or financed precious metals transactions made on behalf of SAG’s customers.

The Order further finds that SAG and Pakel executed the illegal precious metals transactions through Lloyds Commodities, LLC (Lloyds), Hunter Wise, LLC (Hunter Wise), and AmeriFirst Management LLC (AmeriFirst). The CFTC filed enforcement actions against, among others, Lloyds and Hunter Wise in December 2012 and AmeriFirst in July 2013, charging each with engaging in illegal, off-exchange precious metals transactions, and charging AmeriFirst and Hunter Wise with fraud and other violations (see CFTC Press Releases 6447-12 and 6655-13).

On September 18, 2013, the court entered a consent Order resolving the Commission’s claims against AmeriFirst, finding it liable for illegal off-exchange precious metals transactions and fraud (see CFTC Press Release 6973-14).

On February 5, 2014, in a consent Order resolving the Commission’s claims against Lloyds, the court ordered Lloyds Commodities to pay over $5 million in restitution and penalties (see CFTC Press Release 6850-14).

On February 19, 2014, the court found that Hunter Wise had no actual metal to deliver to customers and held that Hunter Wise engaged in illegal precious metals transactions and was required to register as a Futures Commission Merchant but did not do so and therefore violated Sections 4(a) and 4d of the CEA (see CFTC v. Hunter Wise Commodities, LLC, et al., 12-81311-CIV (Order on the Parties’ Motions for Summary Judgment)). On April 15, 2014, the U.S. Court of Appeals for the Eleventh Circuit affirmed the court’s issuance of a preliminary injunction and held that the Commission’s jurisdiction under Section 2(c)(2)(D) of the CEA extends to the precious metals transactions at issue in the case and that no exception to the Commission’s jurisdiction applied. And, on May 16, 2014, after a bench trial on the remaining claims, including fraud, the court entered an Order finding that Hunter Wise fraudulently misrepresented the nature of precious metals transactions that resulted in millions of dollars in customer losses (see CFTC Press Release 6935-14).

In its continuing litigation against SAG and Pakel, the CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and a permanent injunction from future violations of the CEA, as charged.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

CFTC Division of Enforcement staff members responsible for this action are Eugenia Vroustouris, Michael Loconte, James H. Holl, III, and Rick Glaser.

Saturday, February 7, 2015

CFTC CHARGED HUSBAND, WIFE AND COMPANIES WITH FRAUD

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
February 3, 2015
CFTC Charges California Residents Christopher Valois and Cynthia Wong and Their Companies with Fraud and Registration Violations

Husband and wife team allegedly stole more than $300,000 of the $750,000 their customers invested

Federal court enters emergency Order freezing Defendants’ assets and protecting books and records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Cormac J. Carney of the U.S. District Court for the Central District of California entered an emergency restraining Order freezing assets and prohibiting the destruction or concealment of books and records of Defendants Christopher Valois, Cynthia Wong, and their companies, Bertram Trade LLC (Bertram) and Churchhill Commodities Trading LLC (Churchhill), all of Orange County California. The judge set a hearing date for February 12, 2015.

The court’s Order arises from a CFTC Complaint filed on January 28, 2015, charging the Defendants with precious metals and futures fraud, misappropriation, engaging in illegal off-exchange precious metals transactions, and registration violations, in violation of the Commodity Exchange Act and CFTC Regulations from October 2011 to the present.

According to the Complaint, husband and wife Valois and Wong, acting by and through Bertram and Churchhill, fraudulently solicited approximately $450,000 from six customers, some of whom were senior citizens, to purchase precious metals or engage in futures trading. The Complaint states that the precious metals transactions offered by Valois and Wong and their companies were illegal off-exchange instruments and alleges that Valois and Wong misappropriated more than $300,000 of customer money to pay their personal expenses.

The Complaint also alleges that Valois and Wong acted as Commodity Trading Advisors by trading another $300,000 of at least four members of the general public in futures contracts and receiving advisory fees for such futures trading, even though they were not registered with the CFTC, as required. In fact, Valois previously had been banned from the futures industry for cheating and defrauding customers, according to the Complaint.

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

The CFTC appreciates the cooperation of the National Futures Association in this matter.

CFTC Division of Enforcement staff members responsible for this case are Camille Arnold, Joseph Patrick, Robert Howell, Scott Williamson, and Rosemary Hollinger.

Wednesday, August 13, 2014

COURT ORDERS MAN AND HIS COMPANY TO PAY OVER $500,000 FOR OFF-EXCHANGE PRECIOUS METALS TRANSACTIONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Federal Court Orders Florida Resident Lawrence Scott Spain and His Florida Company, Palm Beach Capital LLC, to Pay More than $520,000 in Restitution for Engaging in Illegal, Off-Exchange Precious Metals Transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that on August 4, 2014, Judge Beth Bloom of the U.S. District Court for the Southern District of Florida entered a Consent Order for Permanent Injunction against Florida resident Lawrence Scott Spain and his company, Palm Beach Capital LLC (PBC) (the Defendants), for engaging in illegal, off-exchange precious metals transactions. The Order requires the Defendants, jointly and severally, to pay restitution of $526,960; imposes permanent trading, solicitation and registration bans against them; and prohibits them from engaging in illegal, off-exchange retail commodity transactions, as charged. Spain’s last known address was in Boca Raton, Florida.

The court’s Order stems from a CFTC Complaint filed on May 13, 2014, that charged the Defendants with engaging in illegal, off-exchange transactions in precious metals with retail customers on a leveraged, margined, or financed basis (see CFTC Press Release and Complaint 6931-14). The Complaint further alleged that Spain, as controlling person for PBC, is liable for PBC’s violations of the Commodity Exchange Act.

The Order provides that Melanie Damian, Esq. is responsible for collecting restitution and making any distributions to PBC’s customers. Ms. Damian was appointed by the U.S. District Court for the Southern District of Florida as Special Monitor, Corporate Manager and Equity Receiver in the CFTC’s enforcement action against, among others, Lloyds Commodities, LLC and certain of its associated entities (referred to collectively as Lloyds Commodities) and Hunter Wise Commodities, LLC and certain of its associated entities (referred to collectively as Hunter Wise) (see CFTC Press Releases 6447-12, December 12, 2012 and 6935-14, May 22, 2014). The Order finds that PBC transacted the illegal precious metals transactions through Lloyds Commodities and Hunter Wise.

The Order further finds that, since at least July 16, 2011 and continuing through at least August 2012, PBC, by and through its employees including Spain, solicited retail customers by telephone and on PBC’s website, to engage in off-exchange leveraged, margined, or financed precious metals (including gold, silver, platinum and palladium) transactions. During that period, according to the Order, approximately 39 of PBC’s customers paid at least $1.35 million to PBC in connection with precious metals transactions. The Order finds that these customers lost at least $1.25 million of their funds to trading losses, commissions, fees, and other charges by PBC and other companies, and that PBC received commissions and fees totaling $526,960 in connection with these precious metals transactions.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, leveraged, margined, or financed transactions such as those conducted by PBC, are illegal off-exchange transactions unless they result in actual delivery of the commodity involved within 28 days. The Order finds that metals were never actually delivered in connection with the leveraged, margined, or financed precious metals transactions made on behalf of PBC’s customers.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

CFTC Division of Enforcement staff members responsible for this action are R. Stephen Painter, Jr., Michael C. McLaughlin, David W. MacGregor, Lenel Hickson, Jr., and Manal M. Sultan.

