Articles Posted in CFTC

CFTC Votes to Restrict Commodities Trader’ Position Sizes in the Market

Published on: November 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a 3-to-11 vote, the Commodity Futures Trading Commission chose to favor restricting the size of any traders’ footprint in the commodities market. This is the CFTC’s second vote on a proposal over “position limit” rules. A rule that it proposed two years ago was turned down by the United States District Court for the District of Columbia after two Wall Street trade organizations sued claiming that the rule would cause prices to become erratic.

The proposal is related to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The CFTC already has rules to limit market speculation but before they were just applicable during the last days before a futures contract delivery and only to specific agricultural commodities.

Now, the agency’s new rules are proposing to set up limitations that are more broad so that they include derivative contracts for 28 kinds of commodities futures contracts, and not just agricultural contracts but also metal and energy ones and regardless of when the delivery date would be. Exemptions for traders with genuine hedging needs would be allowed, as it will be for firm-held positions involving banks with nearly 50% ownership. To avail of exemptions, trading firms would have to prove that they are not in control of an affiliate. Aside from that, just non-consolidated firms will get exemptions.

JPMorgan’s Admission to CFTC of “Reckless” Trading Could Lead to More Securities Fraud Cases

Published on: November 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to one brokerage executive who spoke with Advisen, JPMorgan Chase & CO.’s (JPM) admission to the Commodities Futures Trading Commission when settling securities allegations over its London Whale debacle that it engaged in “reckless” trading could get the financial firm into more legal trouble with investors.

The CFTC implied that because of certain “manipulative” actions, JPMorgan managed to sell $7B in derivatives in one day, including $4.6 billion in three hours. That the term “manipulate” was used could prove useful to plaintiffs (The regulator also accused the firm of using manipulative device related to credit default swaps trading, which violated a Dodd-Frank provision prohibiting such behavior). JPMorgan will pay $100 million to settle the securities fraud cause with the agency.

With the Securities and Exchange Commission also now seeking to obtain admission of wrongdoing from defendants in certain instances, such acknowledgments to regulators could impact firm’s insurance coverage terms. Right now, standard directors and officers coverage policies exclude personal profiting, fraud, and other illegal conduct. Admissions of fraud, however, could nullify such policies.

CFTC Roundup: Japan Securities Clearing Corp. Gets Relief Despite Not Registering as a Derivatives Clearing Organization & the Final Oral Communications Records Rule is Approved, as is Interim Final Rules for Major Swap Participants and Swap Dealers

Published on: December 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

No Enforcement Action Against Japan Securities Clearing Corp. Despite Failure to Register as a Derivatives Clearing Organization

The Commodity Futures Trading Commission Division of Clearing and Risk has decided not to recommend that an enforcement action be taken against Japan Securities Clearing Corp. for not registering as a derivatives clearing organization. Enforcement action also won’t be recommended against the corporation’s clearing participants for not clearing yen-dominated interested rate swaps through a registered DCO.

The Commission had recently finalized its clearing requirement determination, which mandates that market participants clear certain CDS classes based on European and North American corporate entities and certain interest rate swaps classes. Under the relief, JSCC will be able to clear credit default swaps (“iTraxx Japan index and yen-denominated interest rate swaps that reference the Tokyo Interbank Offered Rate or LIBOR”, said the CFTC), as long as it doesn’t accept (and none of its qualified clearing participants offer) swaps for clearing for a US customer.

CFTC Securities Headlines: Goldman Sachs Fined For Inadequate Broker Supervision in $118M Fraud, Firms Named in Precious Metal Scam, & Defendants to Pay $1.8M Over Off-Exchange Foreign Currency Scheme

Published on: December 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Fined$1.5 Inadequate Supervision in $118M Fraud
The Commodity Futures Trading Commission says that Goldman Sachs (GS) must pay $1.5M because it did not properly supervise trader Matthew Marshall Taylor, who allegedly got around internal systems to manually make fabricated trades that went straight to the financial firms’ records and books and not the exchange. Taylor is accused of defrauding the bank, which lost about $118.4M.

