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CFTC Addresses 2010 Budget

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CFTC Reports to US Senate Subcommittee on Financial Services – Testimony Provided by Chairman Gary Gensler

On June 2nd, 2009 Gary Gensler of the Commodity Futures Trading Commission (CFTC) addressed the US Senate Subcommittee on Financial Services with a discussion of the issues related to the CFTC’s 2010 Budget.  Gensler stated that the current priorities of the CFTC are to enhance transparency in the marketplace and ensure enforcement of laws governing the financial markets, and that increased funding will be necessary to accomplish these objectives.  Specifically, the CFTC  plans  to grow its professional staff and adopt new technology in order to better monitor the financial markets.  With these goals in mind, the Commission’s FY 2010 budget proposes an increase of $14.6 million,  half of which will be used to maintain FY 2009 level of operations into FY 2010.  In his closing remarks, Gensler stated:

“President Obama has called for action by the end of this year to strengthen market integrity, lower risks, and protect investors. The future of the economy and the welfare of the American people depend on a vibrant Commission to assist in leading the regulatory reform ahead. Additional funding will be necessary to properly implement these reforms.”

The entire text of the testimony is included below and can be found here.

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Testimony by Gary Gensler, Chairman on behalf of the Commodity Futures Trading Commission

Before the United States Senate Subcommittee on Financial Services and General Government, Committee on Appropriations

June 2, 2009

Thank you, Chairman Durbin, Ranking Member Collins, and other members of the Subcommittee. I am pleased to be here to testify on behalf of the Commodity Futures Trading Commission, and I appreciate the opportunity to discuss issues related to the Commission’s 2010 Budget. I am also grateful to have had each of your individual support for my recent confirmation. It is a great honor to serve my country in this capacity.

I come before you today having only served as CFTC Chairman for six calendar days, but with the full knowledge of the failures of our financial regulatory system; failures that affected all Americans and failures that we must ensure never occur again.

The last decade, and particularly the last 21 months, has taught us much about the new realities of our financial markets. We have learned the limits of foresight and the need for candor about the risks we face. We have learned that transparency and accountability are essential and that only through strong, intelligent regulation can we fully protect the American people and keep our economy strong.

As Chairman of the CFTC, I will use every tool and authority available to protect the American people from fraud, manipulation and excessive speculation. I also look forward to working with Congress to establish new authorities to close the gaps in our laws and bring much-needed transparency and regulation to the over-the-counter derivatives market. I firmly believe that doing so will strengthen market integrity, lower risks, protect investors, promote transparency and begin to repair shattered confidence in our financial markets.

I would like to thank the Committee for the $146 million recently appropriated for the CFTC for the 2009 Fiscal Year and special thanks to Chairman Durbin for visiting our Chicago office last year. As a result of this much needed boost in funding, the

Commission has begun to address our alarming staffing levels; levels that recently reached historic lows.

At present, the Commission employs about 500 career staff — roughly equivalent to when the Commission was created in 1975. Three decades later, the futures market has changed in every way: with respect to volume, complexity, risk and locality. What was once a group of regional domestic markets trading a few hours five days a week is now a global market trading 24/7, and what was once just a $500 billion dollar business has exploded to a $22 trillion dollar annual industry.

Ten years ago, the CFTC was near its peak staffing level at 567 employees, but shrunk by 20% over the subsequent eight years before hitting a historic low of 437.

With the increase in FY 2009 funding the CFTC can reach 572 employees.

While this is a start, I believe that merely raising our staffing levels to the same as a decade ago will not be enough to adequately fulfill all of the agency’s missions. In the last ten years, trading volume went up over five fold. The number of actively traded futures and options contracts went up over six fold, and many of these are considerably more complex in nature. We also moved from an environment with open-outcry pit trading to highly sophisticated electronic markets.

In addition to the dramatic evolution of the futures industry, we have experienced the worst financial crisis in 80 years. We also experienced, in my view, an asset bubble in commodity prices. The staff of the CFTC is a talented and dedicated group of public servants, but the significant increase in trade volume and market complexity, as well as rapid globalization, commands additional resources to effectively protect American taxpayers.

For all of these reasons, I feel it is appropriate for our staffing levels and our technology to be further bolstered to more closely match the new financial realities of the day.

In short, despite the recent increase in funding, the Commission remains an underfunded agency. The President’s Budget recommendation of $160.6 million dollars is recognition of this need. Specifically, the Commission needs more resources to hire and retain professional staff and develop and maintain technological capabilities as sophisticated as the markets we regulate.