Wednesday, May 21, 2014

CFTC ANNOUNCES FIRST WHISTLEBLOWER AWARD UNDER DODD-FRANK

 FROM:  COMMODITY FUTURES 
CFTC Issues First Whistleblower Award

Washington, DC — Commodity Futures Trading Commission (CFTC) Acting Chairman Mark Wetjen announced today that the agency will make its first award to a whistleblower as part of the Commission’s Whistleblower Program created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The person will receive approximately $240,000 for providing valuable information about violations of the Commodity Exchange Act.

“I am pleased to announce this first award which illustrates that the CFTC’s Whistleblower Program is a valuable resource for the American public. Information received under the Whistleblower Program helps the agency better protect market participants and the public through successful enforcement actions,” said CFTC Acting Chairman Wetjen.

Acting Director of the CFTC’s Division of Enforcement Gretchen Lowe said, “Here, the whistleblower provided specific, timely and credible information that led to the Commission bringing important enforcement actions. The CFTC’s Whistleblower Program is attracting high-quality tips and cooperation we might not otherwise receive and is already having an impact on the Commission’s enforcement mission.”

Christopher Ehrman, the Director of the Whistleblower Office, said that the number of high quality tips, complaints and referrals received continues to increase. “Our Whistleblower Program is a necessary enforcement tool for the agency, and my hope is that this award will send the strong message that the CFTC will pay for information that helps us do our jobs.”

Under the Dodd-Frank Act, the CFTC’s Whistleblower Program provides monetary awards to persons who report violations of the Commodity Exchange Act if the information leads us to an action that results in more than $1 million in monetary sanctions. Whistleblowers are eligible for 10 to 30 percent of monies collected. The CFTC can also pay awards based on monetary sanctions collected by other authorities in actions that are related to a successful CFTC action, and are based on information provided by a CFTC whistleblower. The Dodd-Frank Act whistleblower provisions also prohibit retaliation by employers against employees who provide the CFTC with information about possible violations, or who assist us in any investigation or proceeding based on such information.

Thursday, May 15, 2014

CFTC OFFICIAL'S TESTIMONY BEFORE SENATE COMMITTEE REGARDING AUTOMATED TRADING ENVIRONMENTS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Testimony of Vincent McGonagle, Director of the Division of Market Oversight, Commodity Futures Trading Commission Before the U.S. Senate Committee on Agriculture, Nutrition and Forestry
May 13, 2014

Chairwoman Stabenow, Ranking Member Cochran and Members of the Committee, thank you for the opportunity to appear before you today. My name is Vincent McGonagle and I am the Director of the Division of Market Oversight at the Commodity Futures Trading Commission (CFTC or Commission). I am pleased to appear before the Committee to provide an overview of the CFTC’s Concept Release on Risk Controls and System Safeguards for Automated Trading Environments (Concept Release). The Concept Release reflects the Commission’s ongoing commitment to the safety and soundness of U.S. derivatives markets in times of technological change, including automated and high-frequency trading (HFT).

My written testimony today will describe the Concept Release and provide an overview of public comments received in response to the risk controls and market enhancements discussed therein. It will also describe the regulatory context in which automated and high-frequency trading currently operate, and numerous measures already taken by the Commission to safeguard trading in modern, technology-driven markets.

Background on Commodity Exchange Act and the CFTC’s Mission

The purpose of the Commodity Exchange Act (Act) is to serve the public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information. Consistent with its mission statement and statutory charge, the CFTC is tasked with protecting market participants and the public from fraud, manipulation, abusive practices and systemic risk related to derivatives – both futures and swaps – and to foster transparent, open, competitive and financially sound markets. In carrying out its mission and statutory charge, and to promote market integrity, the CFTC polices derivatives markets for various abuses and works to ensure the protection of customer funds.

To fulfill these roles, the Commission oversees designated contract markets (DCMs), swap execution facilities (SEFs), derivatives clearing organizations, swap data repositories, swap dealers (SDs), futures commission merchants (FCMs) and other intermediaries. The Act generally requires that all futures transactions be conducted on or subject to the rules of a board of trade that the CFTC designates as a DCM. Sections 5 and 6 of the Act and Part 38 of the Commission’s regulations provide the legal framework for the Commission to designate DCMs, along with each DCM’s self-regulatory compliance requirements with respect to the trading of commodity futures contracts. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), DCMs were also permitted to list swap contracts. Dodd-Frank also adopted a new regulatory category for exchanges that provide exclusively for the trading of swaps (i.e., SEFs).

Exchanges’ Self-Regulatory Responsibilities and CFTC Oversight

DCMs and SEFs play an important role in the regulatory structure established for derivatives markets by the Act. As self-regulatory organizations (SROs) they are responsible for front-line oversight of all exchange-traded derivatives subject to the Commission’s jurisdiction. DCMs must comply with 23 core principles, including core principles requiring them to establish, monitor and enforce compliance with their rules and to have the capacity to detect, investigate and sanction violative conduct1 and to prevent manipulation and price distortion.2 SEFs are subject to 15 core principles and must comply with similar requirements to establish and enforce trading and participation rules that will deter abuses, and have the capacity to detect and investigate rule violations.3 SEFs are also required to monitor trading in swaps to prevent manipulation and price distortion.4 Commission regulations require DCMs and SEFs to prohibit abusive trading practices by exchange members and market participants, including abuses against customers. Prohibited practices include, but are not limited to, trading ahead of customer orders, accommodation trading, improper cross trading, front-running, wash-trading, pre-arranged trades unless otherwise permitted, fraudulent trading and money passes. DCMs and SEFs must prohibit any other manipulative or disruptive trading practice prohibited by the Act or Commission regulations, and any trading practice that the DCM or SEF believes to be abusive.5

To fulfill these responsibilities, DCMs and SEFs are required to and do maintain in-house compliance departments with appropriate human and technology resources, or to contract with third-party regulatory service providers recognized under the Act. DCMs and SEFs must also maintain complete audit trails. For example, DCMs have extensive electronic records of activity on their electronic trade matching platforms. A subset of such records—trade and related order data—is provided to the CFTC daily by DCMs for the Commission’s own surveillance activities.6

The Division of Market Oversight conducts rule enforcement reviews of DCMs’ self-regulatory programs and evaluates their compliance with the Act and Commission regulations. Such reviews aim to promote DCMs’ effective performance as SROs by examining core principles most closely-related to their self-regulatory programs. These include core principles governing DCMs’ trade practice surveillance, market surveillance, audit trail, and disciplinary programs. The Division will conduct similar reviews of SEFs in the future. In addition, the Division also conducts direct surveillance of its regulated markets, and continues to improve the regulatory data available for this purpose. For example, in November 2013 the Commission published final rules to improve its identification of participants in futures and swaps markets (OCR Final Rules).7 While enhancing the Commission’s already robust position-based reporting regime, the OCR Final Rules also create new volume-based reporting requirements that significantly expand the Commission’s view into its regulated markets, including with respect to high-frequency traders.

