Articles Posted in CFTC

Following the Commodity Futures Trading Commission’s decision to charge 20/20 Precious Metals Inc. and 20/20 Trading Co. Inc. with commodity options fraud and other violations, the U.S. District Court for the Central District of California has frozen the assets and records of the defendants. The commission contends that since 2006, the defendants defrauded prospective clients and customers of at least $4M.

Also named as defendants are Bharat Adatia, Todd Krejci, and Sharief McDowell. They and 20/20 Precious Metals are accused of unlawfully offering, entering, or confirming leveraged copper and palladium transactions. The three employees and 20/20 Trading allegedly committed fraud related to purported leveraged metals transactions.

The CFTC also claims that from 1/1/2006 through 10/2009, 20/20 Trading, McDowell, and Adatia made fraudulent solicitations to the public to sell and buy commodity options through 20/20 Trading while failing to disclose that the complex trades they were recommending made the chances of profit not likely if not impossible. Of the nearly $3.8M that 20/20 customers are said to have lost, about 63% of that went to 20/20 Trading commissions. Over $1.9M was lost by almost half of 20/20 Trading customers, who used individual retirement account funds to open accounts.

After 20/20 Trading closed in October 2009, Adatia established 20/20 Precious Metals. The CFTC says that Adatia closed 20/20 Trading after finding out that the National Futures Association was looking at the company for possible NFA rule violations. The agency says that as customers deposited over $1 million, 20/20 Precious Metals made over $400,000 in commissions.

Related Web Resources:
CFTC Files Anti-Fraud Action against California Companies 20/20 Trading Company, Inc. and 20/20 Precious Metals, Inc. and their Employees, Bharat Adatia, Sharief McDowell and Todd Krejci, CFTC, April 28, 2011
Read the CFTC Order (PDF)

More Blog Posts:
Commodities Industry Fears being held to Regulatory Standards of Securities Industry, Stockbroker Fraud Blog, February 4, 2011
CFTC Files Charges in Alleged California Ponzi Scam Involving the Fraudulent Solicitation of $14 million in Commodity Futures, Stockbroker Fraud Blog, January 18, 2011
Texas Securities Fraud: M25 Investments Inc., M37 Investments LLC, and Two Individuals Must Pay $16.2M Over Alleged Forex and Ponzi Scams, Stockbroker Fraud Blog, November 8, 2010 Continue Reading ›

The Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association, and the Futures Industry Association have told the Commodity Futures Trading Commission that the 1934 Securities Exchange Act’s Rule 10b-5 not be the model for how it polices market manipulation under the Dodd-Frank Wall Street Reform and Consumer Protection Law. In a comment letter, SIFMA, FIA, and ISDA told the CFTC not to impose additional duties of inquiry, disclosure, or diligence during bilateral transactions on sophisticated parties.

The groups were responding to a rule proposal involving the CFTC expanding its authority over manipulative and fraudulent conduct. CFTC says the proposal was patterned on Rule 10b-5 and Section 10(b). They contend that securities law standards, such as Rule 10b-5, are hard to adapt and “largely inapplicable” to the derivatives and future arena because the two market frameworks have key structural differences. They want the CFTC to “adopt an antifraud rule” that takes “into account the nature of material information in these markets and the types of duties that may exist.”

The associations also want the CFTC to give guidance that offers market participants clear principals on how to distinguish between “prohibited manipulative conduct” and “legitimate competitive trading practices.” In addition, they want “extreme recklessness” as the scienter standard and any anti-manipulation rule’s scope clarified in regards to the CFTC’s current anti-manipulation authority. ISDA, FIA, and SIFMA want commercial traders to be allowed to trade using their own, nonpublic data about company-specific assets and liabilities.

Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd has this to say: “Our country has just experienced the worst securities debacle in nearly 90 years, which many experts claim was largely caused by deregulation of the securities industry. Despite the ineffectiveness of watered-down securities regulation, the Commodities Industry fears being held to even this weak standard. First among these fears is that those who market commodities contracts to the public may be held to a similar duty as those selling securities. When smooth-talking phone jockeys call dangling profits and little or no risk they should be held responsible for their actions. In other words ‘there ought to be a law.'”

