Author Archives: Hedge Fund Lawyer

Ponzi Scheme Targets Deaf Community

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SEC and CFTC Act to Halt New Fraud

Another fraud was unveiled today as the SEC and the CFTC worked in conjunction to halt a ponzi scheme which purportedly made great returns by trading in the off-exchange foreign currency (forex) markets.  The scammer was a member of the deaf community and perpetrated the fraud on others in the deaf community – a classic example of affinity fraud.  The press releases from both the SEC and the CFTC are reprinted below.

This fraud comes on the heels of other well publicized frauds within the investment management industry including:

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SEC Halts Ponzi Scheme Targeting Deaf Investors

FOR IMMEDIATE RELEASE
2009-30

Washington, D.C., Feb. 19, 2009 — The Securities and Exchange Commission has obtained a court order halting a Ponzi scheme that specifically targeted members of the Deaf community in the United States and Japan.

The SEC alleges that Hawaii-based Billion Coupons, Inc. (BCI) and its CEO Marvin R. Cooper raised $4.4 million from 125 investors since at least September 2007 by, among other things, holding investment seminars at Deaf community centers. The SEC also alleges that Cooper misappropriated at least $1.4 million in investor funds to pay for a new home and other personal expenses. The order obtained by the SEC freezes the assets of BCI and Cooper.

“This emergency action shows that the Commission will act quickly and decisively to help victims of affinity fraud,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement.

“A Ponzi scheme targeting members of the Deaf community is particularly reprehensible,” said Rosalind R. Tyson, Regional Director of the SEC’s Los Angeles Regional Office. “This case is an example of successful coordination between federal and state agencies to protect vulnerable investors.”

The SEC’s complaint, filed yesterday in federal court in Honolulu, alleges that BCI and Cooper represented to the investors that their funds would be invested in the foreign exchange (Forex) markets, that investors would receive returns of up to 25 percent compounded monthly from such trading, and that their investments were safe. According to the complaint, BCI and Cooper actually used only a net $800,000 (cash deposits minus cash withdrawals) of investor funds for Forex trading, and they lost more than $750,000 from their Forex trading. The complaint further alleges that BCI and Cooper failed to generate sufficient funds from their Forex trading to pay the promised returns, and instead operated as a Ponzi scheme by paying returns to existing investors from funds contributed by new investors.

The SEC alleges that BCI and Cooper have violated the registration and antifraud provisions of the federal securities laws. In its lawsuit, the SEC obtained an order temporarily enjoining BCI and Cooper from future violations of these provisions. The SEC also obtained an order: (1) freezing the assets of BCI and Cooper; (2) appointing a temporary receiver over BCI; (3) preventing the destruction of documents; (4) granting expedited discovery; and (5) requiring BCI and Cooper to provide accountings. The Commission also seeks preliminary and permanent injunctions, disgorgement, and civil penalties against both defendants. A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for March 2, 2009, at 9 a.m. HST.
The Commodity Futures Trading Commission (CFTC) also filed an emergency action yesterday against BCI and Cooper, alleging violations of the antifraud provisions of the Commodity Exchange Act. The State of Hawaii’s Department of Commerce and Consumer Affairs (DCCA), Office of the Commissioner of Securities, issued a preliminary order to cease and desist against BCI and Cooper.

The Commission acknowledges the assistance of the Hawaii DCCA’s Office of the Commissioner of Securities and the assistance of the CFTC in this matter.

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For more information, contact:

Andrew Petillon
Associate Regional Director, Los Angeles Regional Office
(323) 965-3214

Kelly Bowers
Senior Assistant Regional Director, Los Angeles Regional Office
(323) 965-3924

John B. Bulgozdy
Senior Trial Counsel, Los Angeles Regional Office
(323) 965-3322

http://www.sec.gov/news/press/2009/2009-30.htm

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Release: 5614-09
For Release: February 19, 2009

CFTC Charges Hawaii-based Marvin Cooper and Billion Coupons, Inc. with Operating a $4 Million Foreign Currency Ponzi Scheme Aimed at Defrauding the Deaf Community

Court Freezes Defendants’ Assets and Appoints Temporary Receiver

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today that it charged Marvin Cooper and his company Billion Coupons, Inc. (BCI), both of Honolulu, Hawaii, with operating a Ponzi scheme that involved more than 125 customers — all of whom are Deaf — in connection with commodity futures trading and foreign currency futures (forex) trading.

The CFTC alleges that since at least September 2007, Cooper and BCI solicited approximately $4.4 million from more than 125 Deaf American and Japanese individuals for the sole purported purpose of trading forex. Also, according to the complaint, while Cooper and BCI opened both forex and futures accounts with approximately $1.7 million of customer money, Cooper misappropriated more than $1.4 million of customer funds for personal use. Cooper allegedly used the misappropriated funds to purchase computer and electronic equipment, flying lessons, and a $1 million home. He also allegedly returned approximately $1.6 million to customers as purported “profits” and as commissions to employees and agents.