The agency says that Goldman failed to make sure that its risk management, supervision, and compliance programs were in alignment with its duties to diligently oversee its business as a registrant of the Commission. However, CFTC commissioner Bart Chilton has criticized the $1.5M fine, describing it as a wrist slap.

CFTC Names Firms and Individuals in Precious Metal Scam The Commission has filed a civil injunctive enforcement action against a number of firms, including Hunter Wise Credit, LLC, Lloyds Commodities Credit Company, Hard Asset Lending Group, Blackstone Metals Group, LLC, CD Hopkins Financial, Newbridge Alliance Inc., Harold Edward Martin Jr., United States Capital Trust, LLC, as well as related entities, and Fred Jager, Frank Gaudino, James Burbage, Chadewick Hopkins, Baris Keser, David A. Moore, and John King. They are accused of fraudulently marketing off-exchange commodity contracts that were illegal. Also, Hunter Wise Commodities, which allegedly orchestrated the fraud, is accused of having gotten least $46M in client funds since July of last year.

The defendants allegedly claimed that they were selling physical metals to retail clients in retail commodity transactions and that they would arrange loans for the balance of the purchase price. Customers were supposed to make down payments at 25% of the complete buying price for certain quantities of metal, which were to be placed in a safe depository. The CFTC contends, however, says that not only were certain statements found in the investment contract untrue, but also the transactions were merely paper transactions with no actual metals involved.

Defendants to Pay $1.8M in Off-Exchange Foreign Currency Scheme
Following a CFTC anti-fraud enforcement action, a permanent injunction order and default judgment has been issued against Forex Capital Trading Partners, Inc., Forex Capital Trading Group Inc., and Highland Stone Capital Management, LLC requiring that they pay a penalty of over $1.3M and disgorge $450,764 to benefit clients who were defrauded. The Commission says that the three firms made fraudulent solicitations to 106 clients that invested over $2.8M in forex trading.

These solicitations were allegedly made with false claims that they were engaging in this type of trading had been profitable for several years, including a falsely reported 51.94% customer gain in 2010, which was a year when the investors actually lost over 1.2M. In fact, says the Commission, customers actually lost over 93% of total invested principal via the defendants’ customer trading.

CFTC Press Room

More Blog Posts:
CFTC Commissioner Proposes Plan to Give Futures Customers SIPC-Like Protections, Stockbroker Fraud Blog, August 14, 2012

CFTC Files Texas Securities Fraud Against TC Credit Services and its Houston Owner Over $1.4M Commodity Pool Scam, Stockbroker Fraud Blog, July 17, 2012
SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012 Continue Reading ›

CFTC Securities Fraud Roundup: Commissioner Bart Chilton Wants Financial System to Adopt Risk-Based Compensation System, Agency Nets $3M in Four Speculative Limits Cases, & Two Registered Futures Entities Pay $539K Over Inadequate Supervision Allegations

Published on: October 9, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Commodity Futures Trading Commission Bart Chilton, the financial system needs to undergo a “cultural shift” that should include employing a risk-based compensation structure instead of one that is “purely profit-based.” Speaking at the Hard Assets Investment Conference last month, Chilton said that bonus systems and incentives create a “poisonous” system in “our financial corporate culture,” compelling individuals to make earning as money as they can as quickly as they can their main priority.

Chilton also talked about how the system inadequately, if at all, uses “puny penalties” to deal with “bad behaviors” and that short-term profiteering is rewarded. He blames both results on the current compensation system employed by many financial firms. Risk management comes second under profit motive, with inducements generated to increase high risk trading, leverage, and the exploitation of funds. Chilton is recommending the implementation of a compensation system based on risk tolerance, with additional compensation and bonuses to be rewarded gradually. He believes that this will lead to longer-term strategies and actions, as well as “longer-serving employees.” He said that while the government may not be able to obligate financial firms to practice morality, it can takes steps to discourage misconduct by creating rules and laws that mandate good behavior.

In other CFTC news, the agency recently settled four separate speculative limits violation cases for $3 million. On September 21, Citigroup Inc. (C) and affiliate Citigroup Global Markets Ltd. consented to pay $525K to settle allegations that on the Chicago Board of Trade they went beyond the speculative position limits in wheat futures contracts. Four days later, Sheenson Investments Ltd., which is located in China, and its owner Weidong Ge consented to pay $1.5 million over allegations that they violated speculative limits in soybean and cotton futures.