Expansion of CFTC Enforcement Authority under Dodd-Frank and New Regulations Relevant to Automated Markets

The Commission’s responsibilities under the Act include mandates to prevent and deter fraud, manipulation, and disruptive trading. Dodd-Frank broadened the Commission’s enforcement authority to include swaps markets. Under the new law and rules implementing it, the Commission’s anti-manipulation reach is extended to prohibit the reckless use of manipulative schemes. Specifically, Section 6(c)(3) of the Act now makes it unlawful for any person, directly or indirectly, to manipulate or attempt to manipulate the price of any swap, or of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity. In addition, new Section 4c(a) of the Act now explicitly prohibits disruptive trading practices, such as the violation of bids or offers, intentional or reckless disregard for the orderly execution of transactions during the closing period, or the placement of bids or offers with the intent to cancel such bids or offers before execution (commonly known as “spoofing”).8

A number of Commission rulemakings to implement Dodd-Frank have focused specifically on safeguards for automated trading. These new rules address both market participants, such as FCMs, SDs and others, and exchanges, including both DCMs and SEFs. In April 2012, the Commission adopted Regulations 1.73 and 23.609 requiring FCMs, SDs and major swap participants (“MSPs”) that are clearing members to establish risk-based limits based on “position size, order size, margin requirements, or similar factors” for all proprietary accounts and customer accounts.9 The rules also require FCMs, SDs and MSPs to “use automated means to screen orders for compliance with the [risk] limits” when such orders are subject to automated execution.10 The Commission also adopted rules in April 2012 requiring SDs and MSPs to ensure that their “use of trading programs is subject to policies and procedures governing the use, supervision, maintenance, testing, and inspection of the program.”11

In June 2012, the Commission adopted rules to implement the 23 core principles for DCMs.12 Regulation 38.255 requires DCMs to “establish and maintain risk control mechanisms to prevent and reduce the potential risk of price distortions and market disruptions, including, but not limited to, market restrictions that pause or halt trading in market conditions prescribed by the designated contract market.”13 Regulation 37.405 imposes similar requirements on SEFs.14 In addition, the Acceptable Practices for DCM Core Principle 4 (Prevention of Market Disruption) and Guidance to SEF Core Principle 4 (Monitoring of Trading and Trade Processing) identify pre-trade limits on order size, price collars or bands, message throttles and daily price limits as responsive measures that a DCM or SEF may implement to demonstrate compliance with elements of Core Principle 4.15

The DCM rules also set forth risk control requirements for exchanges that provide direct market access (“DMA”) to clients. Regulation 38.607 requires DCMs that permit DMA to have effective systems and controls reasonably designed to facilitate an FCM’s management of financial risk. These systems and controls include automated pre-trade controls through which member FCMs can implement financial risk limits.16 Regulation 38.607 also requires DCMs to implement and enforce rules requiring member FCMs to use these systems and controls.17 Finally, the DCM rules implement new requirements in the Act related to exchanges’ cyber security and system safeguard programs. As with its rule enforcement reviews, the Division also conducts periodic systems safeguards examinations to review DCMs’ compliance with the systems safeguards and cyber security requirements of the Act and Commission regulations. The Act and Commission regulations also address cyber security and system safeguards within SEFs.

The CFTC’s Concept Release on Risk Controls and System Safeguards for Automated Trading Environments

The Commission’s Concept Release on Risk Controls and System Safeguards for Automated Trading Environments was published in the Federal Register on September 12, 2013.18 The initial 90-day comment period closed on December 11, 2013, but was reopened from January 21 through February 14, 2014, in conjunction with a meeting of the CFTC’s Technology Advisory Committee (TAC). As discussed in further detail below, the Concept Release considers a series of potential pre-trade risk controls; post-trade reports; the design, testing, and supervision standards for automated trading systems (ATS) which generate orders for entry into automated markets; market structure initiatives; and other measures designed to reduce risk or improve the functioning of automated markets. The Concept Release also requests public comment on 124 separate questions regarding the necessity and operation of such measures in today’s markets. In this regard, the Concept Release serves as a vehicle to catalogue existing industry practices, determining their efficacy and implementation to date, and evaluating the need for additional measures. The Concept Release is not a proposed rule, but rather a prior step designed to engage a public dialogue and educate the Commission so that it may make an informed determination as to whether rulemaking is necessary and, if so, the substantive requirements of such a rulemaking.

The Commission received a total of 43 public comments on the Concept Release, including comments from DCMs; an array of trading firms; trade associations; public interest groups; members of academia; a U.S. federal reserve bank; and consulting, technology and information service providers in the financial industry. All comments are available on cftc.gov. Many of the comments received are detailed and thorough, including some comment letters that addressed all 124 questions presented in the Concept Release. One commenter conducted a survey of its member firms to gauge existing risk-management practices. Other commenters provided academic papers in support of their points of view, and some focused on elements of the Concept Release that are of particular interest to them. CFTC Staff is studying all comments received and will make initial recommendations once its review is complete.

Fundamentally, the Concept Release asks whether existing risk controls in automated trading environments are sufficient to match the technologies and risks of modern markets. In this regard, the Concept Release focuses on the totality of the automated trading environment, including the progression of orders from the ATSs that generate them, through the clearing firms that guarantee customer orders, and on to execution by registered trading platforms. The Concept Release also addresses ATSs themselves, including their design, testing and supervision. It also raises a number of related issues, ranging from the underlying data streams used by ATSs to inform their trading decisions, to the special considerations involved in trading via direct market access. It also asks whether terms such as “high-frequency trading” should be defined in regulations, and whether HFT firms should be registered with the Commission.

The Concept Release was informed by a number of factors, including: (1) controls or best practices already in use or developed within industry; (2) existing CFTC regulatory standards that address automated trading; and (3) best practices developed by expert groups and outside organizations, including international standard setting bodies, foreign jurisdictions, and the CFTC’s TAC.

The Concept Release begins with an overview of the automated trading environment, including the development of automated order-generating and trade-matching systems; advances in high-speed communication networks; the growth of interconnected automated markets; and the changed role of humans in markets. It also highlights the importance of ATSs as tools for the generation and routing of orders.

These developments are addressed in the Concept Release through a series of 23 potential risk controls and other measures broadly grouped into four categories. The first includes “pre-trade risk controls,” such as controls designed to prevent potential errors or disruptions from reaching trading platforms, or to minimize their impact once they have. Specific pre-trade risk controls include maximum message rates, execution throttles, and maximum order sizes. Depending on the measure, pre-trade risk controls could be applicable to all trading firms; to trading firms operating ATSs; to clearing firms; or to trading platforms. The Concept Release includes a total of eight pre-trade risk controls and sub-controls.