“This case is a clear example of affinity fraud: Cooper preyed upon the Deaf community to leverage and exploit the inherent trust within so that his scheme would prosper. The CFTC urges the public to be cautious with their investments even when opportunities are presented by those with whom they have an association,” said CFTC Acting Director of Enforcement Stephen J. Obie.

Cooper and BCI allegedly lured in customers with promises of 15 to 25 percent monthly returns, depending on the amount and size of the customer’s investment, while representing that the investment would be low risk and that the promised return was produced by their successful trading. Cooper and BCI, however, were running a Ponzi scheme since the purported “profits” paid to customers came from existing customers’ original principal and/or from money invested by subsequent customers.

Finally, the complaint alleges that to conceal and perpetuate their fraud, Cooper and BCI provided customers with false account statements representing that their accounts were increasing by as much as 25 percent, when, in fact, the accounts were collectively losing money every month.

Court Orders Freeze of Assets and Appoints Temporary Receiver

On February 18, 2009, the Honorable J. Michael Seabright of the United States District Court of Hawaii granted the CFTC’s request for emergency action by, among other things, freezing Cooper’s and BCI’s assets, granting immediate access to Cooper’s and BCI’s documents and appointing Barry Fisher as temporary receiver. Judge Seabright ordered Cooper and BCI to appear in court on March 2, 2009, at 9 a.m. for a preliminary injunction hearing. In the continuing litigation, the CFTC seeks restitution, disgorgement, civil monetary penalties, and permanent injunctions against further violations of the federal commodities laws and against further trading.

The CFTC requests that all victims of Cooper’s and BCI’s actions contact the temporary receiver at (310) 557-1077.

The CFTC appreciates the assistance of the Securities and Exchange Commission (SEC). The SEC simultaneously filed a related emergency action against Cooper and BCI. The CFTC also wishes to thank the State of Hawaii, Department of Commerce and Consumer Affairs, Office of the Commissioner of Securities.

The following CFTC Division of Enforcement staff members are responsible for this case: Kenneth W. McCracken, Elizabeth Davis, Michael Loconte, Rick Glaser, and Richard Wagner.

Last Updated: February 19, 2009

Forex E-Micro

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New Forex Product Launched by CME

As the CFTC continues to work on promulgating rules which would require forex managers to register (the so called new forex registration rules), the CME has introduced a new forex product called the Forex E-micro which is geared towards the retail forex investor.  It is currently not clear how this new product will fit within the CFTC’s regulatory regime.  We will keep you updated as the CFTC and the NFA provides guidance on this product.

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CME Group to Launch Forex E-Micro Contracts

Smaller contract size and proportionally reduced margins aimed to attract retail participation

CHICAGO, Feb. 18 /PRNewswire-FirstCall/ — CME Group, the world’s largest and most diverse derivatives exchange, today announced that it will launch a series of innovative smaller-sized Foreign Exchange (FX) contracts, called Forex E-Micros, designed to enable retail traders and investors to cost-effectively access the security, transparency and liquidity of CME Group’s FX products. These contracts are listed with, and subject to, the rules and regulations of CME.

“Our new Forex E-micro futures contracts provide the opportunity for a broader universe of customers to mitigate their counterparty risk by trading FX in CME’s $100 billion-a-day global FX liquidity pool,” said Derek Sammann, CME Group Managing Director, Global Head of FX Products. “Active individual traders looking to participate in the global FX market, or small businesses seeking a cost-effective hedging tool for their FX risk, can choose Forex E-micro futures as a versatile and accessible new resource to manage their exposure. And they can do this with the full investor safeguards of operating in CME Group’s regulated environment while benefiting from the transparency and deep liquidity offered by our futures market.”

“With the emergence of FX as a global asset class and the ever-present need to manage FX risk, futures customers will gain access to the global FX markets in a cost-effective, secure manner,” said Christopher Larkin, Vice President, E*TRADE Securities LLC. “We believe that Forex E-micro futures traded at CME provide an ideal introduction to FX and we are pleased to be able to work with CME Group in offering them to our customers.”

“CME Group continues to roll out innovative products for both the institutional and retail futures trader,” said Joseph Cusick, Senior Vice President of Education, OptionsXpress. “We are very excited about offering the new E-Micro FX futures products to our clients.”

“With Forex E-micro futures traded at CME, for the first time we will be able to offer our customers the standards of security and pricing they deserve when entering into a new asset class for the first time,” said Greg Sabatello, President and CEO, Transaction Futures. “Electronically traded and cleared via a central counterparty, these new products ensure on a globally recognized legitimate exchange with transparent fees, which should appeal to spot traders.”

The Forex E-micro contracts will be one-tenth the size of the corresponding CME FX contracts, making them accessible to active individual traders, small Commodity Trading Advisers (CTAs), and Small Medium Enterprises (SMEs). The contracts will be exclusively traded on the CME Globex® electronic trading platform, the world’s largest regulated FX marketplace, which also offers the security of centralized clearing and guaranteed counterparty credit. The new contracts are set to launch in the first quarter of 2009.