I’d like to identify some of my priorities and provide some illustrations of how resource limitations have constrained the Commission. Among my priorities will be to:

  • Ensure robust enforcement of our laws. Currently, the Commission’s enforcement program consists of 122 employees — the lowest level since 1984. Though FY 2009 funding will get us back to 141 enforcement employees, this is still below the agency’s peak of 167 and well below what we need given the current financial turmoil. Any financial downturn reveals schemes that could only stay afloat during periods of rising asset values. Our current, and much larger, downturn is exposing more leads than the Commission can thoroughly and effectively investigate. This is true both as it relates to fraud and Ponzi schemes as well as staff intensive manipulation investigations. The regulations we enact to protect the American people are meaningless if we do not have the resources to enforce them;
  • Ensure greater transparency of the marketplace. Also, I believe that commodity index funds and other financial investors participated in the commodity asset bubble. Notably, though, no reliable data about the size or effect of these influential investor groups has been readily accessible to market participants. The CFTC could promote greater transparency and market integrity by providing further breakdowns of non-commercial open interests on weekly “Commitments of Traders” reports. The American public deserves a better depiction of the marketplace. The temporary relief from higher prices does not negate this need, especially given that a rebounding of the overall economy could lead to higher commodity prices;
  • Ensure position limits are consistently applied. The CFTC has begun a review of all outstanding hedge exemptions to position limits. This review will consider the appropriateness of these exemptions and look for ways to institute regular review and increased reporting by exemption-holders. The Commission also has begun a review of the process and standards through which no-action letters are issued. As part of these reviews, CFTC staff will consider the extent to which swap dealers should continue to be granted exemptions from position limits;
  • Ensure the Commission has the tools to fully monitor the markets. We must upgrade the Commission’s mission critical IT systems for the surveillance of positions and trading practices. Neither is robust enough nor have they been upgraded to reflect the vast increase in volume and complexity. Our systems must begin to produce the surveillance reports needed to meet the analytical needs of our professional staff and the transparency needs of the public; and finally,
  • Ensure timely reviews of the many new products and rule change filings of the futures markets. These have lagged due to the growth and complexity of markets and the added responsibilities extended to the Commission in the 2008 Farm Bill. The Farm Bill requires staff to review all contracts listed on Exempt Commercial Markets (ECMs) to determine if they are significant price discovery contracts — if they are, then any ECM that lists such a contract must also be reviewed to determine compliance with a stringent set of core principles under the Commodity Exchange Act.

Other examples that I believe are illustrative of the difficult tradeoffs caused by resource constraints are:

  • The Commission does not conduct annual compliance audits of every Designated Contract Market (DCM)– rather only periodic reviews on average, every three years;
  • The Commission does not conduct annual compliance audits of every Derivatives Clearing Organization (DCO) — rather periodic reviews are conducted of selected core principles that are rotated and completed every three years; and,
  • The Commission does not conduct routine examinations of Commodity Pool Operators, Commodity Trade Advisors, and Futures Commission Merchants – a function currently performed by Self Regulatory Organizations. If the Commission were to perform direct periodic audits our staff would better understand the operations of brokers and managed funds and could better assess compliance with the law and regulations.

These are only a few of our important funding priorities and the workload challenges imposed by resource limitations. There are, of course, others. I hope that this helps the Committee to understand, in a tangible way, the challenges the Commission faces in regulating the futures markets the way the Nation requires.

Although the work of the Commission can be highly technical in nature, the mission of the agency is quite straightforward. The CFTC is charged with:

  1. Protecting the public and market users from manipulation, fraud, and abusive practices and
  2. Promoting open, competitive and financially sound futures markets.

With that context, I would like to address the specifics of the FY 2010 Budget request. The FY 2010 Budget proposes an increase of $14.6 million. Approximately half of the increase is needed to maintain our FY 2009 level of operations into FY 2010. The balance would fund an additional 38 positions.

Twenty-six of the 38 staff would be allocated to principal program areas. Specifically, we would allocate eleven positions to Enforcement, eight to Market Oversight, six to Clearing and Intermediary Oversight, and one to the Chief Economist’s office. The remaining twelve positions will provide critical mission support in the areas of legal analysis and counsel, technology support, international coordination, legislative and public outreach, and human capital and management support.

The additional 38 positions are essential to addressing some of the limitations I mentioned earlier. This increase, however, will not provide the Commission with the critical mass of professional and technical expertise needed to ensure that the growing markets remain free of manipulation and fraud.

For example, our enforcement staff needs to be significantly expanded to:

  • Ensure that crimes are punished to the fullest extent of the law;
  • Develop strategies aimed at quickly identifying and eradicating fraudulent schemes, such as Ponzi and foreign exchange “boiler rooms”; and
  • Importantly, pursue resource-intensive investigations and litigations involving manipulation, including energy-related market abuses, so wrongdoers will not believe they are immune from enforcement simply due to the complexity of an enforcement action.

Insufficient resources in the enforcement division force it to be too selective in the matters it investigates.

