Articles Posted in CFTC

SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media

Published on: May 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairman Mary Schapiro, the two federal agencies didn’t know that JPMorgan & Chase (JPM) had sustained $2 billion in trading losses until they heard about it through the press in April. Schapiro and Gensler testified in front of the Senate Banking Committee on May 22. Both agency heads noted that trading activities aren’t within the purview of the CFTC and the SEC. They also pointed out that the risky derivatives trading did not happen through JPMorgan’s futures commission merchant arm or broker-dealer arm.

The SEC has no authority over the credit default index derivatives that were involved in the trades, and although, per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC will eventually regulate the swap dealing activities of banks, the rules to make this authority law have not yet been written.

Now, the CFTC is probing JPMorgan’s trading transactions. It recently issued subpoenas asking for the firm’s internal documents related to the financial firm’s massive loss. The probe is being run by the agency’s enforcement division and, according to Reuters, will revolve around what JPMorgan traders told internal management staff and their supervisors as the bets began to sour. (However, per the Wall Street Journal, the inquiry is in the beginning phases and not limited to what traders said or didn’t say. It also doesn’t necessarily mean that JPMorgan or certain individuals will be subject to any civil enforcement action.)

Meantime, Schapiro has said that the SEC is also looking into whether JPMorgan’s financial reporting and public disclosure were accurate in regards to what the financial firm knew and when it had this knowledge. She told Sen. Robert Menendez (D-N.J.) that it was too early to tell whether JPMorgan’s activity would have violated the Volcker rule, which calls for banks to have their proprietary trading activity limited to risk-mitigation hedging. While JPMorgan has said that its transactions were hedges, experts are divided over this assessment. (The Volcker rule, which is part of Dodd-Frank, has not yet been implemented and there are critics fighting its current incarnation.) Menendez, in turn, said that Schapiro should look to JPMorgan’s trading loss as a reason for constructing strong verbiage when implementing the rule. However, Sen. Bob Corker (R-Tenn.), who was also at the hearing, wondered whether employing this approach might backfire-initially causing the legislation to “look good,” while ultimately creating a situation where highly complex institutions would be placed situations to “not appropriately hedge their activity.”

IMPLEMENTING DERIVATIVES REFORM: REDUCING SYSTEMIC RISK AND IMPROVING MARKET OVERSIGHT, Banking.Senate.gov, May 22, 2012

Regulators Say They Learned Of J.P. Morgan Losses from news reports, Los Angeles Times, May 22, 2012

CFTC subpoenas JPMorgan over trading loss: WSJ, The Republic, May 31, 2012

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Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Fraud, May 22, 2012

JPMorgan Chase Had No Treasurer When Chief Investment Office Made Trades Resulting In More than $2B Loss, Reports WSJ, Institutional Investor Securities Fraud, May 19, 2012

JP Morgan Chase To Pay $150M to Settle Securities Lawsuit Over Lending Program Losses of Union Pension Funds, Stockbroker Fraud Blog, March 26, 2012 Continue Reading ›

ABA Presses for Self-Funding for SEC and CFTC

Published on: May 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The American Bar Association is in strong favor of self-funding for both the Commodity Futures Trading Commission and the Securities and Exchange Commission. It is calling on Congress to quickly deal with this need to increase the agencies’ resources.

In a letter to lawmakers on the House Financial Services Committee and the Senate Banking Committee, ABA Task Force on Financial Markets Regulatory Reform co-chairs William Kroener III and Giovanni Prezioso talked about how not having sufficient funding sources for the SEC and the CFTC is going to substantially hurt the regulators’ ability to complete their assigned regulatory missions. The ABA believes that self-funding would effectively deal with this problem.

Both the CFTC and SEC have acknowledged that they are short on funds. The two regulators have partially attributed this to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which doesn’t authorize self-funding despite the fact that SEC Chairman Mary Schapiro, past SEC chairmen, certain senators, and securities lawyers had pressed for it.