The Forex E-Micro contracts will be quoted in interbank or “over the counter” (OTC) terms, making it easy for customers to integrate them into their systems and portfolios. Contracts will be launched in the following six currency pairs: EUR/USD, GBP/USD, AUD/USD, USD/JPY, USD/CHF and USD/CAD.

All Forex E-micro contracts will be cash-settled and EUR/USD, GBP/USD and AUD/USD contracts will be fully fungible with CME Group’s full-sized FX contracts, and margins and exchange fees will be scaled down in proportion with the full-sized versions at roughly one-tenth of the full cost. USD/JPY, USD/CHF and USD/CAD all have a high percentage of margin offset with the larger CME Group FX contracts.

CME Group FX is the largest regulated FX marketplace and one of the top two FX platforms in the world with more than $100 billion in daily liquidity. With the addition of the Forex E-micro contracts, the CME Group FX product suite will consist of 49 futures contracts and 32 options contracts based on 20 currencies.

Hedge Fund Administrator Charity

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As described in the press release reprinted below a hedge fund administrator is providing reduced fees to clients who donate their set up fees to Hedge Funds Care, a charity which benefits abused children.  Hedge Funds Care puts on a number of events throughout the US.  The San Francisco Hedge Funds Care group will be putting on an event on March 11 – more on this event to be forthcoming.

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Hedge Fund Administrator Offers Discount Pricing to Emerging Hedge Fund Managers Who Donate Set-up Fees to Hedge Funds Care

NEW YORK, Feb. 17 /PRNewswire/ — Variman LLC, (www.variman.com) a boutique provider of hedge fund administration, middle and back office services, joins together with Hedge Funds Care (www.hedgefundscare.org) to increase awareness of child abuse and assist its efforts to prevent and treat child abuse.

Variman Fund Services will offer discounted monthly service fees to emerging managers who donate the standard set-up fee to Hedge Funds Care on behalf of Variman LLC for a limited time.
Given the difficult times our industry is currently facing, Variman Fund Services, in an effort to support both the needs of the marketplace and those of abused children, believes this initiative will be worthwhile and bring solid value to all involved.

For further information, please log on to www.variman.com and provide contact information as needed for a quick response. This is a limited time offer and applies to emerging hedge fund managers requiring hedge fund administration. All information will be held strictly confidential.

About Variman LLC

Variman LLC, headquartered in Short Hills, NJ, USA with offices in Dubai and India, brings a fresh perspective to Capital Markets Operations and Hedge Fund Administration with its unique service platform to provide complete visibility to all aspects of post-trade processing including liquidity management and collateral optimization

Variman Fund Services remains one of the few administrators to offer bespoke white glove services according to client requirements and budget. Variman Fund Services can efficiently deal with multiple brokers, global middle and back office operations and accounting functions across asset all classes and time zones.

About Hedge Funds Care

Founder Rob Davis established Hedge Funds Care in 1998 with the dream of helping to prevent and treat child abuse. With the encouragement and participation of his colleagues in the hedge fund industry, the first Open Your Heart to the Children Benefit took place in New York in February of 1999 and raised $542,000. What began as a single fundraiser has grown into an international nonprofit organization. Hedge Funds Care has distributed over $18 million through more than 500 grants. In 2009, annual benefits will take place in New York, San Francisco, Chicago, Atlanta, Boston, Denver, Toronto, London and the Cayman Islands. Through the ongoing generosity and commitment of hedge fund industry professionals, HFC continues its rapid expansion. We anticipate future growth to cities in the U.S. and abroad.

Another Massive Fraud Alledged in the Securities Industry

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The SEC release is below.  For more additional reading and insight into this story, please see the Standford SEC Memorandum of Law.

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SEC Charges R. Allen Stanford, Stanford International Bank for Multi-Billion Dollar Investment Scheme

FOR IMMEDIATE RELEASE
2009-26

Washington, D.C., Feb. 17, 2009 — The Securities and Exchange Commission today charged Robert Allen Stanford and three of his companies for orchestrating a fraudulent, multi-billion dollar investment scheme centering on an $8 billion CD program.
Additional Materials

Stanford’s companies include Antiguan-based Stanford International Bank (SIB), Houston-based broker-dealer and investment adviser Stanford Group Company (SGC), and investment adviser Stanford Capital Management. The SEC also charged SIB chief financial officer James Davis as well as Laura Pendergest-Holt, chief investment officer of Stanford Financial Group (SFG), in the enforcement action.

Pursuant to the SEC’s request for emergency relief for the benefit of defrauded investors, U.S. District Judge Reed O’Connor entered a temporary restraining order, froze the defendants’ assets, and appointed a receiver to marshal those assets.

“As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors.”

Rose Romero, Regional Director of the SEC’s Fort Worth Regional Office, added, “We are alleging a fraud of shocking magnitude that has spread its tentacles throughout the world.”