A second category of safeguards includes “post-trade reports” and “other post-trade measures.” Examples in this category include reports that promote the flow of order, trade and position information; uniform trade adjustment or cancellation policies; and standardized error trade reporting obligations. These measures could be applicable to all trading firms; to trading platforms; or to clearing houses. There are a total of five post-trade reports and other measures or sub-measures in this category, including post-order, post-trade, and post-clearing drop copies.

The third category of risk controls discussed in the Concept Release is termed “system safeguards,” including safeguards for the design, testing and supervision of ATSs, as well as measures such as “kill switches” that facilitate emergency intervention in the case of malfunctioning ATSs. Such safeguards would generally be applicable to trading firms operating ATSs, and depending on the control, might also apply to trading platforms and others. The Concept Release presents a total of seven system safeguards, some with subparts.

Finally, the Concept Release presents a fourth category of measures focusing on various options for potentially improving market functioning or structure. These includes measures such as mandatory publication by exchanges of various market quality indicators to help inform market participants (e.g., order to fill ratios; execution speeds for different types of orders and order sizes; price impacts associated with different trade sizes; and average order duration). They also include a number potential measures requiring exchanges to amend their trade matching systems by, for example: (1) providing batch auctions instead of continuous trade matching; (2) prioritizing orders resting in the order book for some minimum period of time; or (3) aggregating multiple small orders from the same legal entity entered contemporaneously at the same price level and assigning them the lowest priority time-stamp of all orders so aggregated.

As a threshold matter, the Concept Release recognizes that orders and trades in automated environments pass through multiple stages in their lifecycle, from order generation, to execution, to clearing, and steps in between. Accordingly, it solicited comment regarding the appropriate stage or stages at which risk controls should be placed. Focal points for the implementation of risk controls described in the Concept Release include: (i) ATSs prior to order submission; (ii) clearing firms; (iii) trading platforms prior to exposing orders to the market; (iv) clearing houses; and (v) other risk control options, such as third-party “hubs” through which orders or order information could flow to uniformly mitigate risks across various platforms. The Concept Release recognizes that the appropriate location of a risk control also may depend on the type of control or its intended purpose. Therefore, it specifically seeks comment on this question, and on the desirability of a “layered” or “defense in depth” approach that places the same or similar risk controls at more than one stage of the order and trade lifecycle.

Given the variety and complexity of matters raised in the Concept Release, commenters understandably held a range of opinions. Many commenters expressed satisfaction that the Commission has undertaken this review of risk controls and system safeguards in automated trading environments. Based on comments received and other indications, a number of parties support certain Commission actions. Some have expressed “race to the bottom” concerns in the absence of minimum regulatory standards. In this regard, any risk controls that introduce latency (i.e., reduce speed) in the generation or transmission of orders could create competitive disadvantage for firms that adopt them unilaterally.

Most commenters also supported a multi-layered approach to risk controls. One commenter stated, for example, that a “holistic approach, with overlapping supervisory obligations, offers the most robust protection by engaging all levels of the supply chain…and eliminating the possibility that a single point of failure will cause significant harm to the market.” Another entity commented with respect to ATS testing and change management that “the same levels of responsibility for testing and change management should apply to all market participants that deploy their own technology, as well as providers of technology that allows access to the markets.”

At the same time, other measures contemplated in the Concept Release drew opposition by a majority of commenters. For example, a majority of parties who commented on the idea of a credit risk control implemented through a centralized hub were opposed to the idea, citing costs, complexity and an undesirable concentration of risk.

Certain key questions in the Concept Release drew very divergent opinions. Commenters disagreed on the need for a regulatory definition of high-frequency trading. Just over half of the parties who commented on this point were opposed to a definition, while the remainder were in favor. The question of defining high-frequency trading is closely related to the question of whether HFT firms not already registered with the Commission in some capacity should be required to register. Those opposed to defining high-frequency trading suggested that no clear distinction can be drawn between automated trading and high-frequency automated trading, or pointed to the difficulty in defining HFT and to the concern that any definition of HFT would become obsolete over time.

A commenter’s opinion as to whether HFT should be defined typically ran in parallel with its opinion as to whether risk controls should apply equally to all automated systems, or whether high-frequency trading or HFT firms deserve special regulatory attention. Those requesting HFT-specific measures logically saw a need to define high-frequency trading. More fundamentally, however, some academic commenters discussed concerns around the speed of trading, including within exchange order books, and suggested steps to slow trading or to reduce any potential advantages that come with speed.

One recurring theme across comments is whether pre-trade risk controls and other measures should focus on high-level principles or be more granular instead. Many industry commenters stated their preference for a principles-based approach to any rules that the Commission may adopt. These commenters argued that prescriptive requirements will become obsolete as technologies advance; may not account for the unique characteristics of market participants; and could result in participants designing around such measures. Similarly, one commenter noted that the best way to achieve standardization of risk controls is through implementing “best practices” developed through working groups of DCMs, FCMs, and other market participants.

Other commenters, however, expressed a need for more prescriptive rules. One argued, for example, that prescriptive rules are necessary unless the Commission receives documentation that the risk controls implemented by firms and exchanges are consistent and effective. Another commenter questioned whether the incentives facing industry participants would permit them to, quote, “sacrifice speed for prudent risk controls.”

Finally, as with the high-level questions discussed above, many of the specific pre-trade risk controls and other safeguards discussed in the Concept Release drew divergent opinions, either around whether the control should be a regulatory requirement or, if a requirement, how granular it should be. Commenters also addressed the appropriate design and use of particular risk controls. For example, one commenter stated that “kill switches, if implemented and used properly, can serve as an effective last-resort means of risk control,” but “are not a panacea and should only be used during extreme events when all other courses of action have been exhausted.” Another commenter specified that kill switches should exist at the trading firm, clearing firm and trading platform level, and that the Commission should assess the methodology used to set kill switch limits.

As noted previously, staff continues to review all comments received and to refine its thoughts. Next steps could include potential recommendations to the Commission for notice and comment rulemaking in one or more areas addressed by the Concept Release.

This concludes my written testimony.

1 See 17 CFR 38.150 (Core Principle 2—Compliance with Rules).

2 See 17 CFR 38.250 (Core Principle 4—Prevention of Market Disruption).

3 See 17 CFR 37.200 (Core Principle 2—Compliance with Rules).

4 See 17 CFR 37.400 (Core Principle 4—Monitoring of Trading and Trade Processing).

5 See 17 CFR 38.152 and 17 CFR 37.203(a).

6 DCMs provide information to the Commission on a “T + 1” basis, i.e., on trade date plus 1.

7 Commission, Final Rule: Ownership and Control Reports, Forms 102/102S, 40/40S, and 71, 77 FR 69177 (Nov. 18, 2013).

8 The Commission further clarified the scope of these prohibited disruptive trading practices in its Interpretive Guidance and Policy Statement on Disruptive Practices. 78 FR 31890 (May 28, 2013).