Our market oversight operation needs additional highly-skilled economists, investigators, attorneys and statisticians to:

  • Analyze trading reports quickly and thoroughly, indentify potential market problems or trader violations promptly, and avoid market disruptions and pricing anomalies;
  • Conduct timely and complete reviews of regulated entities to ensure compliance with all core principles;
  • Examine exchange self-regulatory programs on an on-going and routine basis with regard to trade practice and market surveillance; and
  • Ensure their compliance with disciplinary, audit trail, record-keeping and governance obligations.

Our clearing and intermediary oversight program needs additional auditors, analysts, and attorneys. This would allow us to:

  • Ensure clearing systems protect against a single market becoming a systemic crisis;
  • Protect investors’ funds from being misused or exposed to inappropriate risks of loss; and
  • Guard against abusive sales practices that harm customers and undermine market integrity.

Our economic research program needs more economists to review and analyze new market structures and off-exchange derivative instruments, especially in light of novel and complex products and practices that call for state-of-the-art economic analysis. Further, additional resources would enhance our economic and statistical analysis, improving transparency of markets and better supporting the Commission’s enforcement and surveillance programs.

We also need to transform the current legacy information technology systems into robust systems capable of efficiently receiving and managing massive amounts of raw data as well as transforming them in to useful analytical and research tools.

The Commission has made a substantial investment in technology over the past two years – focusing first on upgrading obsolete computer hardware to industry standards. We need technology, however, that is as modern and dynamic as the technology-driven markets we are charged with overseeing. Our investment in technology must be more than just periodic equipment upgrades and maintenance. The Commission must leverage resources by employing 21st century technology to protect the American people.

As the Commission informed this Committee in February of this year, the agency believes it needs $177.7 million for FY 2010 to perform its present duties. I look forward to working with this Committee to secure the funding necessary to meet our current regulatory responsibilities.

Before I close, I would like to briefly highlight funding needs that might go along with much needed regulatory reform. The CFTC along with the Administration and other financial regulators is committed to working with Congress on broad regulatory reform. This is particularly true for the markets that the CFTC currently regulates and the markets that may soon come under our regulation.

Specifically, we must urgently move to regulate the over-the-counter derivatives market and address excessive speculation through aggregated position limits.

President Obama has called for action by the end of this year to strengthen market integrity, lower risks, and protect investors. The future of the economy and the welfare of the American people depend on a vibrant Commission to assist in leading the regulatory reform ahead. Additional funding will be necessary to properly implement these reforms.

I look forward to working with the Members here today and others in Congress to accomplish this goal.

Thank you very much. I would be happy answer any questions you may have.

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NFA Takes Regulatory Aim at Spot Commodities Markets

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Asks Congress to Increase Scope of Regulation for CFTC and NFA

Last week various employees of the CFTC and the NFA talked with members of Congress regarding certain aspects of the markets regulated by these groups.  Below is testimony from the Chief Operating Officer of the NFA, Daniel Discroll.  In the testimony, Mr. Discoll actually asks Congress to allow the CFTC and the NFA to regulate MORE markets – specifically the off exchange spot metals and energy markets.  While it is commendable that the NFA wants more power to help protect the investors, there are many reasons why this is not a good idea including:

  • The CFTC is underfunded already underfunded (see remarks by Commissioner Gary Gensley, “Specifically, the Commission [CFTC] needs more resources to hire and retain professional staff and develop and maintain technological capabilities as sophisticated as the markets we regulate.”)
  • In 2008 the CFTC was charged with promulgating proposed regulations to require forex managers to register with the CFTC.  This was supposed to be complete by late 2008 – we have yet to see any proposed regulations.  Are we likely to see any quick movements by the CFTC in the spot commodities markets?  Probably not.
  • The CFTC is likely to play a large role in reforming the regulatory framework for the OTC dervitives markets.  See our post on this issue.
  • The NFA, which must be commended for having staff who are generally cheerful and easy to deal with, is nonetheless a slow organization.  Managers who are registered with the CFTC and who have to interact with the NFA face long start-up times because of the overly onerous NFA review requirements.
  • Much of what the NFA does is ineffective – we probably see the most scams from CFTC/NFA regulated entities than we do from SEC/FINRA regulated entities.  Of note was another Ponzi scheme by a CFTC registered FCM, CPO and CTA (see press release).

I am not saying that the CFTC and the NFA should not have the power to regulate these markets.  I am saying that the CFTC and the NFA need to be pursuing the most egregious offenses and that Congress needs to ensure that the CFTC has the funding it needs in order to do its job propoerly.  If Congress does decide to grant jurisdiction over these markets to the CFTC then Congress should also make sure that a funding grant is included in any such rulemaking bill.

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TESTIMONY OF DANIEL A. DRISCOLL
EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER
NATIONAL FUTURES ASSOCIATION

BEFORE THE COMMITTEE ON AGRICULTURE, NUTRITION & FORESTRY
UNITED STATES SENATE

JUNE 4, 2009

My name is Daniel Driscoll, and I am Executive Vice President and Chief Operating Officer of National Futures Association. Thank you Chairman Harkin and members of the Committee for this opportunity to appear here today to present our views on closing a regulatory gap that allows fraudsters to sell unregulated OTC derivatives to retail customers.