Commodities Future Trading Association

Financial Markets Association

Securities Industry and Financial Markets Association
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The Commodity Futures Trading Commission is charging Increase Investments Inc., Spirit Investments, and Scott Bottolfson with securities fraud. The CFTC contends that the defendants solicited about $14 million from 30 individuals for investments in two commodity trading pools that traded options on commodity futures and commodity futures contracts. Increase and Spirit allegedly ran the pools. The commission is seeking restitution for the investment fraud victims, fines, the return of ill-gotten gains, trading and registration bans, and permanent injunctions against future violations of federal commodities laws.

The CFTC contends that from 2002 through August 2010, Bottolfson made false and misleading statements to draw in prospective investors. He is accused of promising a 20% fixed-rate return and making it appear as if the commodity futures investments were not only guaranteed, but also that they protected, risk-free, and profitable.

Investors went on to sustain about $845,000 in trading losses. About $2.97 million had been placed in the commodity pool trading accounts. The CFTC is accusing Bottolfson of allegedly misappropriating about $11 million of investors’ money to pay pool participants their “profits,” as well as cover some of his personal expenses.

M37 Investments LLC, M25 Investments Inc., Jeffery Lyon, and Scott Kear Sr. have settled for $16.2 million Commodity Futures Trading Commission charges involving the alleged defrauding of over 200 individuals in a foreign currency scheme. Many of the investment fraud victims were senior investors. The Texas securities fraud agreement was reached between the parties in district court.

The CFTC contends that the defendants solicited about $8 million from approximately 213 individuals to trade off-exchange leveraged foreign currency,
commodity futures contracts, and forex options. The commission says that between December 2007 and September 2009, investors in Texas, West Virginia, Maryland, and Mississippi, and other states were solicited for the trades. Many of the seniors who were targeted were solicited through their churches.

The defendants are accused of guaranteeing investors renewal bonuses, if they reinvested, in addition to guaranteed interest payments on investments. The investors were also allegedly told that “profitable trading” would garner returns. Unfortunately, what ended up happening is that most of the investors’ funds didn’t go toward trading and what was traded resulted in substantial losses.

CFTC says that the few funds that M35 and M25 paid to investors was money that had come from other clients. Because of this, CFTC contends, the two firms ended up running Ponzi scams. The agency also is accusing the defendants of covering up the securities fraud with monthly statement accounts that gave clients the false impression that they were making the 2% monthly interest that they had been promised.

Jointly and severally the defendants will pay $7.404 million in restitution. The two companies will jointly and severally pay a fine of $7.1 million. Lyon’s fine is $375,00 and Kear will pay $1.4 million.

Related Web Resources:

Federal Court Orders More than $16.2 Million in Customer Restitution and Monetary Penalties against Texas Defendants Scott P. Kear, Sr., Jeffery L. Lyon and their Firms in CFTC Anti-Fraud Action, CFTC, October 27, 2010
Read the Complaint (PDF)

Texas Securities Fraud, Stockbroker Fraud Blog
Institutional Investor Securities Blog
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According to Commodities Future Trading Commission Judge George H. Painter, his colleague, Judge Bruce Levine, is biased against investors that file complaints. Painter, 83, claims that Levine has a secret deal with former CFTC Chairwoman Wendy Gramm that he would never issue a ruling that favored a complainant.

Painter made these allegations as he was preparing to retire. He is one of two administrative law judges that preside over investor complaints at the CFTC. He requested that his pending cases not be assigned to Levine.

Painter says that Levine makes pro se complainants endure a “hostile procedural gauntlet” until eventually, they are willing to withdraw their case or “settle for a pittance.” Levine has not commented on the allegations. However, according to a Wall Street Journal story that was published 10 years ago, Levine has never ruled in favor of an investor.

