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.

DEFAULT JUDGMENT ENTERED AGAINST DAVID E. HOWARD II, FLATIRON CAPITAL PARTNERS, LLC, AND FLATIRON SYSTEMS, LLC

FROM:  SEC 

April 11, 2012

DEFAULT JUDGMENT ENTERED AGAINST DAVID E. HOWARD II, FLATIRON CAPITAL PARTNERS, LLC, AND FLATIRON SYSTEMS, LLC

The U.S. Securities and Exchange Commission announced that on April 6, 2012, the United States District Court for the Central District of California entered a Final Judgment against David E. Howard II, Flatiron Capital Partners, LLC (FCP), and Flatiron Systems, LLC (FS). Between December 2007 and March 2009, FCP and FS operated as investment companies that purported to trade securities using an automated trading system. Howard, a resident of New York City, was a co-managing member of FCP and the sole managing member of FS. The Commission’s complaint alleged, among other things, that, between December 2007 and January 2009, approximately 192 investors, located in at least 38 states, purchased LLC membership interests in FCP and FS. Investors were persuaded through false and misleading statements made by Howard and others to invest approximately $2.15 million in FCP and FS, and in addition, paid approximately $1.1 million in purported license fees for access to the trading systems. Thereafter, Howard misused and/or misappropriated almost $500,000 of the investor money and he and other principals lost the majority of the remaining funds through unsuccessful trading. Investors lost over $3 million in the scheme.

Howard, FCP and FS did not respond to the SEC’s allegations and the court therefore ordered default judgment against them. Howard, FCP and FS have each been enjoined from committing future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, Howard has been enjoined from future violations of Sections 206(1), 206(2), 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and FCP and FS have each been enjoined from future violations of Section 7(1) of the Investment Company Act of 1940. The Judgment also found Howard and FCP jointly and severally liable to pay disgorgement of $487,028 plus prejudgment interest of $79,838.69 on that disgorgement for a total of $566,866.69 and Howard and FS jointly and severally liable to pay disgorgement of $1,124,218.95 plus prejudgment interest of $127,192.86 on that disgorgement for a total of $1,251,411.81. Finally, Howard was ordered to pay a penalty of $390,000.