CFTC Commissioner Proposes Plan to Give Futures Customers SIPC-Like Protections

Published on: August 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Last week, CFTC Commissioner Bart Chilton unveiled a plan to give futures intermediaries’ clients Securities Investor Protection Corporation-like protections via the creation of a Futures Investor and Customer Protection Fund. Similar to the SIPC Fund, this fund would be called the Futures Investor and Customer Protection Fund, and it would be funded by fees assessed to futures commission merchants.

The idea of setting up an insurance type fund for futures clients arose following the Commission’s recent allegations against Peregrine Financial Group Inc.-the SEC is accusing the futures commission merchants of misappropriating about $215 million in customer funds of about $220 million that was on deposit-and after MF Global Inc.’s bankruptcy filing last year revealed that several hundred million dollars in client funds had been misallocated and could not be withdrawn.

Unlike the securities industry, the futures industry has never provided financial protection coverage to customers who lose money because of illegal actions or bankruptcy. Instead, the protection has come from mandating that client funds and the intermediaries should always be kept separate, which was a structure that seemed to work until the incidents involving Peregrine Financial and MF Global occurred.

Peregrine Financial Group Customers Were Victims of the “System,” Says CFTC Chairman Gensler

Published on: July 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Commodity Futures Trading Commission Chairman Gary Gensler, the customers of Peregrine Financial Group, also called PFG Best, were failed by the system, which neglected to protect them. Peregrine’s owner Russell R. Wasendorf Sr. is accused of embezzling close to $220M and defrauding clients. You can read an earlier post written by our investment fraud law firm about the CFTC’s lawsuit against Peregrine and Wasendorf on our site.

Per the Regulator’s securities case, the futures commission merchant and Wasendorf allegedly misappropriate client monies and submitted untrue statements in the financial statements they turned in to the CFTC. They also are accused of misrepresenting, during a National Futures Association audit, that Peregrine held over $200M in client funds when that figure was actually close to around $5.1 million. The regulator is not sure what happened to the rest of the money and is accusing both Wasendorf and the futures commission merchant of violating fund segregation laws with their alleged intentional deception of the NFA.

Gensler says that the CFTC will look at how NFA handles its responsibilities as they relate to the FCM and whether the CFTC does a good job in regulating the SRO. However, while noting during testimony front of the Senate Agriculture Committee on July 17 that the allegations against Wasendorf and Peregrine, if true, are crimes, he said that is not possible for market regulators to “prevent all financial fraud.” Gensler also talked about how the SRO system is part of the Commodity Exchange Act but that the CFTC doesn’t have enough funds to act as front-line regulator over the NFA, which is funded by dues.

The CFTC will review how NFA dealt with Peregrine examinations. NFA has hired a law firm to conduct its own review of audit procedures and practices, particularly those involving the exams for Peregrine.

Meantime, Peregrine’s bankruptcy trustee, Ira Bodenstein, has retained forensic accountants from PricewaterhouseCoopers to assist in determining how much of customers’ money is left. These clients have expressed frustration at the delays in their being able to recover even some of their funds. According to Michael Eidelman, who is the receiver for the assets of Wasendorf, a portion of the missing cash may be in property that can be sold so that some Peregrine customers can get their money back. (These clients haven’t tried to sell their claims against Peregrine because they still don’t know the extent of the firm’s liabilities and assets.)

The Peregrine securities fraud was confirmed after Wasendorf tried to kill himself on July 9. In his suicide note, he talked about how he bilked clients of over $100 million during a period lasting close to 20 years. He admitted that he used a rented PO box, inkjet printers, and Photoshop software to execute his scam. He also forged documents to hide the missing funds.