Painter is recommending that the CFTC bring in another administrative judge. He has six cases pending before him. Their total claims exceed $1 million.

Stockbroker Fraud Lawyer William Shepherd said, “We have been suspect of commodities reparations proceedings for some time, but WOW!” Shepherd noted. “Other avenues are available, including commodities arbitration and court in Chicago. Some cases may also be decided in securities arbitration when the participants are dually licensed. It is essential that an aggrieved investor hire a law firm with experience, including the knowledge of how to choose the most appropriate forum.”

Meantime, the WSJ is reporting that Painter issued rulings at the CFTC while his wife was battling alcoholism and mental illness and that he did so as recently as February. In August, a psychiatrist wrote that the judge was suffering from a “profound” disability that has rendered him unable to make responsible decisions. His wife, CFTC lawyer Elizabeth Ritter, is seeking guardianship over him. The couple are in the middle of a divorce. The judge’s attorney denies that his client is suffering from Alzheimer’s.

Case Sheds Light on Judge, The Wall Street Journal, October 21, 2010
Commodity Futures Trading Commission judge says colleague biased against complainants, The Washington Post, October 19, 2010
Commodities Future Trading Commission
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The US Securities and Exchange Commission and the Commodity Futures Trading Commission are accusing Houston attorney and accountant Daniel Petroski and Texas A & M Professor Robert Watson of using forged bank records to engage in investor fraud. On May 21, the US District Court for the Southern District of Texas froze the assets of the two men and of two firms associated with the alleged misconduct.

According to the two agencies, Petroski and Watson raised over $19 million from about 65 investors, while claiming they would use a foreign-currency trading software, “Alpha One,” that they said belonged to their company, Private FX Global One Ltd. Watson’s “deal clearing company, “36 Holdings,” was also to participate in the investing.

The SEC and the CFTC contend that the two men engaged in misrepresentation when they made it appear as if their foreign exchange trading business never had a losing month, achieved a yearly return of over 23%, and that their venture had millions of dollars in Swiss and US bank accounts. The two agencies are also accusing the two men of generating bogus records for investigators, including records indicating that 36 Holdings had an account with Deutsche Bank where Global One earned over $2 million this year by trading foreign currencies. In fact, 36 Holdings does not have a Deutsche Bank account.

In addition, the SEC’s complaint accuses the two men of putting, at maximum, 33% of their proceeds in a Swiss bank before transferring some $5 million to a Houston bank-even though they told investors that the amount of foreign currency and other assets was closer to 80%. The defendants are also accused of giving their own employees bogus Swiss bank statements and making false claims that 36 Holdings had nearly $70 million deposited there.

The SEC accuses the defendants of violating the Securities and Exchange Act of 1934’s Section 10(b), Rule 10b-5 thereunder, and the Securities and Exchange Commission Act of 1933’s Section 17(a). The CFTC and the SEC are seeking a preliminary injunction, final judgment from permanent enjoinment of future violations, disgorgement with interest, and fines.

Related Web Resources:
SEC OBTAINS ASSET FREEZE AND TEMPORARY RESTRAINING ORDER AGAINST ROBERT D. WATSON, DANIEL J. PETROSKI, PRIVATEFX GLOBAL ONE LTD., SA AND 36 HOLDINGS, LTD., SEC.gov, May 26, 2009
Read the SEC Complaint (PDF)
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Rosenthal Collins Group LLC has reached an agreement to settle Commodity Futures Trading Commission charges that it neglected to properly supervise employees and enforce compliance procedures. The futures commission merchant says it will pay $310,000 to settle the charges for violations that the CFTC says took place for over two years, between April 2003 and December 2005.The company also agreed to monitor and enforce its compliance rules in the future.

According to RCG’s compliance rules and procedures, issuing third party checks was prohibited unless the Compliance Department approved the checks or they were used to pay for a customer’s business expenses. The approval of the company’s compliance department was also required for any cash payments to customers.