Since 1982, NFA has been the industry-wide self-regulatory organization for the U.S. futures industry, and in 2002 it extended its regulatory programs to include retail over-the-counter forex contracts. NFA is first and foremost a customer protection organization, and we take our mission very seriously.

Congress is currently expending significant time and resources to deal with systemic risk and to create greater transparency in the OTC derivatives markets. Those are important economic issues, and we support Congress’ efforts to address them. Understandably, most of the debate centers around instruments offered to and traded by large, sophisticated institutions. However, there is a burgeoning OTC derivatives market aimed at unsophisticated retail customers, who are being victimized in a completely unregulated environment.

For years, retail customers that invested in futures had all of the regulatory protections of the Commodity Exchange Act. Their trades were executed on transparent exchanges and cleared by centralized clearing organizations, their brokers had to meet the fitness standards set forth in the Act, and their brokers were regulated by the CFTC and NFA. Today, for too many customers, none of those protections apply. A number of bad court decisions have created loopholes a mile wide, and retail customers are on their own in unregulated, non-transparent OTC futures-type markets.

The main problem stems from a Seventh Circuit Court of Appeals decision in a forex fraud case brought by the CFTC. In the Zelener case, the District court found that retail customers had, in fact, been defrauded but that the CFTC had no jurisdiction because the contracts at issue were not futures, and the Seventh Circuit affirmed that decision. The “rolling spot” contracts in Zelener were marketed to retail customers for purposes of speculation; they were sold on margin; they were routinely rolled over and over and held for long periods of time; and they were regularly offset so that delivery rarely, if ever, occurred. In Zelener, though, the Seventh Circuit ignored these characteristics and based its decision on the terms of the written contract between the dealer and its customers. Because the written contract in Zelener did not include a guaranteed right of offset, the Seventh Circuit ruled that the contracts at issue were not futures. As a result, the CFTC was unable to stop the fraud.

Zelener created the distinct possibility that, through clever draftsmanship, completely unregulated firms and individuals could sell retail customers forex contracts that looked like futures, acted like futures, and were sold like futures and could do so outside the CFTC’s jurisdiction. For a short period of time, Zelener was just a single case addressing this issue. Since 2004, however, various Courts have continued to follow the Seventh Circuit’s approach in Zelener, which caused the CFTC to lose enforcement cases relating to forex fraud.

A year ago, Congress closed the loophole for forex contracts. Unfortunately, the rationale of the Zelener decision is not limited to foreign currency products. Customers trading other commodities-such as gold and silver-are still stuck in an unregulated mine field. It’s time to restore regulatory protections to all retail customers.

Back in 2007, NFA predicted that if Congress plugged the Zelener loophole for forex but left it open for other products, the fraudsters would simply move to Zelener-type contracts in other commodities. That’s just what has happened. We cannot give you exact numbers, of course, because these firms are not registered. Nobody knows how widespread the fraud is, but we are aware of dozens of firms that offer Zelener contracts in metals or energy. Recently, we received a call from a man who had lost over $600,000, substantially all of his savings, investing with one of these firms. We have seen a sharp increase in customer complaints and mounting customer losses involving these products since Congress closed the loophole for forex.

NFA and the exchanges have previously proposed a fix that would close the Zelener loophole for these non-forex products. Our proposal codifies the approach the Ninth Circuit took in CFTC v. Co-Petro, which was the accepted and workable state of the law until Zelener. In particular, our approach would create a statutory presumption that leveraged or margined transactions offered to retail customers are futures contracts unless delivery is made within seven days or the retail customer has a commercial use for the commodity. This presumption is flexible and could be overcome by showing that delivery actually occurred or that the transactions were not primarily marketed to retail customers or were not marketed to those customers as a way to speculate on price movements in the underlying commodity.

This statutory presumption would not affect the interbank currency market dominated by institutional players, nor would it affect regulated instruments like securities and banking products. It would also not apply to those retail forex contracts that are already covered (or exempt) under Section 2(c). It would, however, effectively prohibit leveraged non-forex OTC contracts with retail customers when those contracts are used for price speculation and do not result in delivery.

I should note that NFA’s proposal does not invalidate the 1985 interpretive letter issued by the CFTC’s Office of General Counsel, which Monex International and similar entities rely on when selling gold and silver to their customers. That letter responded to a factual situation where the dealer purchased the physical metals from an unaffiliated bank for the full purchase price and left the metals in the bank’s vault. The dealer then turned around and sold the gold or silver to a customer, who financed the purchase by borrowing money from the bank. Within two to seven days the dealer received the full purchase price and the customer received title to the metals. In these circumstances the metals were actually delivered within seven days, so the transactions would not be futures contracts under NFA’s proposal.