9 17 CFR 1.73(a)(1) and 23.609(a)(1).

10 17 CFR 1.73(a)(2)(i) and 17 CFR 23.609(a)(2)(i).

11 17 CFR 23.600(d)(9).

12 Commission, Final Rule: Core Principles and Other Requirements for Designated Contract Markets, 77 FR 36612 (Jun. 19, 2012) (the “DCM Final Rules”).

13 17 CFR 38.255.

14 17 CFR 37.405.

15 DCM Final Rules, 77 FR at 36718; Commission, Final Rule: Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33476, 33601 (June 4, 2013).

16 17 CFR 38.607.

17 Id.

18 Commission, Concept Release on Risk Controls and System Safeguards for Automated Trading Environments, 78 FR 56542 (Sept. 12, 2013).

Last Updated: May 13, 2014

Tuesday, January 28, 2014

DISGORGEMENT AND FINES ORDERED FOR COMMODITY TRADING SYSTEM PROMOTERS

FROM:  COMMODITY FUTURES TRADING COMMISSION 

Federal Court Orders California Defendants CTI Group, LLC, Cooper Trading, Stephen Craig Symons, and James David Kline to Pay Over $29 Million in Disgorgement and Fines for Fraudulent Sale of Automated Trading Systems

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York entered a Consent Order for Permanent Injunction (Order) against Defendants CTI Group, LLC, a California limited liability company, Cooper Trading, a California corporation (collectively, CTI), Stephen Craig Symons of Corona del Mar, California, and James David Kline, who was a resident of Van Nuys, California, for fraudulent sales practices in connection with the sale of two automated trading systems (Trading Systems), known as Boomer and Victory.

The court’s Order stems from a CFTC Complaint filed on May 11, 2012, that charged the Defendants with the fraudulent solicitation of clients to subscribe to the Boomer and Victory Trading Systems, which were used by clients to trade E-mini Standard and Poor’s 500 Stock Index futures contracts in managed accounts (see CFTC Press Release 6266-12 and Complaint).

The Order, entered on January 22, 2014, requires Defendants CTI Group and Cooper Trading to pay $10.175 million in disgorgement and a $10 million civil monetary penalty, Symons to pay over $3.150 million in disgorgement and a $4.5 million civil monetary penalty, and Kline to pay over $275,000 in disgorgement and a $1 million civil monetary penalty. The Order further imposes permanent trading and registration bans on the Defendants and prohibits them from violating the anti-fraud and disclosure provisions of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.

The CFTC’s Complaint also named as Relief Defendants California companies Snonys, Inc. and Dragonfyre Magick Incorporated, which, according to the Complaint, were owned or operated by Symons and Kline, respectively. The Order provides for the disgorgement of Relief Defendants’ funds frozen pursuant to a court order that was previously entered on May 14, 2012.

The Order further finds that, since at least in or around August 2009, CTI and its agents and employees made false and misleading statements and omitted material information when soliciting clients to purchase subscriptions to CTI’s Trading Systems, including (1) how long CTI had been in business, (2) CTI’s experience developing and marketing Trading Systems, (3) the identities and professional experience of CTI’s personnel (who used fictitious names when communicating with clients), (4) the track record of CTI’s Trading Systems, (5) the past profitability of CTI’s Trading Systems, (6) the transaction costs associated with trading via CTI’s Trading Systems, and (7) the risks associated with trading futures contracts via CTI’s Trading Systems.

CTI’s salespeople, including Kline, made false statements to clients and prospective clients about CTI’s purported money-back guarantee, and Symons and Kline are liable for all of CTI’s violations because they controlled CTI and actively participated in CTI’s unlawful conduct, according to the Order.

According to the Order, funds were transferred to the Relief Defendants from CTI as a result of the Defendants’ violations of the CEA and CFTC regulations, and the Relief Defendants do not have a legitimate claim to or interest in those funds.

The CFTC thanks the National Futures Association for its assistance.

CFTC Division of Enforcement staff members responsible for this case are R. Stephen Painter, Jr., Michael C. McLaughlin, David W. MacGregor, Lenel Hickson, Jr., and Manal M. Sultan.

CFTC Fraud Awareness Advisories & Customer Protection Information

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including an Advisory covering Commodity Trading Systems Sold on the Internet. This Advisory states that the CFTC has seen an increase in websites that fraudulently promote commodity trading systems and advisory services and provides information designed to help customers identify this potential swindle before they invest.

Customers can file a tip or complaint to report suspicious activities or other information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or an online form.

Saturday, September 28, 2013

CFTC ORDERS NEWBRIDGE METALS TO PAY RESTITUTION FOR ILLEGAL PRECIOU METALS TRANSACTIONS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Orders Florida Company Newbridge Metals, LLC to Pay over $1.5 Million in Restitution for Illegal, Off-Exchange Precious Metals Transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Newbridge Metals, LLC, based in Boca Raton, Florida, for engaging in illegal off-exchange precious metals transactions.

The CFTC Order requires Newbridge to pay restitution of $1,517,930.66 to its customers. In addition, the Order imposes permanent registration and trading bans against Newbridge and requires the firm to cease and desist from violating Section 4(a) of the Commodity Exchange Act, as charged.

As explained in the Order, financed transactions in commodities with retail customers, like those engaged in by Newbridge, must be executed on, or subject to, the rules of an exchange approved by the CFTC.  The CFTC Order finds that, from February 2012 through February 2013, Newbridge solicited retail customers to buy and sell precious metals on a financed basis.

According to the Order, Newbridge telemarketers typically represented that a customer could purchase a desired quantity of precious metals with a 25% deposit, and that the customer could borrow the remaining 75%. The customer would then pay Newbridge a finance charge on the loan, a service charge, and a maximum commission of 15%.

If a customer agreed to the transaction, the customer sent the deposit, finance charge, and commission to Newbridge. Newbridge confirmed the transaction and ultimately transferred the funds to Hunter Wise Commodities, LLC (Hunter Wise), the Order finds.  Hunter Wise subsequently remitted to Newbridge a portion of the customer commissions and fees, with Newbridge ultimately receiving $1,517,930.66 in commissions and fees for the retail financed precious metals transactions executed through Hunter Wise, the Order states.

However, according to the Order, neither Newbridge nor Hunter Wise bought, sold, loaned, stored, or transferred any physical metals for these transactions, and neither company actually delivered any precious metals to any customer.  Because Newbridge’s transactions were executed off exchange, they were illegal.

The CFTC sued Newbridge’s clearing firm, Hunter Wise, in federal court in Florida on December 5, 2012.  The CFTC charged Hunter Wise with engaging in illegal, off-exchange precious metals transactions, as well as fraud and other violations (see CFTC Press Release 6447-12).  On February 25, 2013, the court granted a preliminary injunction against Hunter Wise, froze the firm’s assets, and appointed a corporate monitor to assume control over those assets (see CFTC Press Release 6522-13).