Scandal Shakes Trading Firm, The Wall Street Journal, July 11, 2012

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Texas Securities: SEC’s Bid To Get Stanford Ponzi Scam Victims SIPC Coverage is Denied by District Court, Stockbroker Fraud Blog, July 9, 2012

CFTC Files Texas Securities Fraud Against TC Credit Services and its Houston Owner Over $1.4M Commodity Pool Scam

Published on: July 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Commodity Futures Trading Commission is charging TC Credit Service, LLC, doing business as Del-Mair Group, LLC), and its owner Christopher D. Daley with Texas securities fraud. In its anti-fraud enforcement action, the CFTC is accusing them of running a $.1.4 million commodity pool scheme.

According to the CFTC, beginning at least as early as the start of 2010 and up until at least November 2011, the defendants fraudulently accepted and solicited at least $1.4 million from at least 55 participants who became involved in a commodity pool for trading crude oil futures contracts. However, alleges the agency, TC Credit Services wasn’t maintaining any commodity accounts under its name during this time, while Daley’s personal trading accounts were suffering net losses monthly.

The Texas securities complaint accuses Daley of omitting material fact, giving pool participants fake account statements to hide the fraud, and making fraudulent misrepresentations that: his trading in crude oil futures contracts would make 20% monthly returns on deposits, the pool never experienced a month of losses, and its value had grown 60% for the year starting March 2011. Daley also allegedly omitted that the pool did not keep any commodity interest account under its name, his personal futures trading accounts lost money each month, and he was not a properly registered Commodity Pool Operator with the agency.

The CFTC claims that Dailey used just a part of the participants’ money to trade futures contracts while he misappropriated the rest of the cash, including at least $100,000 to cover his own expenses and about $195,000 toward his own bank accounts.

One day after the agency submitted its complaint to the U.S. District Court for the Southern District of Texas, Judge Lynn N. Hughes issued an emergency order freezing the defendants assets and barring them from destroying records and books. The CFTC wants restitution for the defrauded pool participants and for the defendants to pay civil penalties and give back ill-gotten gains. It also wants registration and trading bans and permanent injunctions against future federal commodities laws violations.

Commodity Pool Fraud
These scams usual involve unregistered commodity pool operators that promise investors big profits with low risks. These fraudsters will usually capitalize on their personal relationships or reputations to get people to invest. Unfortunately, every year, investors end up losing millions of dollar in commodity pool scams and fake “hedge funds” that trade in commodity futures and options.

CFTC Charges Houston-based Christopher Daley and his company, TC Credit Service, LLC, with Solicitation Fraud and Misappropriation in $1.4 Million Dollar Commodity Pool Scheme, CFTC, July 11, 2012

Read the Complaint (PDF)

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Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe, Stockbroker Fraud Blog, July 3, 2012

Ponzi Scam Receiver Can Go Forward with Securities Claim Against Texas Investor Who Benefited From the Fraud, Stockbroker Fraud Blog, June 26, 2012 Continue Reading ›

CFTC Accuses Peregrine Financial Group of Securities Fraud Related to $200M Customer Funds Shortfall

Published on: July 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The CFTC is accusing Peregrine Financial Group and its owner Russell R. Wasendorf, Sr. of misappropriating client monies, including statements that were untrue in financial statements submitted to the CFTC, and violating customer fund segregation laws. The Commission filed its securities fraud complaint against the registered futures commission merchant in the United States District Court for the Northern District of Illinois.

Per the CFTC’s complaint, during an audit by the National Futures Association, Peregrine misrepresented that it was holding more than $200M of client funds when it only held about $5.1M. The regulator says that the whereabouts of this at least $200 million in customer fund shortfall are not known at this time. In the wake of the allegations, Peregrine has told its clients that it was being investigated for “accounting irregularities.”

The Commission contends that beginning at least 2/2010 until now, Peregrine and Wasendorf did not meet CFTC Regulations and the Commodity Exchange Act by not maintaining enough client money in accounts that were segregated. The brokerage and its owner also are accused of making false statements about the funds that were being segregated for clients that were trading on US Exchanges in required filings.

Wasendorf, who reportedly tried to kill himself on Monday is now in a coma. The NFA just recently was given information that he may have been responsible for a number of falsified bank records.

The CFTC wants a restraining order to preserve records, freeze assets,, and establish a receiver. It is seeking disgorgement, restitution, financial penalties, and other appropriate financial relief.