In conclusion, while NFA supports Congress’ efforts to deal with systemic risk and create greater transparency in the OTC markets, Congress should not lose sight of the very real threat to retail customers participating in another segment of these markets. This Committee can play a leading role in protecting customers from the unregulated boiler rooms that are currently taking advantage of the Zelener loophole for metals and energy products. We look forward to further reviewing our proposal with Committee members and staff and working with you in this important endeavor.

Series 30 Exam Information

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Overview of Series 30 Exam

The Series 30 exam is a National Futures Association sponsored exam which is required for those persons who are branch office managers of a NFA member firm (see our post on CPO and CTA Branch Office Information).  Generally if a NFA Member firm (such as a CPO or CTA) has a branch office (any place of business other than the main office), the firm will need to make sure that a branch office manager is employed at each such branch office.

Exam Specifics

  • Branch Manager Examination.
  • 50 True/False and Multiple Choice questions.
  • One hour long.
  • $70.
  • 70% correct answers required to pass

Signing up for the Exam

The Series 30, like all of the other exams sponsored by the NFA, is administered by FINRA.  Accordingly, an applicant will need to first register to take the exam by completing a FINRA Form U-10.  After the U-10 has been completed, submitted and processed, the applicant will be “in the FINRA system” and will be able to sign up for an exam time at either a Prometric or Pearson testing facility.  Applicants can determine available times and locations by visiting these websites.  The test is generally given a number of times a day, six days a week.

Series 30 Exam Topics

BRANCH MANAGER EXAM—FUTURES

SERIES 30

The following is a general listing of the major subject areas covered by the examination and does not represent an exhaustive list of the actual test questions.

A. General

  • Books and records, preparation and retention
  • Order tickets, preparation and retention
  • Written option procedures
  • Handling of customer deposits
  • NFA Compliance Rule 2-9, supervision of employees
  • Business Continuity and Disaster Recovery Plan
  • Registration requirements—who needs to be registered, sponsor verifi cation, NFA Bylaw 1101, AP termination notices, temporary licenses
  • NFA disciplinary process
  • Reportable positions
  • NFA Arbitration Rules
  • On-site audits of branch offices
  • Bona fide hedging transactions
  • Trading on foreign exchanges

B. CPO/CTA General

  • Registration requirements
  • Books and records to be maintained
  • Reports to customers
  • Bunched orders

C. CPO/CTA Disclosure Documents

  • Management and incentive fees
  • Performance records
  • How long a CPO or CTA can use a disclosure document
  • Conflicts of interest
  • Pool units purchased by principals
  • Business backgrounds of principals
  • Amendments to disclosure documents
  • Disclosure of disciplinary actions
  • NFA review of document before each use

D. NFA Know Your Customer Rule

  • Client information required
  • Responsibility to obtain additional client information
  • Risk disclosures

E. Disclosure by CPOs and CTAs Required for Costs Associated with Futures Transactions

  • Disclosure of upfront fees and expenses
  • Effect of upfront fees and organizational expenses on net performance

F. Disclosure by FCMs and IBs Required for Costs Associated with Futures Transactions

  • Explanation of fees and charges to customers

G. IB General

  • Accepting funds from customers
  • Guarantee agreements
  • Responsibilities of guarantor FCM
  • Minimum net capital requirements
  • Time stamping of order tickets
  • Books and records to be maintained

H. General Account Handling and Exchange Regulations

  • Risk Disclosure Statement
  • Margin requirements
  • Stop loss orders
  • Preparing orders
  • Proprietary accounts
  • Positions limits and reporting requirements
  • Trade confirmations

I. Discretionary Account Regulation

  • Requirements relating to discretionary accounts
  • Supervision and review of discretionary accounts

J. Promotional Material (Compliance Rule 2-29)

  • Definition of promotional material
  • Standardized sales presentations
  • Use of a third-party consulting or advertising firm
  • Reprints of articles from industry publications
  • Recordkeeping of promotional material
  • Past performance
  • Hypothetical trading results
  • Written procedures for promotional material
  • Supervisory review of promotional material

K. Anti-Money Laundering Requirements

  • Developing policies, procedures and internal controls
  • Customer identification program and recordkeeping
  • Detection and reporting of suspicious activity
  • Training staff to monitor trading activity
  • Recordkeeping
  • Designation of individual or individuals (“compliance officer”) to be responsible for overseeing the program
  • Employee training program Independent audit function

Other NFA Information

The NFA also has this to say about the Series 30 exam:

Branch Manager Examination – Futures (Series 30)

NFA must receive evidence that individuals applying to be a branch office manager have passed the Series 30. However, NFA will not require evidence that they have passed the Series 30 if, since the date they last ceased acting as a branch office manager, there has not been a period of two consecutive years during which they have not been registered as an AP. Additionally, individuals whose sponsor is a registered broker-dealer may, in lieu of the Series 30, provide proof that they are qualified to act as a branch office manager or designated supervisor under the rules of FINRA.