The SEC’s complaint, filed in federal court in Dallas, alleges that acting through a network of SGC financial advisers, SIB has sold approximately $8 billion of so-called “certificates of deposit” to investors by promising improbable and unsubstantiated high interest rates. These rates were supposedly earned through SIB’s unique investment strategy, which purportedly allowed the bank to achieve double-digit returns on its investments for the past 15 years.

According to the SEC’s complaint, the defendants have misrepresented to CD purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in “liquid” financial instruments (the portfolio); monitors the portfolio through a team of 20-plus analysts; and is subject to yearly audits by Antiguan regulators. Recently, as the market absorbed the news of Bernard Madoff’s massive Ponzi scheme, SIB attempted to calm its own investors by falsely claiming the bank has no “direct or indirect” exposure to the Madoff scheme.

According to the SEC’s complaint, SIB is operated by a close circle of Stanford’s family and friends. SIB’s investment committee, responsible for the management of the bank’s multi-billion dollar portfolio of assets, is comprised of Stanford; Stanford’s father who resides in Mexia, Texas; another Mexia resident with business experience in cattle ranching and car sales; Pendergest-Holt, who prior to joining SFG had no financial services or securities industry experience; and Davis, who was Stanford’s college roommate.

The SEC’s complaint also alleges an additional scheme relating to $1.2 billion in sales by SGC advisers of a proprietary mutual fund wrap program, called Stanford Allocation Strategy (SAS), by using materially false historical performance data. According to the complaint, the false data helped SGC grow the SAS program from less than $10 million in 2004 to more than $1 billion, generating fees for SGC (and ultimately Stanford) of approximately $25 million in 2007 and 2008. The fraudulent SAS performance was used to recruit registered investment advisers with significant books of business, who were then heavily incentivized to reallocate their clients’ assets to SIB’s CD program.

The SEC’s complaint charges violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act, and registration provisions of the Investment Company Act. In addition to emergency and interim relief that has been obtained, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the relevant provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.

The Commission acknowledges the assistance and cooperation of the Financial Industry Regulatory Authority (FINRA) in connection with this matter.

The SEC’s investigation is continuing. FINRA independently developed information through its examination and investigative processes that contributed significantly to the filing of this enforcement action.

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For more information, contact:

Rose Romero, Regional Director
Steve Korotash, Associate Regional Director, Enforcement
SEC’s Fort Worth Regional Office

Four CFTC Actions against CPOs and CTAs

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This past week and a half has proven to be a busy time for the CFTC’s enforcement divisions as a number of actions have been released to the public.  The four actions below showcase the unlawful and unsavory behavior of four groups.  Specifically, two of the actions below provide details of two more Ponzi schemes and the other two actions involve misrepresentations and lies.  As we’ve discussed before hedge fund investors have many tools to protect themselves from these sorts of actions.  Simple hedge fund due diligence will go a long way towards protecting an investment.

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Release: 5612-09
For Release: February 11, 2009

CFTC Orders Former Bank Trader and New York City Resident to Pay $360,000 Penalty in Connection with False Trading Reports Submitted to His Former Employer, Bank of America

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today settled charges against Michael Moster for submitting false reports to the Bank of America in Chicago, where he once worked as a trader, and ordered Moster to pay a $360,000 civil penalty.

The CFTC issued an order on February 11, 2009, which finds that, during a three-day period in January 2004, Moster, a former proprietary trader for the Bank of America, falsely reported to the bank that he purchased 4,000 Treasury futures contracts to conceal the risk associated with large unauthorized positions in Treasury bonds that he established over the same time period, by making it appear as if the long futures position hedged the Treasury bond risk. By the following week, the fictitious trades inflated the value of his trading book by over $12 million, the order finds. The sale of Moster’s unauthorized Treasury bond position resulted in a loss of approximately $12.2 million to the Bank of America.

Based upon the same conduct, Moster pled guilty on September 18, 2008, to a one-count violation of making false entry into the books and records of a bank in the Southern District of New York. Under the criminal sentencing guidelines, Moster will be required to make full restitution of the over $12 million loss he caused to the Bank of America. The CFTC’s order recognizes the restitution made in the context of the criminal case and provides that Moster must pay and satisfy any criminal restitution obligation before his payment of the CFTC civil monetary penalty.

The following CFTC Division of Enforcement staff members are responsible for this case: Ken Koh, Todd Kelly, Peter Haas, Paul Hayeck, and Joan Manley.

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Release: 5610-09
For Release: February 10, 2009

CFTC Seeks Freeze of Assets in Oklahoma Ponzi Scheme Involving Over $30 Million

Mark Trimble of Edmond, Oklahoma Posted Profits, While Losing Millions in Phidippides Capital Hedge Fund

Washington, DC – The Commodity Futures Trading Commission (CFTC) announced that today it filed an enforcement action against Mark S. Trimble, of Edmond, Oklahoma, and his company, Phidippides Capital Management LLC (PCM), with offices in Oklahoma City. Trimble, who controlled Phidippides, also managed a private hedge fund named Phidippides Capital LP, which the CFTC’s complaint alleges was a Ponzi scheme.

