Recent regulatory actions:
Federal Court in New York imposes a $1 million fine and other sanctions against Kevin Cassidy, former CEO of Optionable Inc.
Cassidy settles CFTC charges of defrauding the Bank of Montreal
The Commodity Futures Trading Commission (CFTC) obtained a federal court order requiring Defendant Kevin Cassidy, formerly of Bedford Hills, New York, former CEO of Optionable Inc., to pay a $1 million civil monetary penalty for violating the anti-fraud provisions of the Commodity Exchange Act (CEA) and CFTC regulations. The order was entered on May 28, 2013, by the Honorable George B. Daniels of the U.S. District Court for the Southern District of New York.
The order stems from a CFTC complaint filed on Nov.18, 2008, which charged David P. Lee, a former trader for the Bank of Montreal (BMO), for mis-marking and mis-valuing BMO’s natural gas options book and deceiving BMO and charged Lee and Cassidy for deceiving BMO, from 2003 through April 2007, by fabricating purportedly independent broker quotes delivered to BMO’s back office for price and skew verification.
Previously, on April 30, 2012, Judge Daniels entered an amended partial consent order for permanent injunction and other equitable relief finding that Cassidy violated Section 4c(b) of the Act, 7 U.S.C. § 6c(b) (2002), and CFTC Regulations 33.10 (a)-(c), 17 C.F.R. § 33.10 (a)-(c) (2008). The amended partial consent order also imposed permanent trading and registration bans on Cassidy and prohibited him from violating the CEA, as charged.
In relation to the same underlying conduct, in August 2011 Cassidy entered a plea of guilty in the Southern District of New York to one criminal count of conspiracy. In April 2012, Cassidy was sentenced to 30 months imprisonment followed by three years of supervised release.
Defendant Lee settled the CFTC action against him in November 2009. In November 2008, in the Southern District of New York, Lee entered a plea of guilty to four criminal counts: conspiracy to commit wire fraud and to make false bank entries, wire fraud, false statements to a bank, and obstruction of justice. Lee has not yet been sentenced.
CFTC orders FCStone LLC to pay a $1.5 million civil monetary penalty for failing to have risk controls, in violation of supervision obligations
The CFTC issued an order filing and simultaneously settling charges against FCStone LLC, a futures commission merchant (FCM) headquartered in New York, NY, for failing to diligently supervise its officers and employees . FCStone failed to implement adequate customer credit and concentration risk policies and controls in 2008 and part of 2009, allowing one account (Account) to acquire a massive options position that it could not afford to maintain. Ultimately, FCStone was forced to take over the Account, and lost approximately $127 million. The CFTC Order requires FCStone to pay a civil monetary penalty of $1.5 million, retain an independent consultant to review its internal controls and procedures, and cease and desist from violating its supervisory obligations.
The order finds that from Jan. 1, 2008 through March 1, 2009, FCStone failed to diligently supervise its officers’ and employees’ activities relating to risks associated with its customers’ accounts, and with the Account, which was primarily controlled by two individuals who traded natural gas futures, swaps, and option contracts. Because FCStone did not have adequate credit and concentration risk policies and controls, the two Account owners accumulated a massive position -- more than 2.5 million relatively illiquid commodity option contracts, which the Account owners could not afford to maintain. After the value of the positions deteriorated over the course of 2008, the Account owners were unable to meet their financial obligations with respect to the Account. As FCMs are required to do in that situation, FCStone assumed the financial obligations to the clearing house that carried the positions. Unable to successfully manage the positions, FCStone ended up suffering $127 million in losses. The Commission found that FCStone violated Regulation 166.3 by failing to diligently supervise in a manner designed to mitigate risks associated with customer accounts, such as the risks arising from unsatisfied margin obligations, negative account balances, and the handling of large relatively illiquid positions.
David Meister, the CFTC’s Director of Enforcement stated, “The Commission’s supervision regulation helps ensure the financial integrity of the markets and safeguard customer funds. When an FCM’s financial risk controls are so lacking that they do virtually nothing to prevent an unchecked customer from taking grossly excessive trading risks as happened here, a harmful domino effect of financially dangerous consequences can follow, affecting not only the FCM but also potentially other customers and the market at large. This case should serve to remind FCMs to make sure that their risk controls are in order.”
Following a bench trial, Florida court orders William and Gregory Center to pay millions in restitution and civil monetary penalties for operating a $28.4 million Ponzi scheme
The CFTC announced that Judge Daniel Hurley of the U.S. District Court for the Southern District of Florida, following a bench trial on April 24, 2013, entered a final judgment order, ordering defendant William Center, of Richmond, Vir., to pay restitution of $455,430 individually and $8,652,140.41 jointly and severally with Trade, LLC, as well as a $4 million civil monetary penalty. Defendant Gregory Center, of McLean, Vir., was ordered to pay $265,661.14 in restitution and a $2 million civil monetary penalty.
The order stems from a complaint filed against defendants Philip Milton, William Center, Gregory Center, and Trade, LLC on June 22, 2010 that charged the defendants with operating a Ponzi scheme, misappropriating at least $9.6 million of pool funds for their personal use and to continue the scam, and fraudulently soliciting approximately $28.4 million from at least 2,000 customers to participate in a commodity pool to trade futures and securities. The complaint also named four relief defendants, all corporations owned by the individual defendants, for receiving funds as a result of the defendants’ misappropriation to which they have no legitimate entitlement. The CFTC charges against defendants Philip Milton and Trade, LLC, and against the relief defendants, were resolved via supplemental consent Orders entered by the court on April 24, 2013.
On Feb. 18, 2011, and July 29, 2011, the court entered consent orders of permanent injunction against William Center and Gregory Center, respectively. The Centers consented to liability but left the matters of restitution, disgorgement, and civil monetary penalties to be resolved by agreement. However, the CFTC and the Centers were unable to reach an agreement; therefore, the parties proceeded to trial on April 24, 2013, in front of Judge Hurley. Judge Hurley’s final judgment was entered on May 17, 2013. The judge also entered a memorandum opinion in the matter.
See last week's blotter.