Please contact us if you have a question on this issue or if you would like to start a hedge fund, CPO or CTA.  If you would like more information, please see our articles on starting a hedge fund.  Other related hedge fund law articles include:

CFTC Uncovers More Frauds and Ponzi Schemes

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This week alone the Commodities Futures Trading Commission issued 5 separate press releases regarding various frauds and ponzi schemes.   As we have noted many times before investors should make sure they conduct adequate due diligence into their managers.  It also goes without saying, but managers should not engage in fraudulent conduct, make misrepresentations to investors, lie to investors or regulators, or do anything that is contrary to what is stated in the investment program offering documents.  Four of the press releases are reprinted below.

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Release: 5646-09
For Release: April 9, 2009

New York Court Enters Order Imposing a $240,000 Fine and Other Sanctions against New York State Resident Michael Vitebsky in a Foreign Currency Scam

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today that it obtained $240,000 in sanctions and a permanent injunction in a consent order against Michael Vitebsky, a resident of New York State, in connection with his participation in an illegal foreign currency (forex) boiler room operation and for violating the anti-fraud provisions of the Commodity Exchange Act. The order also imposes permanent trading and registration bans on Vitebsky.

Vitebsky is obligated to pay the $240,000 civil monetary penalty upon satisfaction of a $220,000 forfeiture obligation entered in a parallel criminal proceeding, U.S. v. Vitebsky, E.D.N.Y. Docket No. 04 Cr. 0419.

The order was entered by Judge Leo I. Glasser of the U.S. District Court for the Eastern District of New York and stems from a CFTC complaint filed in 2003 (see CFTC News Release, 4852-03, October 16, 2003). The order enters findings of fact that Vitebsky and others participated in a scheme in which Vitebsky used A.S. Templeton Group, Inc., a company of which he was the president and treasurer, to fraudulently solicit funds from customers for forex transactions.
According to the order, Vitebsky helped divert customer funds for unauthorized purposes and willfully made false representations to customers regarding the profitability of their accounts.

The CFTC would like to thank the U.S. Attorney’s Office for the Eastern District of New York for their assistance.

The following CFTC staff members are responsible for this case: Sheila Marhamati, Philip Rix, Steven Ringer, Lenel Hickson, Jr., and Vincent McGonagle.

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Release: 5645-09
For Release: April 9, 2009

CFTC Charges Austin, Texas Resident Steven Leigh Shakespeare and His Company, Guardian Futures, Inc., With Fraud and Unauthorized Trading

WASHINGTON, DC — The U.S. Commodity Futures Trading Commission (CFTC) announced today that it charged Steven Leigh Shakespeare, and his company, Guardian Futures, Inc., both of Austin, Texas, with fraud and unauthorized trading of customer accounts, resulting in combined customer trading losses of at least $196,000.

The CFTC complaint, filed on April 8, 2009, in the U.S. District Court for the Western District of Texas, alleges that Shakespeare engaged in a series of unauthorized transactions and fraudulent acts in the accounts of Plains Grain Company, Inc. and Evans Grain Marketing LLC. The complaint charges that Shakespeare, throughout the course of the unauthorized transactions, made misrepresentations and omitted material facts to customers and to Alaron Trading Corporation, the futures commission merchant to whom Shakespeare had introduced the customer accounts.

On the same day the complaint was filed, the court entered a statutory restraining order preserving books and records and providing the CFTC immediate access to such books and records.

In its continuing litigation, the CFTC seeks restitution to customers, disgorgement of all ill-gotten gains, civil monetary penalties, a permanent injunction, and trading prohibitions, among other sanctions.

The CFTC appreciates the assistance of the office of the United States Attorney for the Western District of Texas.

The following CFTC Division of Enforcement staff are responsible for this case: Timothy J. Mulreany, David Reed, Michael Amakor, Paul Hayeck, and Joan Manley.

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Release: 5644-09
For Release: April 9, 2009

William D. Perkins of St. George, Utah Ordered to Pay More Than $2 Million in Sanctions in CFTC Ponzi Scheme Action

Universe Capital Appreciation Commodity Pool, Operated by Perkins, Part of Larger CFTC Action that Has Resulted in More than $45 Million in Judgments

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced that it obtained a federal court order against William D. Perkins of St. George, Utah and Tax Accounting Office (TAO), Perkins’ private bookkeeping service, for more than $2 million in an anti-fraud action brought by the CFTC in 2006. The CFTC action alleged that Perkins fraudulently solicited $3.4 million from investors in a commodity pool he operated under the name Universe Capital Appreciation LLC. (See CFTC Release 5240-06 October 5, 2006.)