CFTC Seeks Court Order Freezing Defendants’ Assets

In conjunction with the filing of the complaint today in the U.S. District Court for the Western District of Oklahoma, the CFTC is seeking a statutory restraining order freezing defendants’ assets and preserving records. Trimble has consented to the entry of an asset freeze order.

The CFTC’s complaint alleges that, from at least 2005 to the present, Trimble and PCM operated a $34 million hedge fund with approximately 60 investors and traded partly in the name of Phidippides Capital, a Delaware company incorporated by Trimble. Since at least October 2007, Trimble and PCM allegedly issued false account statements, failed to disclose the fund’s actual multi-million trading losses, and operated the fund as a Ponzi scheme, paying participant redemptions based on the fund’s fabricated profitability. Additionally, defendants allegedly received over $1 million in management fees based on false reports of trading profits.

Trimble Used Email to Notify Investors that He Had Not Been “Honest” About the Fund’s Trading Results

According to the complaint, Trimble’s activities were exposed in late January 2009, after Trimble provided the Federal Bureau of Investigation a fictitious 2008 year-end trading account showing millions of dollars in trading profits that did not square with actual trading statements issued by Trimble’s brokerage firm that disclosed millions of dollars in trading losses. Trimble subsequently stated in an email sent to his brokerage firm, and addressed to “Family, Friends, and Clients,” that he had not been “honest” about the hedge fund’s trading results, explaining: “The reason our balances are off is because I could not look myself in the mirror and face all of you and notify you that in the last quarter of 2008 we lost all the profits for the year and then some.”

Stephen J. Obie, CFTC Acting Director of the Division of Enforcement commented: “Through the swift action of CFTC staff, millions of dollars have been frozen, which ultimately we will seek to return to the victims Trimble deceived by his scheme. The CFTC continues to zealously prosecute these lecherous schemes, so that as many assets can be preserved as possible as we fulfill our vital mission to protect customers from fraud and abuse.”

The CFTC’s complaint seeks civil monetary penalties, disgorgement of ill-gotten gains, restitution to defrauded customers, and injunctive relief, among other sanctions.

The CFTC appreciates the assistance of the Securities and Exchange Commission and the Financial Crimes Enforcement Network.

The following CFTC Division of Enforcement staff members are responsible for this case: Rosemary Hollinger, Scott Williamson, Richard Wagner, and Ken Hampton. CFTC Auditors Thomas J. Bloom, Shauna Wright-Regas, and Lauren Corn also are working on this matter.

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Release: 5609-09
For Release: February 6, 2009

CFTC Obtains Judgment Against Albert E. Parish and Parish Economics LLC for Operating a Commodity Pool Scam in CFTC Anti-Fraud Action

Parish Currently Serving a Sentence of More than 24 years in Federal Prison for Related Criminal Violations

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) announced today that the Honorable David C. Norton of the U.S. District Court for the District of South Carolina entered an order settling charges alleging that Albert E. Parish and Parish Economics LLC, both of Charleston, South Carolina, lied to customers and misappropriated millions of dollars in customer funds (see CFTC Press Release 5320-07, April 19, 2007).

According to the order entered on February 2, 2009, between 1986 and March 2007, Parish and Parish Economics fraudulently solicited approximately $40 million in investments for their commodity futures pool. Parish and Parish Economics misrepresented to pool participants that funds would be invested in commodity futures when, in reality, Parish misappropriated the vast majority of funds for his personal use. Parish and Parish Economics also provided false futures account statements to pool participants and failed to provide required pool disclosure documents.

The order permanently bars Parish and Parish Economics from further violating certain provisions of the Commodity Exchange Act and the CFTC’s regulations and from engaging in any commodity-related activity. Parish is currently serving a sentence of more than 24 years in federal prison for related criminal violations. In lieu of an award of restitution and civil monetary penalties, the order recognizes that Parish will be subject to a criminal judgment restitution obligation in excess of $40 million.

The CFTC would like to thank James A. Rue of the Securities and Exchange Commission and John H. Douglas of the U.S. Attorney’s Office for the District of South Carolina for their assistance in this matter.

The following CFTC Division of Enforcement staff members are responsible for this case: Jo Mettenburg, Jeff Le Riche, Charles Marvine, Donald Nash, Rick Glaser, and Richard Wagner.

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Release: 5608-09
For Release: February 5, 2009

CFTC Charges Minnesota Resident Charles “Chuck” E. Hays and His Company, Crossfire Trading, LLC, with Running a $5.5 Million Ponzi Scheme

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) filed an enforcement action today against Charles “Chuck” E. Hays and Crossfire Trading, LLC (Crossfire), both of Rosemount, Minnesota, charging them with fraud and misappropriation in connection with a commodity pool Ponzi scheme.