Institutional Investment Securities Round-Up: Citigroup Agrees to $3.5M FINRA FIne Related to Subprime RMBS, Ex-Broker Consents to $600K CFTC Fine Over Alleged Options Trading Scam, and Senate Ag Chair Presses Regulators To Fully Implement Dodd-Frank

Published on: May 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

Commodities/Futures Round Up: CFTC Cracks Down on Perpetrators of Securities Violations and Considers New Swap Market Definitions and Rules

Published on: April 20, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Rep. John Larson (D-Conn.) and Rep. Chris Murphy (D-Conn.) are calling on the Commodities Futures Trading Commission to crack down on excessive energy market speculation. They believe that this type of speculation on oil that is “based on world events” is “abusive” and has been creating difficulties for Americans.

In their released statement, Murphy said that such speculation ups the price of a gallon of gas by 56 cents. The two lawmakers want the futures and option markets regulator to swiftly implement rules that have already been passed to curb excessive speculation.

In other commodities/futures trading news, last month the U.S. District Court for the Eastern District of Texas ordered two men and their company Total Call Group Inc. to pay over $4.8 million for allegedly producing false customer statements and making bogus solicitations related to an off-exchange foreign currency fraud. In CFTC v. Total Call Group Inc., Thomas Patrick Thurmond and Craig Poe will pay $1.62 million and $3.24 million, respectively. Per the agency, between 2006 through late 2008, the two men solicited about $808,000 from at least four clients for trading in foreign currency options.

Earlier this month, another company, registered futures commission merchant Rosenthal Collins Group LLC, consented to pay over $2.5 million over CFTC allegations that it did not adequately supervise the way the firm handled an account linked to a multibillion dollar Ponzi scam. The account, held in Money Market Alternative LP’s name, experienced “significant change” between April 2006 and April 2009 in how much money it took in. For instance, the CFTC says that even though the account at inception reported a $300,000 net worth and a $45,000 yearly income, deposits varied from $2 million to $14 million a year. RCG is also accused of failing to look into and report excessive wire activity involving the account. As part of the CFTC securities settlement, the financial firm consented to pay a $1.6 million fine and disgorge $921,260, which is how much RCT made in account fees.

Just three days before, the CFTC announced that its swaps customer clearing documentation rule packaging will expand open access to execution and clearing, enhance transparency, lower cost and risks, and generate competition. The rules will not allow arrangements involving swap dealers, designated clearing organizations, major swap participants, and futures commission merchants that would limit how many counterparties a customer can get into a trade with, impair a client’s ability to access a trade execution on terms reasonable to the best terms that already exist, limit the position size a customer can take with an individual counterparty, and not allow compliance for specified time frames for acceptance of trades into clearing. Also, the CFTC is thinking about adopting definitions for swap dealers, major security-based swap participant eligible contract participant, security-based swap dealer, and major swap participant. These entities were created under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Meantime, MF Global Inc. (MFGLQ.PK) liquidation trustee James Giddens reportedly believes that he can make claims against certain company employees. Possible claims again such persons could include allegations of customer funds segregation requirement violations and breach of fiduciary duty. Although MF Global had told regulators that it was unable to account for customer funds of up to $900 million when it filed for bankruptcy protection, investigators are now saying that this figure is closer to somewhere between $1.2 billion and $1.6 billion.

Commodities Futures Trading Commission

Trustee May Sue MF Officials, NY Times, April 12, 2011
CFTC Orders Rosenthal Collins Group, LLC, a Registered Futures Commission Merchant, to Pay More than $2.5 Million for Supervision and Record-Production Violations, CFTC, April 12, 2012
CFTC v. Total Call Group Inc.

More Blog Posts:
CFTC Says RBC Took Part in Massive Trading Scam to Avail of Tax Benefits, Stockbroker Fraud Blog, April 12, 2012
Texas Man Sued by CFTC Over Alleged Foreign Currency Fraud, Stockbroker Fraud Blog, February 23, 2012
CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking, Institutional Investor Securities Blog, January 31, 2012 Continue Reading ›

CFTC Says RBC Took Part in Massive Trading Scam to Avail of Tax Benefits

Published on: April 4, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Commodities Futures Trading Commission has filed a lawsuit accusing Royal Bank of Canada of taking part in hundreds of millions of dollars worth of illegal futures trades to earn tax benefits linked to equities. In its complaint, the CFTC claims the Toronto-based lender made misleading and false statements about “wash trades” between 2007 and 2010, which allowed affiliates to trade between themselves in a manner that undermined competition and price discovery on the OneChicago LLC exchange. This electronic-futures trading exchange is partly owned by CME Group Inc.