The opinion and order were entered on March 25, 2009, by U.S. District Judge Robert B. Kugler of the District of New Jersey.

Specifically, the order requires Perkins to repay $1.6 million to investors and a civil monetary penalty of $354,462, and prohibits Perkins from engaging in any business activities related to commodity futures or options trading. The court also ordered relief defendant TAO to repay $76,000 of investor money in which TAO had no legitimate interest.

In the opinion, Judge Kugler found that Perkins was reckless to solicit funds for his commodity pool without making a reasonable inquiry into the validity of representations that third parties made regarding the performance of the “superfund”, especially where Perkins had personal experience in three previous failed high yield investment schemes with one of the parties in which they had lost over $2 million of participant funds.

The CFTC complaint alleged that Perkins touted Universe Capital Appreciation LLC as a way for investors with less than $100,000 to participate in a so-called “superfund” that Perkins claimed was making “astonishing” profits of approximately 100 percent annually trading financial futures contracts. In fact, the CFTC complaint alleged that the “superfund” was itself a massive fraud that was the subject of other CFTC actions resulting in over $45 million in judgments. (See CFTC Press Releases 5447-08 February 7, 2008 and 5357-07, July 23, 2007.)

The following Division of Enforcement staff members are responsible for this case: Elizabeth M. Streit, Joy McCormack, Venice Bickham, Scott R. Williamson, Rosemary Hollinger, and Richard Wagner.

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Release: 5642-09
For Release: April 7, 2009

Federal Court Issues Preliminary Injunction Against Two Nevada Corporations in $20 Million Commodity Pool Ponzi Scheme Operated by Tennessee Resident, Dennis Bolze

Court Freezes Assets of Centurion Asset Management and Advanced Trading Services; Bolze Is Arrested

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today that on April 1, 2009, a federal court judge in Knoxville, Tennessee issued a preliminary injunction against defendant Centurion Asset Management, Inc. (Centurion) and relief defendant Advanced Trading Services, Inc. (ATS), both located in Las Vegas, Nevada.

Judge Thomas A. Varlan issued the order that freezes the assets of Centurion and ATS and prohibits Centurion from further violations of the Commodity Exchange Act, as charged. The court determined that the preliminary injunction was necessary to protect the public from further loss and damage and to enable the CFTC to fulfill its statutory duties.

The order stems from a CFTC complaint filed on March 3, 2009, charging Dennis Bolze of Gatlinburg, Tennessee, and Centurion, with fraud and misappropriation in operating a $20 million commodity pool Ponzi scheme. (See CFTC v. Bolze, et. al., No. 09 C 88 [E.D. Tenn. 2009] and CFTC Press Release 5634-09, March 12, 2009).

As alleged, Bolze and Centurion operated a Ponzi scheme for at least six years that defrauded more than 100 investors and caused approximately $20 million in investor losses. ATS was charged as a relief defendant for receiving funds from defendants to which it was not entitled. Bolze and Centurion told investors that they were pooling and investing customer money in S&P 500 and NASDAQ 100 stock index commodity futures, but instead misappropriated most of the funds, according to the complaint.

Bolze Arrested on March 12

On March 12, 2009, Bolze was arrested in Pennsylvania by federal authorities in connection with a related criminal complaint. However, Bolze was in the custody of the U.S. Marshal’s Service at the time of the March 31 hearing. As a result, Judge Varlan’s preliminary injunctive order did not address the CFTC’s charges against him.

In the continuing litigation, the CFTC is seeking permanent injunctive relief, return of funds to defrauded participants, repayment of ill-gotten gains, civil penalties, and other equitable relief.

The following CFTC Division of Enforcement staff are responsible for this case: Jon J. Kramer, Diane M. Romaniuk, Michael Tallarico, Mary Beth Spear, Ava M. Gould, Scott R. Williamson, Rosemary Hollinger, and Richard B. Wagner.

CFTC Fines BD/FCM For Books and Records Violations

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Firm Fails to Institute Procedure for Bunched Orders

(www.hedgefundlawblog.com)

The fines can be hefty for breaking CFTC regulations or NFA rules.  We have seen a large number of actions both with the SEC and the CFTC as well as with the NFA.  Below is another example of a group who has been fined for failing to supervise its employees.  I think maybe even more importantly the group below got into trouble for not having written policies regarding “bunching” client orders.

Yesterday I wrote a post about hedge fund bunched orders and I specifically stated how important it is for managers to understand how bunched orders are allocated to their separately managed account clients.  I discussed how it is important from a disclosure standpoint and that each manager should have the broker’s back office or compliance group review the disclosures regarding bunched orders so that the manager is sure that the disclosure is accurate.  Evidently the broker below did not have managers who followed this protocol.  I would imagine that it is likely that managers had a broad statement that gave them the ability to allocate trades to client accounts in their own discretion.  In the future broad statements like these are going to become less prevalent and specific statements regarding the actual allocation procedures will become the industry best practice, if not the industry standard.

