Regulatory actions this week:
CFTC charges “Prediction Market” proprietor Banc de Binary with violating the CFTC’s off-exchange options trading ban and operating as an unregistered futures commission merchant
The U.S. Commodity Futures Trading Commission (CFTC) filed a civil complaint in federal district court in Nevada charging Banc de Binary, Ltd. (Banc de Binary), a foreign company that held itself out as being headquartered on Wall Street, with violating the CFTC’s ban on off-exchange options trading by offering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers. The CFTC’s complaint also charges Banc de Binary with operating as an unregistered Futures Commission Merchant (FCM).
According to the CFTC’s complaint, Banc de Binary operates an online trading website through which customers can buy or sell binary (“call” or “put”) options, predicting whether the price of a certain commodity will increase or decrease in a given time period.
Specifically, from May 2011 through March 2013, Banc de Binary operated an online trading website that allowed U.S. customers to trade options products prohibited by the CFTC’s ban on off-exchange options trading. Through its website, Banc de Binary allegedly unlawfully solicited and permitted U.S. customers to buy and sell options betting on the prices of wheat, oil, platinum, sugar, coffee, corn, foreign currency pairs, and stock indices.
The CFTC’s complaint also charges Banc de Binary with operating as an unregistered FCM from July 2011 through March 2013. Finally, the complaint alleges the company did not limit its options offerings to eligible contract participants, allowing U.S. customers to trade without requiring any information about their trading history or net worth.
David Meister, the director of the CFTC’s Division of Enforcement, stated: “If a company wants to offer U.S. persons the opportunity to buy and sell predictions on the direction of commodity prices, the company must play by the rules or suffer the consequences. The applicable rules are on the books for good reason – to protect market participants and promote market integrity – and we will serve the public by enforcing them.”
The CFTC seeks civil monetary penalties, an injunction preventing Banc de Binary from engaging in certain commodity options activity with U.S. customers, and other remedial ancillary relief, including restitution, disgorgement, and rescission.
The CFTC today also announced the issuance of a joint CFTC and SEC Consumer Alert on fraudulent schemes involving binary options and their trading platforms. The Alert warns customers that the perpetrators of these schemes allegedly refuse to credit customer accounts, deny fund reimbursement, commit identity theft, and manipulate software to generate losing trades.
CFTC files complaint against U.S. Bank, N.A. alleging unlawful use of Peregrine Financial Group, Inc.’s customer segregated funds and violation of customer segregation laws
The CFTC filed a complaint in the U.S. District Court for the Northern District of Iowa against U.S. Bank National Association (U.S. Bank) for unlawfully using and holding Peregrine Financial Group, Inc.’s (Peregrine) customer segregated funds. U.S. Bank is the fifth largest bank in the country and maintains branch offices in Cedar Falls, Iowa, where Peregrine and its owner, Russell R. Wasendorf Sr. (Wasendorf), were located.
The Commodity Exchange Act (CEA) and CFTC regulations prohibit depository institutions, like U.S. Bank, from using or holding funds that belong to customers of a futures commission merchant (FCM) as though they belong to anyone other than the customers, and also prohibit the extension of credit based on such funds to anyone other than the customers.
The complaint alleges that U.S. Bank was a depository institution serving Peregrine, a registered FCM, and Wasendorf since 1992. From approximately September 2008 to July 2012, U.S. Bank unlawfully accepted Peregrine’s customers’ funds as security on loans it made to Wasendorf, his wife, and his construction company, Wasendorf Construction, L.L.C., to build an office complex for Peregrine in Cedar Falls, Iowa. The complaint further alleges that from approximately June 2008 to July 2012, U.S. Bank improperly held Peregrine’s customers’ funds in an account U.S. Bank treated as Peregrine’s commercial checking account and knowingly facilitated Wasendorf’s transfers of millions of dollars of customers’ funds out of this account to pay for Wasendorf’s private jet, his restaurant, and his divorce settlement, among other things. U.S. Bank knew that these transfers were not for the benefit of Peregrine’s customers, according to the complaint.
David Meister, the CFTC’s director of enforcement, said: “The Commodity Exchange Act and Commission rules protecting customer funds impose obligations on banks that hold those funds. As should be apparent from today’s action, we will seek to hold a bank to account if it falls short on complying with customer fund protection obligations. Wasendorf stole vast sums of customer money, but his crimes do not excuse U.S. Bank from its own independent responsibilities.”
