The Blotter: ABN AMRO fined $1 million for seg fund and minimum net cap violations

Broker lacked adequate supervision policies.

Regulatory actions taken this week:

North Carolina

Federal Court in North Carolina orders Toby D. Hunter, Prestige Capital Advisors, and D2W Capital Management to pay over $11.7 million for fraud and other violations in commodity pool and managed foreign currency schemes

The Commodity Futures Trading Commission (CFTC) announced that it obtained federal court orders requiring defendants Toby D. HunterPrestige Capital Advisors, LLC (Prestige), and D2W Capital Management, LLC (D2W), all of Charlotte, N., together N.C.to pay more than $4.3 million in restitution to defrauded pool and managed account clients and imposing civil monetary penalties of approximately $7.5 million.  The court’s grant of default judgment against Prestige and D2W and a consent order of permanent injunction against Hunter stems from a CFTC enforcement action filed Sept. 6, 2011, charging defendants with fraudulent solicitation, misappropriation, and regulation violations.The orders also impose permanent trading and registration bans against the defendants and prohibit them from violating the anti-fraud and other provisions of the Commodity Exchange Act (CEA) and CFTC regulations, as charged. 

 Judge Max O. Cogburn, Jr. of the U.S. District Court for the Western District of North Carolina entered an order of default judgment and permanent injunction against defendants Prestige and D2W on Jan.  25, 2013, imposing civil monetary penalties of approximately $6.9 million on Prestige and $280,000 on D2W.  The court entered a subsequent order on Feb. 22, 2013, requiring Prestige to pay restitution of over $4.1 million and D2W to pay restitution of $85,250.

The court found that Prestige fraudulently solicited and accepted more than $4.7 million from multiple pool participants for investment in one or more commodity pools that traded among other things, commodities and futures contracts.  The court specifically found that in soliciting pool participants, Prestige posted false trading returns on a website called BarclayHedge, where fund managers could post unverified historical returns for prospective clients to view, sent false trading results to at least one Prestige pool participant, and issued false account statements.  Furthermore, according to the orders, approximately $2.3 million of pool participant funds was misappropriated by Prestige, and D2W, a managed forex account service, sent false account statements to t least one client.

Subsequently, on June 13, 2013, Judge Cogburn entered a consent order of permanent injunction settling charges stemming from the same violations of the CEA and CFTC Regulations against Hunter.  Hunter will have to pay approximately $85,000 in restitution to D2W’s clients, $40,000 in restitution to Prestige pool participants, and also imposes a $280,000 civil monetary penalty.

Hunter was indicted by the U.S. Attorney’s office for the Western District of North Carolina (Charlotte office) for criminal activity related to the Prestige matter.

Illinois

CFTC orders ABN AMRO Clearing Chicago LLC to pay $1 million to settle charges of segregated and secured fund deficiencies, a minimum net capital violation, books and records violation, and supervision failures

The CFTC issued an order on June 18, 2013, filing and settling charges against ABN AMRO Clearing Chicago LLC (ABN AMRO) of Chicago, Ill., for failing to segregate or secure sufficient customer funds; failing to meet the minimum net capital requirements, failure to maintain accurate books and records, and failure to supervise its employees. 

 According to the CFTC order, during the period March 19, 2009, through January 2012, ABN AMRO reported three instances of under-segregated customer funds  and one instance of under-secured customer.  Each of these violations was the result of clerical errors and/or a lack of adequate policies and procedures related to customer movement of funds. 

The order also states that during a CME Group routine audit of ABN AMRO’s books and records as they were on the close of business on May 31, 2011, the CME Group found that ABN AMRO had improperly used a customer’s withdrawn warehouse receipts as collateral for margining purposes.  Without these warehouse receipts, the customer’s accounts were under-margined on several occasions, and ABN AMRO had to reduce its adjusted net capital by an amount equal to the margin deficits.  Once these reductions were calculated, it was determined that ABN AMRO failed to meet the minimum net capital requirements for a single month-end.

 Also, the CFTC’s division of swap dealer and intermediary oversight examination staff conducted a limited review of ABN AMRO beginning Jan. 27, 2012.  According to the order, at that time, ABN AMRO was unable to produce a complete and accurate margin report listing for a very limited number of certain types of accounts (e.g., omnibus accounts that offset margin requirements for certain spread transactions).  The order found that ABN AMRO was in violation of several rules when it failed to keep accurate books and records sufficient to determine the margin status of each customer.

 The order finds that each of these violations was a result of ABN AMRO’s insufficient controls, reflecting a lack of supervisory controls over commodity interest accounts and/or other activities of its partners, employees, and agents relating to its business as a Commission.. 

 Based on these violations of the CEA and CFTC Regulations, the order imposes a $1 million civil monetary penalty, a cease and desist order, and requires ABN AMRO to retain an independent consultant to review and evaluate the effectiveness of its existing internal controls and policies and procedures and adopt any recommendations for improvement made by the consultant.

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