In conjunction with the filing of the complaint today in the U.S. District Court for the District of Minnesota, the CFTC is seeking a statutory restraining order freezing defendants’ assets and preserving records.

The CFTC’s complaint alleges that, from January 2006 to the present, Hays and his company, Crossfire, a purported commodity pool, fraudulently solicited and accepted more than $5.5 million from at least three individuals and a charitable foundation for the purpose of trading stock index and crude oil futures.

Hays, according to the complaint, convinced at least one person to invest in Crossfire by representing verbally and in fabricated account statements — issued on Crossfire’s letterhead — that Crossfire earned consistent profits trading commodity futures with no losing months. However, as charged in the complaint, Crossfire has never had an active commodity futures trading account. Additionally, in an attempt to alleviate at least two investors’ suspicions as to what Hays was actually doing with their money, Hays provided an account statement for the Crossfire pool fabricated to appear as if it were issued by a legitimate brokerage company by using that brokerage’s letterhead. This false account statement indicated that Crossfire maintained a trading account at the brokerage with over $37 million. As alleged, that account is nonexistent.

Furthermore, the complaint charges Hays with misappropriating investor funds to purchase a $4 million yacht, and for other purposes.

“Hays ran his Ponzi scheme from his yacht, but was grounded when the tide turned as Federal authorities exposed this egregious fraud,” said CFTC Acting Director of Enforcement Stephen J. Obie.

The CFTC complaint seeks orders requiring the defendants to provide the CFTC with continuing access to books and records and to make an accounting with information necessary to determine the actual amounts of net contributions and profits or losses. The CFTC also requests that the court issue orders of preliminary and permanent injunction against the defendants, a return of alleged ill-gotten gains, repayments to defrauded investors, monetary penalties, and other relief.

The CFTC appreciates the assistance of the United States Attorney’s Office for the District of Minnesota, the Department of Justice, the United States Postal Inspection Service, and the Federal Bureau of Investigation in this action. Hays was arrested this morning by Federal authorities.

The following CFTC Division of Enforcement staff is responsible for this case: Susan Gradman, Neville Hedley, Judith McCorkle, Venice Bickham, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

Hedge Fund Law Questions

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Recently I have received a few good hedge fund law questions.  Please remember that these answers are general discussions of the law and should not be a substitute for actual legal advice.  This discussion does not form an attorney-client relationship, please see our disclaimer.

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Question: [with reference to the new Hedge Fund Registration article] So what’s to say a hedge fund can’t just become the outside advisor to a series of managed accounts?  If so, does the fund still need to register?

Answer:  Many hedge fund management companies do provide individual account management outside of the hedge fund.  Typically this is described as hedge fund separately managed accounts. There are many reasons why a manager may have such accounts, including the fact that many large institutional investors require that their assets be managed in this way.

With regard to registration, yes a manager may have to register as an investment advisor if he manages separately managed accounts outside of the hedge fund.  There are two separate levels of registration – State and SEC.  Generally the SEC does not require a manager to register unless the manager has 14 or less clients over the last 12 months.  This generally means that a hedge fund manager can have 13 separately managed account clients (in addition to the hedge fund) without implicating the SEC registration requirements (see Hedge Fund Registration Exemption).  However, states are free to adopt their own registration laws and many would require a manager with 5 separately managed account clients (in addition to the hedge fund) to register as an investment advisor with the state securities commission.

Each manager’s situation is unique and if the manager has specific questions regarding his legal or registration status he should discuss with legal counsel.  Additionally, if the Hedge Fund Transparency Act is passed, it is likely that hedge fund managers with $50 million or more of AUM will need to register as investment advisors with the SEC.

Question:  Regarding the 3c7 Funds, does the counting of investors require a ‘look through’?  I.e. If an qualified investor was a Fund of Funds, would the counting up to the limit of 500 investors require counting the underlying investor of the Fund of Funds?

Answer: If the investing fund was also a Section 3(c)(7) hedge fund then there would be no “look through.”  If the investing fund was a Section 3(c)(1) hedge fund then there would be certain issues which the Section 3(c)(1) would need to take into consideration.  We will be writing a post about this issue shortly.

Question: What happens if you are NOT an accredited investor, but you have already been allowed to invest into a hedge fund that requires you to be an accredited investor?

Answer: I am not quite sure how this would happen but I believe there might be two separate ways.  First, the investor may have lied in the hedge fund subscription documents.  The subscription documents require the investor to make certain representations regarding the investor’s net worth.  Generally hedge fund managers have no duty to inquire further about the representations made in the subscription documents.  If this happens then generally the investor will not receive the protections under the law for non-accredited investors.

Second, the investor may have been an accredited investor at the time the subscription documents were signed and, because of outside circumstances, the investor later becomes a non-accredited investor.  In this instance the newly non-accredited investor should immediately contact the hedge fund manager and inform him of the new circumstances.

Question: Can you recommend a cost-effective (cheap) administrator for a hedge fund start up?