The CFTC says that RCG did disburse cash to someone that worked for a New York Mercantile Exchange floor brokerage operation even though the worker was not an account holder that had been authorized to receive cash from the account. The futures commission merchant also disbursed a number of checks to third parties while failing to obtain the proper approval.

Related Web Resources:

CFTC Sanctions Rosenthal Collins Group, LLC $310,000 for Failing to Enforce Compliance Procedures and Diligently Supervise Employees, CFTC.gov, August 26, 2008
Rosenthal Collins Group, LLC
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The U.S. Commodity Futures Trading Commission (CFTC) ordered Interactive Brokers LLC (IBL) to relinquish $175,000 in commissions, for failing to properly supervise its compliance employees while handling a commodity futures trading account. The National Futures Association (NFA) recently fined IBL $125,000 regarding the same matter and for failing to maintain adequate books and records.

IBL is a discount direct access brokerage firm and registered futures commission merchant (FCM) headquartered in Greenwich, Connecticut. According to the order, an account was maintained at IBL in the name of Kevin Steele, a Canadian who used the account to defraud more than 200 Canadian, German, and US citizens of over $8 million in a commodity pool fraud that was the subject of an earlier CFTC enforcement action.

The CFTC found that, from February 2003 through May 2005, IBL accepted 135 third-party deposits in the form of wire transfers and checks totaling $7.7 million into Steele’s personal account, but did not have procedures reasonably designed to detect the deposit of third-party funds in an individual trading account. The frequency and magnitude of deposits and withdrawals to Steele’s account, relative to his stated liquid net worth, and the pattern of deposits followed by withdrawals suggested that Steele might be operating as an unregistered commodity pool operator.

The Commodity Futures Trading Commission filed enforcement actions in the U.S. District Court for the Southern District of New York March 22 against nine firms with names identical to or extremely close to those of legitimate firms and exchanges. The actions accuse the firms of fraud while soliciting customers to purchase commodity futures and options contracts (CFTC v. American Futures and Options Exchange, S.D.N.Y., No. 07-CV-2377, 3/22/07; AFTC v. International Energy Exchange, S.D.N.Y., No. 07-CV-2378, 3/22/07; CFTC v. New York Petroleum Option Exchange, S.D.N.Y., No. 07-CV-2379, 3/22/07; CFTC v. New York Options Exchange, S.D.N.Y., No. 07-CV-2376, 3/22/07).

The CFTC also stated that the defendants used misrepresentations on their Web sites to defraud the public out of millions of dollars. Customers were solicited to trade futures and options on energy and currency. In reality, however, the defendants actually invented phony exchanges and brokers to deceive clients.

Those charged–some of which share the names of legitimate firms–are New York Options Exchange (NYOEX); Tahoe Futures; International Energy Exchange (INTENX); Vitol Capital Management; New York Petroleum Option Exchange (NYPOE); HPR Commodities; American Futures and Options Exchange; Metro Financials; and American Futures and Options Trading Commission (AFOTC).

At a hearing discussing the budgetary needs of the Commodity Futures Trading Commission, Senator Richard Durbin voiced concerns that President Bush’s 2008 budget request for the CFTC would not be enough to meet the regulatory agency’s key needs to allow it to function effectively. Durbin, the chairman of the Senate Appropriations Financial Services and General Government Subcommittee, also said that he was worried that staffing problems and older computer systems at the CFTC could negatively affect is ability to supervise the surging derivates industry.

At the hearing, Durbin addressed CFTC Chairman Richard Jeffrey, telling him that he had observed agency’s problems with developing technology to keep up with market changes and its struggles with staffing levels. Durbin said that he believed the agency needed the right tools to enforce the laws.

Jeffrey has complained that agency’s staff size had dropped over the past several years and its computers had become out of date, even as trade volume has increased. He said the $116 million request by President Bush-18 million more than what Congress had allotted to the agency for fiscal year 2007-would help “modestly increase our capabilities in certain areas,” but that this amount of financial support needed to be seen as a beginning, not the end attempt, to addressing certain problems the agency had been experiencing.

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