Yesterday, Peregrine’s clearing broker Jefferies Group Inc. said that it had started unloading positions held for the futures brokerage’s clients after a margin call was not met. Jeffries Group doesn’t expect to sustain losses.

Meantime, the NFA and “other officials, have frozen all customer funds and Peregrine is not allowed to accept or solicit new client funds or accounts or make trades for customers unless it involves liquidating positions or distributing their money. Also looking into this financial matter is the US Federal Bureau of Investigation.

It was just this year that a court-appointed receiver in Minnesota sued Peregrine over allegedly disregarding warning signs that the futures brokerage’s client Trevor Cook was running a Ponzi scam. According to the securities lawsuit, investments by Cook and others with Peregrine that were supposedly profitable sustained over $30 million in losses as the allegedly culpable participants moved about $48 million from clients to Peregrine accounts.

According to Fox Business, the fallout from these latest allegations against Peregrine could be bigger than the MF Global collapse as traders blame regulators for not doing enough and industry members fight to recapture investor confidence.

CFTC Files Complaint Against Peregrine Financial Group, Inc. and Russell R. Wasendorf, Sr. Alleging Fraud, Misappropriation of Customer Funds, Violation of Customer Fund Segregation Laws, and Making False Statements, CFTC, July 10, 2012

Peregrine Financial Allegedly Has $200 Million Shortfall, Bloomberg, July 10, 2012

PFG Scandal Deepens as CFTC Files Claim, Fox Business News/Reuters, July 10, 2012

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SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Institutional Investor Securities Blog, May 31, 2012

Lawmakers Use Funding Bill for Financial Police as Forum to Express Views on Regulators and their Agencies

Published on: June 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Senate Appropriations Committee is recommending that the Commodity Futures Trading Commission and the Securities and Exchange Commission be funded at the same levels that the White House has requested. The $22.9 billion spending bill would allot $308 million for the CFTC and $1.566 billion to the SEC for the next fiscal year. No amendments were offered. Fiscal year 2013 begins on October 1, 2012.

However, Senator Jerry Moran (R-Kan.), a ranking member of this committee’s Financial Services Subcommittee, did express his opposition to the portion of the bill having to do with CFTC funding by voting “no” on that part. He contends that CFTC chairman Gary Gensler has rebuffed efforts to modify the way the agency is run. He also claims that Gensler has neglected to make rulemaking a priority as it relates to implementing key aspects of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The proposed funding for the CFTC is 50% above its present funding level, which is about $205 million. (Meantime, the proposed spending amount for the SEC is $245 million-a 19% rise from its current spending level.)

“One could argue that taxpayers are not getting their money’s worth from this investment but millions are involved in the securities and commodities markets and trillions of dollars change hands annually,” said Securities lawyer William Shepherd. ” Furthermore, more is lost through financial fraud than all other forms of fraud combined.”

Financial Services Subcommittee Chairman Richard Durbin (D-Ill.) has noted that the CFTC’s job, which includes overseeing the $300 trillion swaps market, is “huge.” Gensler, who supports the funding bill, has said that the CFTC’s proposed funding amount would allow the agency to have enough “cops on the beat” to maintain swaps and futures markets that are fair. He and Durbin also have pointed out that the swaps market is eight times bigger than the futures market.

It is important to note, however, that these funding recommendations are counter to two bills currently making their way through the US House. Both bills would provide funding to the two agencies at financial levels below what President Obama has requested.

“Conservatives stress that private enterprise works better than government,” said Securities fraud attorney Shepherd. ” If investment fraud laws were even as strong as a decade ago, free enterprise could cut the cost of regulation in half. This is because private law suits would then deter most investment fraud at no cost to taxpayers.”

U.S. Senate panel OKs budget boosts for SEC, CFTC, Chicago Tribune/Reuters, June 14, 2012

Obama proposes large budget boosts for SEC, CFTC, Reuters, February 13, 2012

United States Committee on Appropriations

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ABA Presses for Self-Funding for SEC and CFTC, Institutional Investor Securities Blog, May 31, 2012
SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

ABA Presses for Self-Funding for SEC and CFTC, Institutional Investor Securities Blog, May 31, 2012 Continue Reading ›