The alleged scam is said to have involved RBC officials working with two subsidiaries on the selling and buying of futures contracts that give the right to sell the stock later on at certain prices. CFTC said that this removes the risk of RBC sustaining any losses on the investments, while locking in the tax breaks.

Also, according to the CFTC, RBC designed certain instruments related to the transactions that were traded on OneChicago. The transactions, which involved narrow-based indexes and single-stock futures, were used to hedge the risks involved in holding the equities. CFTC says that the Canadian bank tried to cover up the scam and even provided misleading and false statements when CME started asking questions.

RBC contends that CFTC’s allegations against it are “absurd” and the lawsuit “meritless.” The bank also claims that the trades in question were completely documented and reviewed, as well as monitored by the exchanges and CFTC.

CFTC Enforcement director David Meister said that the securities action shows that the regulator will not balk at bringing charges against those that illegally exploits the futures market for profit. The CFTC has been under pressure to get tougher on its oversight of the futures industry in the wake of MF Global Holdings Ltd.’s failure last year. The demise of that securities firm resulted in an approximately $1.6 billion shortfall in client funds. Measured by the futures contracts’ national dollar amount, this case against RBC is the biggest wash-sale lawsuit the CFTC has ever brought.

Meantime, RBC says that the CFTC’s allegations against it are “absurd” and the lawsuit “meritless.” The bank has issued a statement claiming that the trades in question were completely documented and reviewed, as well as monitored by the exchanges and CFTC.

The US regulator is seeking injunctions against additional violations and monetary penalties of three times the monetary gain for each violation or $130,000/per violation from 10/04 to 10/08 and $140,000/violation after that period.

CFTC Deals Out Royal Pain, Wall Street Journal, April 3, 2012

RBC Sued by US Regulators Over Wash Trades, Bloomberg Businessweek, April 3, 2012

More Blog Posts:
SEC Inquiring About Wisconsin School Districts Failed $200 Million CDO Investments Made Through Stifel Nicolaus and Royal Bank of Canada Subsidiaries, Stockbroker Fraud Blog, June 11, 2010

Texas Man Sued by CFTC Over Alleged Foreign Currency Fraud, Stockbroker Fraud Blog, February 23, 2012

CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking, Institutional Investor Securities Blog, January 31, 2012 Continue Reading ›

Texas Man Sued by CFTC Over Alleged Foreign Currency Fraud

Published on: February 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Commodity Futures Trading Commission is suing Texas resident Christopher Cornett for alleged solicitation fraud, issuing false account statements, misappropriation of participants’ funds, and not registering in connection with an off-exchange foreign currency fraud. The CFTC filed its complaint on February 2 in the U.S. District Court for the Western District of Texas.

The CFTC contends that between June 2008 through October 2011, the Texas resident approached prospective clients to try to get them to put money in a pooled investment in forex. He played the role of operator and manager of the pool that was referred to with different names, including ICM, ITLDU, IFM, LLC, and International Forex Management, LLC. Cornett is accused of falsely soliciting these prospective participants and making false claims to them that he never had a losing month or year while engaging in forex trading.

Cornett was allegedly able to solicit about $7.07 million between June 2008 and September 2010. Pool participants were able to redeem about $1.64 million. Meantime, he lost about $4.17 million of the funds’ money. During this period of over two years, Cornett allegedly had only one month that was profitable while engaged in forex trading with the pool funds. He is also accused of misappropriating about $1.26 million and falsely reporting the pool’s profits, account balances, and losses to participants.

CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking

Published on: January 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In their efforts to move forward with rulemaking for over-the-counter derivatives, some are saying that the Commodities Futures Trading Commission and the Securities and Exchange Commission may find themselves grappling with differences that could pose a challenge for industry participants. For example, differences between proposed and final regulations could set up compliance issues. Also, the regulators appear to be working at separate paces to put into effect the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Title VII, which issued a directive to both regulators ordering them to establish a regulatory regime to oversee swaps.

