This week’s regulatory actions:
CFTC charges MF Global Inc., MF Global Holdings Ltd., Former CEO Jon S. Corzine, and former employee Edith O’Brien for MF global’s unlawful misuse of nearly $1 billion of customer funds and related violations
Settlement of charges against MF Global, subject to court approval, directs payment of all funds still owed to commodity customers and imposes a $100 million penalty against the company
The U.S. Commodity Futures Trading Commission (CFTC) filed an enforcement action in the U.S. District Court for the Southern District of New York against MF Global Inc. (MF Global), a registered futures commission merchant (FCM), MF Global Holdings Ltd. (Holdings), former Chief Executive Officer of MF Global and Holdings Jon S. Corzine, and former Assistant Treasurer of MF Global Edith O’Brien based on, among other violations, MF Global’s unlawful use of customer funds that harmed thousands of customers and violated fundamental customer protection laws on an unprecedented scale.
MF Global has agreed to settle all charges against it on terms set forth in a proposed order that is subject to court approval and includes 100% restitution of the approximately $1 billion lost by all commodity customers when the firm failed on Oct. 31, 2011. Commissioner Jill Sommers stated, “I am pleased that the MF Global Trustee has agreed to settle the charges against the company. There is nothing more important than doing everything possible to make full restitution to all commodity customers. I am also proud of the members of the Division of Enforcement team, who have worked so hard on this case to bring us to where we are today.”
According to the complaint, Corzine, a former U.S. Senator and New Jersey Governor with more than 20 years of Wall Street experience, joined MF Global as CEO in March 2010 with a plan to transform the firm from a futures broker into a major investment bank. Corzine’s strategy called for making increasingly risky and larger investments of the firm’s money. In the summer and fall of 2011, as MF Global’s need for cash was rising and its sources of cash were diminishing, Corzine knew that the firm was relying more and more on proprietary funds that it held alongside customer funds in FCM customer accounts. During this time, Corzine did not enhance MF Global’s deficient systems and controls sufficiently to ensure that the firm’s increasing reliance on FCM cash did not result in unlawful uses of customer money. Ultimately, these failures contributed to the massive customer losses.
As alleged, during October 2011, MF Global was on the brink of failure and in desperate need of cash to survive. As Holdings’ Treasurer told Holdings’ CFO at that time, in one of many recorded phone calls obtained by the CFTC, the firm was “skating on the edge,” without “much ice left.” Corzine was warned about the firm’s liquidity stresses, and he knew that the firm violated its own policy that had been designed to protect customer funds. Holdings’ Treasurer recommended to Holdings’ CFO in a recorded call, “we have to tell Jon that enough is enough. We need to take the keys away from him.”
In the last week of October 2011, with virtually no other sources of immediate cash to turn to, the firm repeatedly and unlawfully used customer funds for firm needs, ultimately leaving it nearly $1 billion short of customer funds. In that last week, Corzine is alleged to have been aware of the firm’s true low cash balance, even as he directed the firm to continue paying large obligations without inquiring how the firm could come up with the money to do so. Corzine is charged for the firm’s violations as an MF Global “control person” who, among other things, did not act in good faith and is also charged with violating his legal obligations to diligently supervise.
David Meister, the CFTC’s Enforcement Director, said, “Turning a profit is not the only job of the person at the top of a CFTC-regulated firm. Particularly in times of crisis, the person in control, like the CEO here, must do what’s necessary to prevent unlawful uses of customer money, so that customers’ money is still there if and when the music stops. The allegations in our Complaint serve as a stark reminder that we will enforce the law against responsible individuals at all levels of a firm to ensure that customer funds are properly safeguarded every minute of every day.”