Saturday, September 21, 2013

COURT ORDERS MAN AND COMPANY TO PAY OVER $2.4 MILLION IN FOREIGN CURRENCY SCHEME

FROM:   COMMODITY FUTURES TRADING COMMISSION 
Federal Court Orders Alex Ekdeshman and Paramount Management, LLC, to Pay over $2.4 million in Restitution and a Fine for Fraudulent Foreign Currency Scheme
Court Order Stems from a CFTC Complaint that Charged Defendants with Solicitation Fraud and Misappropriation of Customer Funds

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court consent Order against Defendants Alex Ekdeshman of Holmdel, New Jersey, and Paramount Management, LLC (Paramount), requiring them to pay $1,146,000 in restitution to their defrauded customers and a $1,337,000 civil monetary penalty. The Consent Order of Permanent Injunction also imposes permanent trading and registration bans against the Defendants and prohibits them from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.

The Order was entered on September 9, 2013, by U.S. District Judge Colleen McMahon of the Southern District of New York and stems from a CFTC Complaint filed against the Defendants on June 26, 2013. The CFTC’s Complaint charged Ekdeshman, individually and as the agent of Paramount, with solicitation fraud and misappropriating “the vast majority” of customer funds for business expenses. Specifically, the Complaint charged the Defendants with operating a fraudulent scheme that solicited more than $1.3 million from approximately 110 retail customers to engage in leveraged or margined foreign currency (forex) transactions with unregistered off-shore counterparties. The Defendants allegedly advised customers that forex trading accounts would be opened in the customer’s name and would be traded by the Defendants on behalf of the customer.

Furthermore, the Defendants, through a telemarketing sales force and a “Performance Record” linked to their website, touted Paramount’s successful trading record as having yielded an average monthly return of 4.6% over a 20-month period, based on the performance of Paramount’s proprietary trading software system, according to the Complaint.

However, the court’s Order finds that, contrary to the claims made during the solicitations, the Defendants did not manage or trade any customer account, and thus Paramount’s customers neither made actual purchases of any forex nor received delivery of forex. The Order also finds that the Defendants misappropriated all customer funds for Ekdeshman’s personal benefit and failed to disclose to actual or prospective customers that they were misappropriating customer funds. To conceal their fraud, the Order finds that, during all phases of the scheme, the Defendants issued false account statements to their customers, as no individual customer accounts were ever created and no profits were ever generated.

The CFTC appreciates the assistance of the United Kingdom Financial Conduct Authority, the Financial Services Commission Mauritius, and the Financial Services Board of the Republic of South Africa.

Further, the CFTC appreciates the assistance of the Wisconsin Department of Financial Institutions, the National Futures Association, and the Federal Trade Commission.

CFTC Division of Enforcement staff members responsible for this matter are Thomas Kelly, Michael Amakor, Michael Geiser, Melanie Devoe, George Malas, Timothy J. Mulreany, Paul Hayeck, and Joan Manley.

Friday, September 20, 2013

CFTC ORDERS BROKER EMPLOYEE TO PAY PENALTY FOR MAKING FALSE STATEMENTS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Orders Futures Broker Employee Susan Butterfield to Pay $50,000 Penalty in Settlement of Charges of Making False Statements to the CFTC During Her Investigative Testimony

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it entered an Order requiring Susan Butterfield of New Lenox, Illinois, to pay a $50,000 civil monetary penalty for making false statements of material fact in testimony to CFTC staff during a CFTC Division of Enforcement investigation. The Order enforces the false statements provision of the Commodity Exchange Act (CEA), which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

According to the CFTC’s Order, Butterfield, an employee of a company registered with the Commission as an introducing broker (the IB), handled various clerical and administrative responsibilities concerning trading on the floor of the Chicago Board of Trade (CBOT). Her responsibilities included accepting and recording customer orders. When done properly, this involved time-stamping paper order tickets contemporaneously with the receipt of a customer commodity futures or options order to accurately record the time of day when the IB received the order.

On January 31, 2013, Butterfield gave sworn testimony in an investigation being conducted by the CFTC’s Division of Enforcement. The CFTC Order finds that during that testimony, Butterfield knowingly made false and misleading statements regarding whether she had improperly pre-stamped order tickets, i.e., whether she stamped order tickets in blank, prior to the time when a customer order was actually received. As the Order states, this testimony was significant in that use of pre-stamped order tickets may violate Commission Regulations and CBOT rules and also may facilitate unlawful trade allocation schemes in which brokers decide who will receive trades only after they are executed, potentially allowing them to profit at their customers’ expense.

The CFTC Order finds that prior to her CFTC testimony Butterfield told her supervisor, who was a principal at the IB, that “we pre-stamp orders and it’s something that is – that we should not be doing.” However, on January 31, 2013, when the Division of Enforcement staff questioned Butterfield on the IB’s pre-stamping practice, Butterfield falsely told the staff that she “never pre-stamped any [order] tickets.” Later during the course of her testimony the same day, Butterfield admitted to various instances of pre-stamping order tickets, but only after she was confronted by documents that plainly contradicted her initial false testimony. Ultimately, having been confronted with evidence that demonstrated her falsehoods, Butterfield admitted by the end of her testimony that it was in fact her daily practice to pre-stamp order tickets from multiple futures commission merchants throughout the trading session, in numbers amounting to dozens of order tickets every day.

David Meister, the CFTC’s Enforcement Director, stated: “When a witness walks into CFTC testimony he or she should plan to tell the truth to every question or face the consequences. We will use the new Dodd-Frank false statements provision against witnesses who provide false or misleading information to make sure it is well understood that lying is not an option.”

In addition to the $50,000 civil monetary penalty, the CFTC Order requires Butterfield to cease and desist from violating the relevant provision of the CEA, to never apply for or claim exemption from registration with the CFTC or engage in any activity requiring such registration or exemption, and to never act as a principal or officer of any entity registered or required to be registered with the CFTC.

The CFTC Division of Enforcement staff members responsible for this matter are Allison Passman, Theodore Z. Polley III, Joseph Patrick, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.

Saturday, August 31, 2013

CFTC GETS INJUNCTION GETS INJUNCTION FORCING MAN AND COMPANY TO PAY RESTITUTION AND PENALTY

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Federal Court in Maryland Orders Sidney J. Charles, Jr. and his Company, The Borrowing Station, LLC, to pay over $600,000 to Settle CFTC Forex Fraud Action

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court consent Order of permanent injunction requiring Defendants Sidney J. Charles, Jr., formerly of Bowie, Maryland, and his company, The Borrowing Station, LLC (Borrowing Station) of Bowie, Maryland, jointly and severally to pay $254,236 in restitution and a $350,000 civil monetary penalty in connection with an off-exchange leveraged foreign currency (forex) Ponzi scheme.