Answer: Yes.  It is common for me to provide clients with recommendations for all service providers including hedge fund administrators.  There are many hedge fund administration firms and there are many low cost providers which I can put you in touch with.  Usually I will want to get to know you and your firm before I make recommendations.  If you are interested, please contact us now.

Two Separate CPOs Subject to NFA Action

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In two separate actions the NFA has effectively shut down two separate Commodity Pool Operators who were operating in the Northeast.  The press releases are reprinted below.

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For Immediate Release

NFA takes emergency enforcement action against New York commodity pool operator

February 9, Chicago – National Futures Association (NFA) announced today, that it has taken an emergency enforcement action against Mark E. Bloom, a Commodity Pool Operator (CPO) located in New York City. Bloom has failed to cooperate with NFA in its investigation of allegations that Bloom and North Hills Management, LLC, operated an illegal commodity pool, and exercised unlawful control over $8 million which was given to them by a charitable trust and a corporation owned by that trust for the purpose of making investments on their behalf. North Hills Management, LLC is a former CPO and Commodity Trading Advisor Member of NFA of which Bloom was principal. The Member Responsibility Action (MRA) is deemed necessary to protect the commodity futures markets, pool participants, customers and other NFA Members.

Effective immediately, the MRA suspends Bloom from NFA membership and associate membership indefinitely. The MRA also prohibits Bloom from soliciting or accepting any customer or pool participant funds or placing trades for pools that he operates. Additionally, Bloom and any other person acting on his behalf, is prohibited from disbursing or transferring any funds from any accounts which he owns or controls without prior approval from NFA. NFA Members who carry accounts in the name of, controlled by or advised by Bloom are prohibited from disbursing funds to Bloom or to any entity or account controlled by him without prior NFA approval. The MRA provides that it will remain in effect until such time Bloom has demonstrated to NFA that he is in complete compliance with all NFA Requirements. Bloom may request a hearing before an NFA Hearing Panel.

NFA is the premier independent provider of innovative and efficient regulatory programs that safeguard the integrity of the futures markets.

For more information contact:
Larry Dyekman (312) 781-1372, [email protected]
Karen Wuertz (312) 781-1335, [email protected]

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For Immediate Release

NFA bars New Jersey commodity pool operator

February 9, Chicago – National Futures Association (NFA) has ordered Progressive Investment Funds (Progressive), a Commodity Pool Operator located in Glenrock, New Jersey, to withdraw from NFA membership and not reapply. Victor E. Cilli, Progressive’s sole principal, also agreed to withdraw from NFA membership. If Cilli reapplies for NFA membership in the future, his application will be subject to certain conditions, including a requirement that he pay a $10,000 fine. The Decision, issued by an NFA Hearing Panel, is based on a Complaint filed in August 2008 and a settlement offer submitted by Progressive and Cilli.

The Complaint charged that Progressive and Cilli had failed to produce certain books and records requested by NFA as part of an inquiry relating to a pool operated by Progressive. NFA previously issued a Member Responsibility Action against Progressive and Cilli in June 2008. See previous press release.
NFA is the premier independent provider of innovative and efficient regulatory programs that safeguard the integrity of the futures markets.

For more information contact:

Larry Dyekman (312) 781-1372, [email protected]
Karen Wuertz (312) 781-1335, [email protected]

Related hedge fund law articles include:

Grassley Clarifies Hedge Fund Registration Act

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Investors in Hedge Fund Won’t Need to Disclose Names and Addresses

As we have discussed in many posts, Senators Grassley and Levin have introduced legislation which would require hedge funds to be regulated under the Investment Company Act.  The legislation would also require hedge fund managers to be registered as investment advisors with the SEC under the Investment Advisors Act.  The name of the act is the Hedge Fund Transparency Act of 2009.

As I pointed out in this post, one of the more controversial parts of the bill was the requirement that the fund disclose the names and current addresses of each investors in the hedge fund.  The specific provision provides:

“The information form required…shall be filed at such time and in such manner as the Commission shall require, and shall…include… the name and current address of…each natural person who is a beneficial owner of the investment company.”  The information shall “be made available by the Commission to the public at no cost and in an electronic, searchable format.”  (See new Section 6(g)(2) of the Investment Company Act as described in Section 2(b) of the bill)

However, the plain words of the statue, apparently, aren’t what they mean.  Senator Grassley has recently stated that the disclosure of names and addresses only applies to the hedge fund managers.  The Wall Street Journal recently ran this piece which states:

“The bill requires disclosure of a hedge fund’s beneficial owners, who profit from the fees generated in operating the fund,” and not the names of outside clients, the senators said in a joint statement Thursday.

We disagree with this statement and we humbly recommend that the bill be amended if there was an intent which is different from the plain language meaning of the bill.  Additionally, there are other parts of the bill which deserve clarification if any re-writes occur.  Specifically we believe that new Section 6(g)(1), as described in Section 2(b) of the bill, would require the hedge fund itself to register as an investment advisor with the SEC.  We believe the intent is for the hedge fund management company, instead, to register with the SEC and accordingly Section 2(b) of the bill should be rewritten.