O’Brien, MF Global’s assistant treasurer, is charged with aiding and abetting the firm’s misuse of customer funds. According to the complaint, she directed, approved, and/or caused improper transfers of hundreds of millions of dollars from customer accounts to help meet the firm’s needs during the final days of October 2011, while knowing that MF Global did not have sufficient proprietary funds available in those customer accounts for those transfers. The Complaint alleges that O’Brien remarked in a recorded telephone conversation that it “could be game over” from a regulatory perspective if funds were not returned to customer accounts on Friday, October 28, 2011, MF Global’s final business day.
With respect to the company defendants, in addition to the misuse of customer funds described above, the complaint charges that MF Global (i) unlawfully failed to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts; (ii) filed false reports with the CFTC that failed to show the deficits in the customer accounts; and (iii) used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulation; and that Holdings controlled the operations of MF Global and is therefore liable as a principal for MF Global’s violations of the Commodity Exchange Act and CFTC regulations.
If approved by the U.S. District Court and the U.S. Bankruptcy Court, the proposed settlement of all charges against MF Global will require 100% restitution of all remaining commodity customer claims. The proposed order also includes the imposition of a $100 million penalty, which can be paid to the extent MF Global has not fully exhausted all available funds and assets paying customers and then other creditors entitled to priority under bankruptcy law.
The CFTC also seeks full restitution and penalties against Holdings, Corzine, and O’Brien, in addition to trading and registration bans and injunctions against Corzine and O’Brien.
Federal Court in Colorado Orders Michael Gale to Pay More than $1.2 Million to Settle Fraud Charges in CFTC Enforcement Action
The CFTC obtained a federal court order against defendant Michael Gale of Littleton, Col., individually and doing business as Capital Management Group, requiring him to pay $479,402.35 in restitution to defrauded customers. The consent order of permanent injunction, entered on June 25, 2013, by Senior U.S. District Judge John L. Kane of the District of Colorado, also imposes a $750,000 civil monetary penalty. The order imposes permanent trading and registration bans against Gale and prohibits him from violating the anti-fraud provisions of the Commodity Exchange Act (CEA), as charged.
The order stems from a CFTC complaint filed July 25, 2012, that charged Gale with fraudulently operating a commodity futures pool, making false statements and providing false tax records to prospective and actual pool participants, misappropriation of pool funds, commingling of pool funds, and failing to register with the CFTC as a commodity pool operator.
The order finds that Gale solicited and accepted approximately $900,000 from at least nine participants to invest in his commodity pool. Gale lied about his trading record and the pool’s profitability and value, and rather than trade the pool participants’ funds, Gale deposited only a fraction of the funds into an account for trading, and used much of the pool participant money to pay his business and personal expenses, the order finds. In order to perpetuate the fraud, Gale continued to represent that investments in his pool were profitable and distributed false account performance documentation and false tax records to actual and prospective pool participants, according to the order. In fact, the order finds, Gale knew the representations were false because he knew his trading was not profitable and that he had misappropriated significant portions of the pool’s money.
Federal Court orders Alpha Trade Group S.A. and its employees and agents to pay combined restitution and penalties of $5.779 million for defrauding pool participants
On June 3, 2013, Judge Gregory A. Presnell of the U.S. District Court for the Middle District of Florida entered an amended order entering final judgment (order) against defendants Alpha Trade Group, S.A. (ATG), Jose Cecilio Martinez Beltran (Martinez), Welinton Bautista Castillo (Bautista), Yehodiz Padua Valentin (Padua), Maria Alvarez Gutierrez (Gutierrez), andMaria Asela Rodriguez (Rodriguez), all of Orlando, Fla., for their involvement in a fraudulent off-exchange foreign currency (forex) and commodity futures scheme involving two pools, Orsa Investment Group, L.L.C. and Online Marketing Solutions. The order finds that certain defendants solicited customers, accepted their funds into the two pools and then failed to return more than $1,461,000, primarily from residents in Florida, California, and Puerto Rico. Moreover, the order finds that all of the defendants misappropriated customer funds.