According to reform legislation, security-based swaps are swaps based on one loan or security or on a securities index that is narrowly based. In general, the CFTC’s jurisdiction includes all swaps except for security-based swaps, which the SEC oversees.

With the other types of swaps under its charge, the CFTC has to write a lot more swap regulations compared to the SEC. So far, under Title VII the CFTC has finalized 25 swap rules. The SEC has adopted three. (Just last January, the CFTC adopted rules addressing cleared swaps customer collateral segregation, registering significant swap participants and swap dealers, and business conduct for swap dealers interacting with counterparties.) However, together the regulators have jointly put forward proposals for definitions for products and key entities under Title VII. These definitions, however, have yet to be made final and some have expressed concern that the regulators are forging forward with adopting final rules without adopting the key definitions that certain requirements will be relying upon.

Former Texan and First Capital Savings and Loan To Pay $4.5M for Alleged Foreign Currency Ponzi Scheme

Published on: November 11, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The CFTC has been able to get a permanent injunction and default judgment against former Houston resident Jeffery Alan Lowrance and First Capital Savings and Loan. As restitution for their involvement in an alleged off-exchange foreign currency Ponzi scam, both will pay $1.2 million in restitution and a civil monetary penalty of $3.3 million. They have been permanently banned from commodity-related activities.

According to the order, Lowrance and First Capital Savings and Loan fraudulently solicited at least three dozen to get involved in forex trading. The two of them allegedly falsely claimed that they were successful traders and promised up to 4.15% monthly returns on their investments. They also are accused of publishing bogus client account statements that showed supposed monthly profits on the financial firm’s Web site. The court said that not only did both Lowrance and First Capital fail to put the money clients gave them into forex trading accounts, but also, they allegedly misappropriated the funds to set up a religious newspaper, support Lowrance’s personal expenses and the expenses of his family members, and pay supposed profits to existing investors. The order mandates that any entity or person that provided Lowrance and his company with domain registration or web hosting services now pull offline any of their Web sites that are soliciting clients to trade forex or commodity futures.

It was the U.S. Attorney’s Office for the Northern District of Illinois that indicted Lowrance for running a $25 million financial scam. In July, the SEC charged him with running a multimillion-dollar Ponzi scheme that defrauded hundreds of investors. Lowrance allegedly raised about $21 million. The investors he targeted lived in over two dozen US states. He enticed investors by claiming to share their Christian values and government views.

The SEC complaint contends that Lowrance and his financial firm told investors they were guaranteed a “predictable” income each month, along with returns as high as 7.15%. Certain clients even received bogus credit letters. Even though by 2008 Lowrance and his company had lost all of the investors funds, between June 2008 and February 2009 he still solicited at least another $1 million from at least three dozen investors.

The SEC is alleging violations of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and the Securities Act of 1933. It is seeking penalties, disgorgement, and other relief.

Court Orders Jeffery A. Lowrance and His Company to Pay More than $4.5 Million for Operating Foreign Currency Ponzi Scheme, CFTC
SEC CHARGES OPERATOR OF $21 MILLION FOREX PONZI SCHEME, SEC, July 15, 2011
Read the indictment (PDF)

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EagleEye Asset Management LLC Sued by SEC and CFTC for Alleged Forex Trading Scam

Published on: September 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In separate securities lawsuits, the Securities and Exchange Commission and the Commodity Futures Trading Commission are both suing EagleEye Asset Management LLC, which a Massachusetts asset management firm, and Jeffrey A. Liskov, its principal.

The CFTC is accusing the two defendants of defrauding at least one US-based client while trading forex on a margined or leveraged basis for her. Per the CFTC’s lawsuit, the client decided to grant permission to EagleEye and Liskov to trade part of her retirement money because Liskov allegedly advised her that this type of trading was appropriate for her conservative investment objects.