As an open note to Senators Grassley and Levin, we would be happy to provide input on future revisions of this bill.

NFA Fingerprint Cards

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Information on Requesting and Submitting NFA Fingerprint Cards

Those persons who are registering with the CFTC in any capacity (Associated Person of a CPO, CTA, IB) will need to submit fingerprint cards to the NFA prior to their registration being effective. It is also likely that the new forex registration rules will require fingerprint cards from Associated Persons of Forex CPOs, Forex CTAs and Forex IBs.  Below are two announcements from the NFA regarding fingerprint cards.

You can request fingerprint cards from the NFA by calling: 312-781-1410 or 800-621-3570.

You can have the fingerprints done at any local police station.

You will send the fingerprint cards to this address:

NFA
Attn: Registration
300 South Riverside Plaza
Suite 1800
Chicago, Illinois 60606

Please note: recently we have seen clients who have had issues with having their fingerprint cards read by the NFA.  If you do not have a local police station take your prints (i.e. you have a notary or other group take the prints), you risk the prints being illegible which will slow down the registration process.  We recommend you always have your prints taken at a police station.

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Fingerprint Cards

Fingerprint cards are sent by NFA to the Federal Bureau of Investigation (FBI) to determine if the applicant has a criminal record. To conduct a check of its records the FBI must be able to analyze the print pattern of all 10 fingers. The FBI will reject fingerprint cards that do not have legible patterns for all 10 fingers. For this reason it is very important that you have your fingerprints taken by a person properly trained in rolling fingerprints.

NFA has issued a Registration Advisory [HFLB note: please see below] that provides guidance concerning fingerprinting to assist those who submit applications via the Online Registration System.

NFA can only accept and process a complete FBI “applicant card”. Applicants are encouraged to submit more than one set of fingerprints with their application to avoid delays in obtaining additional sets if necessary for processing.

We will return any fingerprint cards we receive which are incomplete or not an applicant card to the registrant and request new cards be sent as soon as possible.

NFA offers a fingerprinting service for NFA applicants at the Chicago office (300 South Riverside Plaza, Suite 1800) between the hours of 8:30 a.m. and 4:00 p.m. for $15 (cash, check or money order). In order to use NFA’s fingerprint service, visitors must be pre-registered in the building’s visitor registry. Visitors should contact NFA’s Information Center (either by phone at 312-781-1410 or send an email to [email protected]) to register their name and date of visit so they can receive access to NFA’s offices on the 18th floor. NFA recommends that visitors pre-register at least a day prior to their visit.

All individuals being fingerprinted will be required to present two forms of identification, one of which is a valid picture ID issued by a government agency, in order to verify the identity of the person being fingerprinted. NFA now submits digital images of fingerprints to the FBI for criminal background checks. Results are received in three days or less, and in some cases within several hours, resulting in a faster and more efficient registration process. If you have any questions regarding the fingerprint process, please contact NFA’s Information Center at 312-781-1410 or 800-621-3570.

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Registration Advisory – Fingerprinting
July 29, 2005

As part of a 2003 Report to Congress (GAO-03-795), the United States Government Accountability Office identified potential weaknesses in controls with respect to the fingerprinting of individuals who submit fingerprints in connection with registration applications in the futures and securities industries. NFA is providing the following guidance to assist Members who submit applications via NFA’s Online Registration System (ORS).

Members are responsible for performing due diligence and establishing appropriate procedures in the hiring process. Members are required to submit fingerprint cards for each of their applicants for registration as associated persons or for approval as a principal. Members should use all available information gathered in the hiring process (both from the ORS application information and from any other hiring due diligence procedures such as background checks and employment references) to confirm that the person being fingerprinted is the same person submitting an application via ORS.

Members should consider incorporating the following fingerprinting practices in connection with filing registration applications in the futures industry. These recommended practices are intended to enhance the integrity of the fingerprinting process and complement Members’ existing procedures used to verify that the fingerprint card contains the fingerprints of the person whose application has been filed.

Members that use their own personnel to take fingerprints should consider:

  • Establishing and communicating internal fingerprinting procedures, and periodically reviewing and updating them;
  • Limiting the number of employees who are responsible for the fingerprinting process;
  • Training those employees to roll high-resolution fingerprints that will be accepted by the FBI; and
  • Training those employees to require the person being fingerprinted to present two forms of identification, one of which is a valid picture ID issued by a government agency, in order to verify the identity of the person being fingerprinted.

Members that use third parties to take fingerprints should consider requiring individuals to be fingerprinted at a location where the persons taking the fingerprints are likely to verify identity as well as the authenticity of identification cards presented, such as law enforcement offices and NFA’s Chicago office. Other locations that may provide fingerprinting services and that would be appropriate include military bases, government agencies and self-regulatory organizations.

If you have any questions regarding the information contained in this Advisory, please contact NFA’s Information Center at (800) 621-3570.