The order requires ATG, Martinez, and Bautista to pay, jointly and severally, $1,461,500 in restitution, and each to pay a $980,000 civil monetary penalty. The order requires Padua, Gutierrez and Rodriguez to pay restitution in the amounts of $10,383, $82,750, and $49,079.37, respectively, as well as civil monetary penalties in the amounts of $840,000, $248,250, and $147,238.11, respectively. The order also imposes permanent trading and registration bans against all of these defendants, and prohibits them from violating the CEA, as charged.
The order stems from a CFTC Complaint filed on Sept. 27, 2011, charging ATG, Martinez, Bautista and Padua with solicitation fraud, issuing false account statements, and misappropriating pool participant funds, in connection with both futures and forex, and failing to register with the Commission in connection with futures activities, and also charging Gutierrez and Rodriguez with misappropriating pool participant funds
Federal Court orders Christopher Varlesi to pay over $1.3 million to settle Ponzi scheme fraud and misappropriation action
The CFTC obtained a federal court order against defendant Christopher Varlesi of Chicago, individually and doing business as Gold Coast Futures and Forex, requiring him to pay restitution of more than $638,000 to defrauded investors and a $700,000 civil monetary penalty. The consent oder of permanent injunction, entered June 12, 2013, by Judge James B. Zagel of the U.S. District Court for the Northern District of Illinois, also imposes permanent trading and registration bans against Varlesi and prohibits him from violating the anti-fraud provisions of the Commodity Exchange Act (CEA), as charged.
The order stems from a CFTC complaint filed March 7, 2012, charging Varlesi with fraudulently operating a commodity pool to trade commodity futures and off-exchange foreign currency (forex), making false statements to pool participants, misappropriating pool funds, and failing to register with the CFTC as a Commodity Pool Operator.
The order finds that Varlesi solicited and accepted at least $1.7 million from at least 20 individuals to trade commodity futures and forex contracts by touting his past trading record and ability to profitably trade futures and forex contracts. In exchange for their investment, Varlesi issued promissory notes to pool participants purportedly paying a fixed monthly interest rate on principal, according to the Order. However, Varlesi used no more than $220,000 of the $1,716,169 that he accepted from pool participants to trade commodity futures and forex contracts, the order finds. Varlesi spent misappropriated investor funds on business and personal expenses, including food, utilities, gas, life insurance, entertainment, travel, restaurants, his children’s tuition, and spa treatments and used approximately $1,343,471 to pay participants purported profits in the manner of a Ponzi scheme, according to the order.
To perpetuate the fraud, Varlesi made false verbal representations and provided pool participants with fabricated account statements and false account performance documentation, showing that their investments were growing, according to the Order. In fact, the order finds that Varlesi knew the representations, statements, and account performance documentation were false because he failed to disclose to pool participants that he had misappropriated a significant amount of the pool’s money.
In or around March 2011, Varlesi stopped making interest payments on the promissory notes and admitted to a pool participant that there was no money in his account, the Order finds. Furthermore, despite subsequent promises to repay the pool participants, Varlesi has not done so and still owes 17 pool participants approximately $638,227, the order finds.
CFTC charges C. David Wright with commodity pool fraud
On June 24, 2013, the CFTC filed a civil enforcement action charging C. David Wright of Iron Station, N.C., with operating a $1 million commodity pool Ponzi scheme and misappropriating participants’ funds. Wright has never been registered with the CFTC.
The CFTC’s complaint, filed in the U.S. District Court for the Western District of North Carolina, charges Wright with soliciting over $1 million from individuals to participate in the fraudulent scheme from at least August 2008 through March 2013. Although Wright told participants that their funds would be invested in a variety of investments, including commodity futures, he in fact misappropriated nearly all of the funds, using them to pay personal expenses and to make so-called profit payments to participants, as is typical of a Ponzi scheme.
In its continuing litigation, the CFTC seeks a permanent injunction from future violations of federal commodities laws, permanent registration and trading bans, restitution to defrauded pool participants, disgorgement of ill-gotten gains, and civil monetary penalties.