However, Liskov allegedly did not warn her of the risks involved or tell her that he did not have a successful track record with forex trading. While the trading did generate short-term profits for the woman, she lost most of the money that she invested. The CFTC contends that instead of revealing the trading losses, Liskov allegedly forged the client’s name and set up a new account opening documents and on more than $3 million in secret wire transfers from her mutual fund account to her forex account so that trading wouldn’t have to stop. The woman client lost more than $3.24 million, while Liskov and EagleEye made about $235,000 in performance incentive fees.

Per the SEC, between 4/08 and 8/10, Liskov made misrepresentations to clients to persuade them to move funds they’d placed in securities investments into forex trading. The SEC contends that these investments were not appropriate for elderly clients that had conservative investment objectives and that this caused them to sustain significant financial losses totaling almost $4 million. EagleEye and Liskov allegedly earned performed fees of over $300K, plus management fees. The Commission believes that having clients make short-term investment gains and then earning performance fees before these gains were lost was the defendants’ plan.

Liskov allegedly did not even help some investors understand the nature of forex trading. With other clients, he deemphasized the degree of investment risk involved. The SEC also says that Liskov made false statements with claims that he had achieved success with forex trades when, in fact, the opposite was the case.

Meantime, Massachusetts Secretary of the Commonwealth William Francis Galvin (D) has also filed administrative charges against the investment advisor firm and Liskov. Galvin is accusing them of violating Massachusetts’s Uniform Securities Act.

Our securities fraud law firm has helped thousand of investors recoup their losses caused by broker misconduct and investment adviser fraud. Working with a stockbroker fraud law firm is the best way to help you get back your lost investment.

Read the SEC’s Complaint (PDF)

CFTC Charges Massachusetts Man Jeffrey Liskov and His Company, EagleEye Asset Management, LLC, with Committing a $3 Million Forex Fraud, CFTC, September 8, 2011
State files complaint against local investment advisor, WickedLocal, September 13, 2011
Mass. Adviser Sued by Regulators Over Alleged Forex Trading Scheme, BNA Securities Law Daily, September 9, 2011

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Texas Commodity Trading Advisor FIN FX LLC Now Subject to NFA Emergency Enforcement Action, Stockbroker Fraud Blog, April 27, 2011
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Winell Associates Inc., Maxi Partners GP, and Howard Winell Settle CTFC Charges Accusing Them of Misappropriating Funds and Unauthorized Trading of Over $5.2M

Published on: May 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Howard Winell, Winell Associates Inc., and Maxie Partners GP LLC have agreed to pay over $5.2 million to settle Commodity Futures Trading Commission charges accusing them of taking part in unauthorized trading and misappropriating funds related to a commodity futures and options pool. By settling, the respondents are not denying or admitting the allegations. They have, however, agreed to a permanent ban from both trading and registering with the CFTC.

The agency says that in 2005, Winell and the two firms solicited and pooled about $20 million from approximately 25 participants to trade commodity futures and options on commodity futures through Maxie Partners LP, which is a commodity pool. In May 2007, one of the largest participants in the pool asked to redeem about $7 million. The agency says that while the respondents segregated that amount to meet this request, before the redemption was issued the pool suffered substantial losses and had margin calls of about $4 million issued by futures commission merchants that held the pool’s trading accounts. The CFTC says that to keep on trading and meet the margin calls, Winell had to transfer those segregated funds back to the pool’s trading accounts. About $3.8 million of the participant’s money was lost.

It is wrong for brokers and financial advisers to misappropriate funds when doing their job. If you believe that you have suffered financial losses because of broker misconduct, do not hesitate to contact our stockbroker fraud lawyers immediately.

Related Web Resources:
Howard Winell and Winell Associates fined USD5.2m for fraud, HedgeWeek, May 3, 2011
CFTC Sanctions New York Resident Howard Winell and His Companies, Winell Associates, Inc., and Maxie Partners GP, LLC, More than $5.2 Million for Fraud, CFTC, May 2, 2011
Commodity Futures Trading Commission

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CFTC Files Charges in Alleged California Ponzi Scam Involving the Fraudulent Solicitation of $14 million in Commodity Futures, Stockbroker Fraud Blog, January 18, 2011 Continue Reading ›