The Order, entered on August 23, 2013, by Judge Paul W. Grimm of the U.S. District Court of the District of Maryland, also imposes permanent registration and trading bans against both Defendants and prohibits them from further violations of the Commodity Exchange Act (CEA) and CFTC Regulations, as charged. The court’s Order stems from a CFTC complaint filed on April 23, 2012, that charged Defendants with solicitation fraud, misappropriation, issuing false statements, and registration violations (see CFTC Press Release 6247-12).

The Order finds that, from at least October 2009 through at least July 2011, Defendants fraudulently solicited $369,326 from 18 individuals or entities for participation in a pooled investment vehicle managed by Borrowing Station, through Charles, that traded forex. According to the Order, Defendants solicited pool participants directly and through a website. In their solicitations, Defendants promised substantial investment returns such as 25 percent per year or 10 percent per month, and falsely claimed that pool participant funds were guaranteed against trading losses. The Order finds that Defendants deposited only a portion of pool participant funds into trading accounts and lost a majority of those funds unsuccessfully trading forex.

The Order also finds that Defendants issued checks to pool participants that represented purported “monthly returns” or “return on investment.” However, any purported profits that Defendants paid to pool participants came from the principal of other pool participants in the manner of a Ponzi scheme. In addition, Charles misappropriated pool participant funds to pay for personal expenses and to fund Borrowing Station’s operations, according to the Order.

The Order further finds that Borrowing Station and Charles failed to register as a Commodity Pool Operator (CPO) and Associated Person of a CPO, respectively, as required under the CEA and CFTC Regulations.

The CFTC appreciates the assistance of the U.K. Financial Conduct Authority.

CFTC Division of Enforcement staff responsible for this case are Kara Mucha, Kassra Goudarzi, Michael Solinsky, Gretchen L. Lowe, and Vincent A. McGonagle.

Tuesday, July 30, 2013

CFTC ANNOUNCEMENT REGARDING MANDATORY CLEARING OF iTRAXX CDS INDICES FOR CATEGORY 2 ENTITIES

FROM:  COMMODITY FUTURES TRADING COMMISSION

July 25, 2013
CFTC Announces that Mandatory Clearing of iTraxx CDS Indices for Category 2 Entities Begins Today

Washington, DC — The Division of Clearing and Risk (Division) of the Commodity Futures Trading Commission (Commission) announces that the second phase of required clearing for certain iTraxx credit default swap (CDS) indices begins today for Category 2 Entities. Category 2 Entities include commodity pools, private funds, and persons predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature, except for third-party subaccounts. These entities are required to begin clearing iTraxx CDS indices that are subject to the clearing requirement under section 2(h) of the Commodity Exchange Act (CEA) and Regulations 50.2 and 50.4(b) executed on or after July 25, 2013.

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the CEA to require that the Commission determine whether a swap is required to be cleared by a derivatives clearing organization (DCO). The Commission adopted its first clearing requirement determination for four classes of interest rate swaps and two classes of CDS on November 28, 2012.

At the time of the Commission’s initial clearing determination no DCO was offering client clearing for the iTraxx CDS indices. The Commission specified that if no DCO offered client clearing for the indices by February 11, 2013, compliance with the required clearing of iTraxx would begin 60 days after the date on which iTraxx was first offered for client clearing by an eligible DCO.

On February 25, 2013, ICE Clear Credit LLC notified the Commission that it had begun offering customer clearing of the iTraxx CDS indices that are subject to the clearing requirement. The following are the compliance dates previously announced for required clearing of these iTraxx swaps:

Category 1 Entities: Friday, April 26, 2013
Category 2 Entities: Thursday, July 25, 2013
All other entities: Wednesday, October 23, 2013
The compliance dates set forth above do not apply to the clearing schedule for the interest rate swaps and other CDS indices subject to the clearing requirement established in the Commission’s first determination, which are as follows:

Category 1 Entities: Monday, March 11, 2013
Category 2 Entities: Monday, June 10, 2013
All other entities: Monday, September 9, 2013


Monday, July 1, 2013

COURT ORDERS COMPANY, EMPLOYEES AND AGENTS TO PAY RESTITUTION AND PENALTIES IN POOL FRAUD CASE




FROM: COMMODITY FUTURES TRADING COMMISSION

Federal Court Orders Alpha Trade Group S.A. and its Employees and Agents to Pay Combined Restitution and Penalties of $5.779 Million for Defrauding Pool Participants


Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that on June 3, 2013, Judge Gregory A. Presnell of the U.S. District Court for the Middle District of Florida entered an Amended Order entering final judgment (Order) against Defendants Alpha Trade Group, S.A. (ATG), Jose Cecilio Martinez Beltran (Martinez), Welinton Bautista Castillo (Bautista), Yehodiz Padua Valentin (Padua), Maria Alvarez Gutierrez (Gutierrez), and Maria Asela Rodriguez (Rodriguez), all of Orlando, Florida, for their involvement in a fraudulent off-exchange foreign currency (forex) and commodity futures scheme involving two pools, Orsa Investment Group, L.L.C. and Online Marketing Solutions. The Order finds that certain Defendants solicited customers, accepted their funds into the two pools and then failed to return more than $1,461,000, primarily from residents in Florida, California, and Puerto Rico. Moreover, the Order finds that all of the Defendants misappropriated customer funds.

The Order requires ATG, Martinez, and Bautista to pay, jointly and severally, $1,461,500 in restitution, and each to pay a $980,000 civil monetary penalty. The Order requires Padua, Gutierrez and Rodriguez to pay restitution in the amounts of $10,383, $82,750, and $49,079.37, respectively, as well as civil monetary penalties in the amounts of $840,000, $248,250, and $147,238.11, respectively. The Order also imposes permanent trading and registration bans against all of these defendants, and prohibits them from violating the Commodity Exchange Act, as charged.

The Order stems from a CFTC Complaint filed on September 27, 2011, charging ATG, Martinez, Bautista and Padua with solicitation fraud, issuing false account statements, and misappropriating pool participant funds, in connection with both futures and forex, and failing to register with the Commission in connection with futures activities, and also charging Gutierrez and Rodriguez with misappropriating pool participant funds. (See CFTC Press Release 6115-11; CFTC v. Alpha Trade Group S.A., et al., Case No. 6:11-cv-01584-GAP-DAB.)


The CFTC acknowledges the assistance of U.S. Immigration and Customs Enforcement, Department of Homeland Security, as well as the U.S. Attorney’s Office for the Middle District of Florida during the investigation of this matter. The CFTC also acknowledges the assistance provided by Germany’s Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), the Ontario Securities Commission (OSC), and Spain’s Comisión Nacional del Mercado de Valores (CNMV) during the investigation.

CFTC Division of Enforcement staff members responsible for this case are Kim Bruno, Amanda Harding, Michael Loconte, Erica Bodin, Kathleen Banar, Rick Glaser, and Richard Wagner.





Monday, June 3, 2013

FORMER CEO RECEIVES FINE AND SANCTIONS FROM FEDERAL COURT FOR FRAUD

FROM: COMMODITY FUTURES TRADING COMMISSION

Federal Court in New York Imposes a $1 Million Fine and other Sanctions against Kevin Cassidy, Former CEO of Optionable Inc.