According to the complaint, Wasendorf defrauded more than 24,000 Peregrine clients and misappropriated more than $215 million over two decades using a customer segregated account at U.S. Bank. In connection with that fraud, Wasendorf misrepresented to the National Futures Association and to Peregrine’s auditor that Peregrine’s customer segregated account at U.S. Bank contained $200 million or more, when in fact the average balance since May 2005 was only $15.7 million. On July 10, 2012, the CFTC instituted a civil action against Wasendorf and Peregrine, CFTC v. Peregrine Financial Group, Inc. and Russell Wasendorf Sr. Wasendorf also was criminally charged by the U.S. Attorney’s Office for the Northern District of Iowa, pled guilty, and on Jan. 23, 2013 was sentenced to 50 years in prison and ordered to pay more than $215 million in restitution. United States v. Russell Wasendorf, Sr.,
In this litigation, the CFTC seeks an injunction against U.S. Bank for further violations of the CEA and CFTC Regulations, restitution, disgorgement, and civil monetary penalties, among other appropriate relief.
Federal court orders Utah residents Christopher D. Hales, Eric A. Richardson and their company Bentley Equities, LLC to pay more than $2.7 million in sanctions for fraud
The CFTC obtained federal court orders for more than $2.7 million in disgorgement and civil monetary penalties against Bentley Equities, LLC (Bentley), a Delaware corporation, and its principals, Christopher D. Hales (Hales) and Eric A. Richardson (Richardson), resolving the CFTC’s May 2, 2012 complaint charging them with fraud. Hales is currently an inmate at the Federal Correctional Institution in Safford, Arizona, and Richardson is currently an inmate at the Florence Federal Correction Complex in Florence, Col..
On May 31, 2013, the Honorable Dee Benson of the U.S. District Court for the District of Utah, Central Division, entered a consent order for permanent injunction against Richardson requiring him to pay $100,000 in disgorgement and a $150,000 civil monetary penalty. That order also permanently bans Richardson from engaging in any commodity-related activity, including trading and registering with the CFTC, and prohibits him from violating the anti-fraud provisions of the CEA, as charged. On May 14, 2013, Judge Benson also entered an order for default judgment and permanent injunction against Hales and Bentley that requires Hales to pay $382,080 in disgorgement and $1,146,240 in civil monetary penalties and Bentley to pay an $840,000 civil monetary penalty. That order also permanently bans Hales and Bentley from engaging in any commodity-related activity, including trading and registering with the CFTC, and prohibits them from violating the anti-fraud provisions of the CEA.
The CFTC’s 2012 enforcement action against Hales, Richardson and Bentley charged them with fraudulently soliciting and accepting more than $1.1 million from approximately 39 customers for the purpose of trading commodity futures. It also alleged that they misappropriated approximately $658,452 of customer funds for personal expenses including auto expenses, utility bills and credit card payments and to make payments to existing customers in the manner of a Ponzi scheme. The complaint further alleged that Hales, Richardson and Bentley misrepresented to customers that their trading was profitable, when in reality, they lost more than $482,000 trading commodity futures and that Hales and Bentley issued false statements to certain customers.
In related criminal prosecutions, Hales was sentenced to more than seven years imprisonment and ordered to pay $12,719,236 in criminal restitution in connection with a judgment entered against him in United States v. Christopher D. Hales, No.2:10-CR-183-TS-SA-1 (C. D. UT, Sept. 2, 2010) and Richardson was sentenced to a year and a day imprisonment and ordered to pay $110,000 in criminal restitution in connection with a judgment entered against him in United States v. Eric A. Richardson.
Federal court orders Melissa C. Rushton to pay $50,000 to settle charges pertaining to her husband’s fraudulent operation of Summit Trading & Capital LLC
The CFTC obtained a federal court order on May 30, 2013 requiring defendant Melissa C. Rushton of Gridley, Ill. to pay a $50,000 civil monetary penalty to settle fraud and other charges stemming from her role in the operation of Summit Trading & Capital LLC (Summit). The court’s order also imposes permanent trading and registration bans against her and prohibits her from violating the anti-fraud and other provisions of the CEA and commission regulations, as charged.
The order, entered by Judge James E. Shadid of the U.S. District Court for the Central District of Illinois, stems from a CFTC enforcement action filed November 29, 2011 against Summit, Melissa Rushton, and her husband Brant L. Rushton, charging them with fraudulent operation of a commodity pool. On Feb. 1, 2013, Judge Shadid granted summary judgment against Brant Rushton and Summit and subsequently ordered them to jointly pay approximately $1.6 million in restitution to defrauded pool participants and a civil monetary penalty of approximately $3.2 million. In July 2012, Brant Rushton pled guilty to criminal charges in a parallel federal criminal action stemming from the same conduct. Melissa Rushton was not charged in the criminal action.
The current order finds that Melissa Rushton was a controlling person of Summit and that upon learning of the fraud being perpetrated by her husband, she failed to act but instead allowed the fraud to continue until the CFTC filed this action.
For last week's Blotter.
Other CFTC actions this week.