A 2004 forex fraud case against Erskine and Goros LLC, which the CFTC has lost as well as an appeal, threatens to limit its authority to prosecute fraud in the forex industry and its authority to regulate off exchange markets.
“Like Zelener, the panel decision provides a roadmap whereby fraudsters can evade CFTC fraud jurisdiction, notwithstanding the stated intention of Congress to the contrary,” the CFTC attorneys wrote in their petition for rehearing. The CFTC also suggested that the rehearing be held ‘en banc,’ or before a panel of judges, a move reserved for decisions of unusual importance or those that potentially contravene previous law, in this instance, the Zelener and Henderson cases.
The CFTC’s authority to prosecute fraud in the forex market is based on the transactions being defined as futures contracts and an effort to formalize the CFTC’s jurisdiction over those markets is underway in the CFTC’s reauthorization.
A source in the Senate Agriculture Committee says the 2007 reauthorization bill will clarify the CFTC’s authority in policing forex fraud by defining “retail foreign exchange dealer” and extending CFTC anti-fraud authority to that group and futures commission merchants, provisions supported by the CFTC and the President’s Working Group. CFTC reauthorization is one element of the Farm Bill that is being worked out in a House-Senate conference, although the House has yet to name conferees. Passage of the Farm Bill, and the CFTC reauthorization, has been long delayed but could happen before summer.
“The regulatory loophole created by the Zelener decision will not be closed until Congress clarifies CFTC’s oversight regarding forex and mandates that all soliciting agents are under the CFTC’s jurisdiction,” says Glenn Stevens, CEO of GAIN Capital Group. “GAIN supports mandatory registration for anyone who directly solicits retail investors - including introducing brokers and money managers.”
The case that initiated the meltdown was filed in January of 2004 and alleged that Erskine and Goros LLC fraudulently solicited customers and assured customers of enormous gains to be made in the foreign exchange markets. Lawyers for the firm successfully argued that the trades were not “futures contracts” subject to the CFTC’s jurisdiction, noting that forex trading is not in a public market, that batch units were not mandatory, the trades anticipated delivery, and that there was no designated time for closing trades. Goros and Erskine won summary judgment and a subsequent appeal.
