Rosenthal Collins Group sanctioned $1.3 million

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against Rosenthal Collins Group, L.L.C. (RCG), a registered Chicago, Ill.-based futures commission merchant (FCM), for failing to supervise diligently its employees’ handling of accounts held at RCG in the name of George D. Hudgins. In May 2008, the CFTC sued Hudgins, of Nacogdoches, Texas, for fraudulently soliciting the general public to invest millions of dollars in a commodity pool that traded futures contracts in accounts at RCG (see CFTC v. George Hudgins, et al., Case no. 6:08cv187 [E.D. Tex.] and CFTC Press Release 5500-08, May 21, 2008).

The CFTC order, entered on September 30, 2010, requires RCG to pay a $780,000 civil monetary penalty and orders disgorgement of $618,526, the amount of commissions that RCG and its guaranteed introducing broker earned from Hudgins’ trading. The court-appointed receiver in the CFTC’s Hudgins litigation will distribute the disgorgement funds to persons defrauded by Hudgins.

Specifically, the order finds that, at various times from July 2005 through May 2008, despite having received warning signals, RCG’s employees did not enforce diligently RCG’s internal compliance procedures that imposed on them a continuing duty to “know their customer,” i.e., obtain information about their customer’s identity, background, investment objectives, income source, assets and other information. RCG’s employees also failed to enforce RCG’s compliance procedures when they failed to investigate and report activity regarding Hudgins’ accounts that should have been recognized as suspicious, according to the order. These red flags included the fact that Hudgins’ losses for 2005, 2006, 2007 and 2008 totaled $30 million by May 2008 – an amount representing 300 percent of his original stated net worth.

The CFTC order concludes that, despite warning signs, which contradicted key assertions Hudgins made in his account-opening statements, RCG’s employees failed to take diligent steps to ensure that they “knew” Hudgins, as required by the FCM’s internal compliance procedures.

The CFTC Division of Enforcement staff members responsible for this case are James Deacon, Kim Bruno, Erica Bodin, Frank Mangiatordi, Kathleen Banar, Rick Glaser and Richard Wagner.

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