Cassidy settles CFTC charges of defrauding the Bank of Montreal

Washington, DC
— The Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order requiring Defendant Kevin Cassidy, formerly of Bedford Hills, New York, former CEO of Optionable Inc., to pay a $1 million civil monetary penalty for violating the anti-fraud provisions of the Commodity Exchange Act (CEA) and CFTC Regulations. The order was entered on May 28, 2013, by the Honorable George B. Daniels of the U.S. District Court for the Southern District of New York.

The Order stems from a CFTC Complaint filed on November 18, 2008 (see CFTC Press Release
5571-08). The Complaint charged David P. Lee, a former trader for the Bank of Montreal (BMO), for mis-marking and mis-valuing BMO’s natural gas options book and deceiving BMO and charged Lee and Cassidy for deceiving BMO, from 2003 through April 2007, by fabricating purportedly independent broker quotes delivered to BMO’s back office for price and skew verification.

Previously, on April 30, 2012, Judge Daniels entered an Amended Partial Consent Order for Permanent Injunction and Other Equitable Relief finding that Cassidy violated Section 4c(b) of the Act, 7 U.S.C. § 6c(b) (2002), and CFTC Regulations 33.10 (a)-(c), 17 C.F.R. § 33.10 (a)-(c) (2008). The Amended Partial Consent Order also imposed permanent trading and registration bans on Cassidy and prohibited him from violating the CEA, as charged.

In relation to the same underlying conduct, in August 2011 Cassidy entered a plea of guilty in the Southern District of New York to one criminal count of conspiracy. In April 2012, Cassidy was sentenced to 30 months imprisonment followed by three years of supervised release.

Defendant Lee settled the CFTC action against him in November 2009 (see CFTC Press Release
5745-09, November 6, 2009). In November 2008, in the Southern District of New York, Lee entered a plea of guilty to four criminal counts: Conspiracy to Commit Wire Fraud and to Make False Bank Entries, Wire Fraud, False Statements to a Bank, and Obstruction of Justice. Lee has not yet been sentenced.

Defendant Robert Moore settled the CFTC’s litigation on March 8, 2010 (see CFTC Press Release 5788-10).

The CFTC thanks the Manhattan District Attorney’s Office, the Federal Bureau of Investigation, and the U.S. Attorney’s Office for the Southern District of New York for their assistance.

CFTC staff members are responsible for this case are Christine Ryall, Eugene Smith, Patricia Gomersall, Joan Manley, and Paul Hayeck.

Friday, March 22, 2013

MAN AND COMPANY ORDERED TO PAY $840,000 FOR SOLICITATION FRAUD AND MAKING FALSE STATEMENTS

FROM: COMMODITY FUTURES TRADING COMMISSION

Federal Court Orders Oregon-based System Capital, LLC and its President Joshua Wallace to Pay $840,000 for Solicitation Fraud and Making False Statements to the National Futures Association

In a related criminal action, Wallace pled guilty to criminal commodities fraud

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 System Capital, LLC (System Capital) and its founder and president, Joshua Wallace, both of Lake Oswego, Oregon. The Order requires System Capital and Wallace to each pay a $420,000 civil monetary penalty, imposes permanent trading and registration bans against them, and prohibits them from violating the Commodity Exchange Act, as charged.

The court’s Order stems from a CFTC Complaint filed on November 23, 2010, charging the defendants with solicitation fraud regarding the trading of E-Mini S&P 500 futures contracts and making false statements to the National Futures Association (NFA). The case is U.S. Commodity Futures Trading Commission v. System Capital, LLC, et al., Case No.10 Civ. 8850 (KBF).

The Order finds that the Defendants, among other things, falsely represented to prospective and actual clients that the Defendants had a successful history of trading futures contracts and that System Capital had assets of at least $29 million under management. As a result of these fraudulent solicitations, System Capital and Wallace retained at least 17 clients, managed approximately $3.5 million of client funds, and directed the trading of clients’ commodity futures accounts, the Order finds.

The Order also finds that Wallace, on behalf of System Capital and himself, knowingly provided false information and documents to the NFA. In April or May 2010, Wallace sent a Disclosure Document to the NFA containing false information. During an NFA audit in May 2010, Wallace repeatedly made false statements to NFA’s auditors regarding the Disclosure Document, System Capital’s promotional materials, a forged report purportedly authored by a major accounting firm regarding defendants’ trading history, and other documents used to solicit clients, according to the Order.

On November 27, 2012, Wallace pled guilty to criminal commodities fraud in connection with the fraudulent scheme described above and to other, unrelated charges (United States v. Joshua Wallace, No. S1 11 Cr. 124 (LTS) (S.D.N.Y.)). Sentencing in the criminal case is scheduled for April 18, 2013.

The CFTC thanks the NFA, the Federal Bureau of Investigation, and the U. S. Attorney’s Office for the Southern District of New York for their assistance.

CFTC Division of Enforcement staff members responsible for this case are Mark A. Picard, Elizabeth C. Brennan, Philip Rix, Steven Ringer, Lenel Hickson, and Stephen J. Obie.

Thursday, December 27, 2012

THE iTRADE SCHOOL OF HARD LUCK

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.

Friday, June 10, 2011

M25 AND M37 REGISTRATIONS REVOKED AS TEXAS COMMODITY TRADERS

Whenever there is a market blow-up then ultimately cases of criminal and civil fraud are exposed. Fraud was uncovered duing the last stock market bust, real estate market bubble and, now the commodity prices seem to be falling apart. The following case is an excerpt from the CFTC web site and involves the revocation of registrations for two commodity trading advisors:

“Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) revoked the registrations of M25 Investments, Inc. (M25) and M37 Investments, LLC (M37), of Waxahachie, Texas, as registered Commodity Trading Advisors. The Initial Decision, issued on May 4, 2011 by a CFTC Administrative Law Judge (ALJ), resolves a CFTC statutory disqualification proceeding brought against M25 and M37 on February 23, 2011.

In the Initial Decision, the ALJ entered a default judgment against M25 and M37 and found that M25 and M37 were unfit for registration based upon the entry of an order for permanent injunction, other equitable relief, and for civil penalties on October 25, 2010 in the U. S. District Court for the Northern District of Texas (see CFTC Press Release 5927-10, October 27, 2010).

The federal district court’s October 25, 2010 order found that, from December 2007 to September 2009, the defendants and their representatives fraudulently solicited individuals, often targeting elderly persons through their churches, in West Virginia, Texas, Mississippi, Maryland and other states to trade forex and forex options. The order prohibits M25 and M37 from violating the Commodity Exchange Act as charged and from seeking registration with the CFTC in any capacity, among other sanctions. The district court also ordered M25 and M37, among other defendants, to jointly and severally pay restitution to defrauded customers of $7,404,036.56 and required M25 and M37 to jointly and severally pay a $7.1 million civil monetary penalty.”