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Release: 5639-09
For Release: March 26, 2009

CFTC Sanctions ADM Investor Services, Inc. $200,000 For Failing To Diligently Supervise Its Employees

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today simultaneously filed and settled charges against ADM Investor Services, Inc. (ADMIS) for violating rules governing post-execution allocations, maintenance of books and records, and supervision of its employees. The CFTC order sanctioned ADMIS with a $200,000 civil monetary penalty, among other things.

The CFTC entered an order on March 26, 2009, which finds that during 2002 to 2004, ADMIS, a Chicago-based registered futures commission merchant, failed to diligently supervise its employees concerning post-execution allocations of bunched orders.

According to the order, ADMIS had no written policy or procedures concerning post-execution allocations of bunched orders. To the extent ADMIS had unwritten procedures concerning such allocations, ADMIS on certain occasions failed to implement those procedures, the order finds. Additionally, ADMIS allowed an account manager to conduct post-execution allocations days after orders were originally executed and failed to maintain records that identify orders subject to the post-execution allocations. Finally, the order finds that ADMIS prepared, but failed to keep, forms related to such allocations.

Post-execution allocation is a procedure where an account manager is permitted to bunch customer orders together for execution, and to allocate them to individual accounts at the end of the day. Bunching of orders involves an account manager placing trades for two or more customers at the same time in the same order. By allowing all customers the opportunity to have their orders bunched, customers may receive better execution and better pricing of their orders. After the bunched orders are executed, an account manager must assign the trades to customers’ accounts, a process known as allocation. The allocation must be made in a manner that is fair and equitable.

The order also requires ADMIS to implement enhanced procedures to assure adherence to rules governing post execution allocation of trades.

The CFTC wishes to thank the National Futures Association for its cooperation in this matter.

The following Division of Enforcement staff was responsible for this case: W. Derek Shakabpa, Eliud Ramirez, Nathan Ploener, Manal Sultan, Lenel Hickson, Jr., Vincent A. McGonagle, and Stephen J. Obie.

Last Updated: March 26, 2009

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Please feel free to contact us if you have any questions on this article or if you are interested in starting a hedge fund.  Other related articles include:

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.

# # #

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

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.

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.

CPO Annual Report Guidance

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CFTC Release Provides Guidance on Annual Report Requirements

CFTC Rule 4.22(c) requires commodity pool operators to provide each investor in the commodity pool with certain information on an annual basis.  These Annual Reports must be provided to investors (generally in hard copy) within 90 days of the end of the CPO’s fiscal year (generally the calendar year).  These Annual Reports must also be filed with the NFA within 90 days of the end of the CPO’s fiscal year.  Because of the technical nature of the Annual Report requirement, the CFTC has released a reminder which provides information on a variety of technical aspects of the Rule.  Continue reading →

Annual Reminder for CPOs and CTAs

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Commodity Firms Need to Complete Annual Regulatory Information

The NFA recently released a regulatory reminder to firms which are registered as commodity pool operators and/or commodity trading advisors.  The reminder reminds CPOs and CTAs that there are certain annual regulatory items which a firm must complete in order to remain in good standing with the NFA.  I have reprinted these two releases below.  As a summary, the reports emphasize:

  1. Firms must complete an annual update and questionnaire.  Firms must pay of yearly dues to the NFA (which can be done online).  Firms should also make sure that all employees are appropriately registered as Associated Persons, as necessary.
  2. Firms should review the NFA Self Exam checklist to ensure compliance.
  3. Firms should send Privacy Policy to all investors/ clients.
  4. Firms should review and test the Disaster Recovery Plan.  If necessary, adjustments should be made.
  5. Firms should review Ethics Training Procedures.   If necessary, appropriate ethics training should be provided.
  6. Firms should file any new exemption notices with the NFA, if necessary.
  7. Firms should review their Disclosure Document.  As a reminder, the Disclosure Document must be no more than 9 months old and reviewed by the NFA.  If the CPO or CTA firm also trades in the off-exchange forex markets, the Disclosure Document must incorporate the new forex rules which were adopted on November 30, 2008 (see NFA Compliance Rule 2-41 on post regarding NFA to Begin Regulating Forex).
  8. (For CTAs) If the firm places bunched orders, the firm must conduct (and document) quarterly analysis of the of order allocation method.  The order allocation method must be fair and equitable.
  9. (For CPOs)  Firms must distribute the pool’s Annual Report to investors; Annual Report must also be submitted to the NFA.

Many of the above items can be done online.  Many of the above items should be overseen by a hedge fund/ securities attorney or an experienced NFA compliance consultant.  Please contact us if you would like more information on our annual NFA compliance packages which can be modified based on your needs.  We can also provide compliance support on an hourly basis. Continue reading →