The Blotter: There's gold in dem der frauds

CFTC issues warning on precious metals frauds

Recent regulatory actions: 

CFTC’s precious metals fraud advisory

 In January 2012, the CFTC issued a Precious Metals Consumer Fraud Advisory to alert customers to precious metals fraud, which stated that the CFTC had seen an increase in the number of companies offering customers the opportunity to buy or invest in precious metals.  The CFTC warns that companies often fail to purchase any physical metals for their customers, instead simply keeping the customer’s funds. It further cautions customers that leveraged commodity transactions are unlawful unless executed on a regulated exchange. 

Here are some of those stories

Florida

CFTC charges Worth Group and its principals in multi-million dollar fraudulent precious metals scheme 

The U.S. Commodity Futures Trading Commission (CFTC) filed on Aug. 13, 2013, a civil injunctive enforcement action in the U.S. District Court for the Southern District of Florida against Worth Group Inc. (Worth), as well as its owner, Andrew Wilshire, and its sole officer and director, Eugenia Mildner, all of Jupiter, Florida.  The CFTC’s complaint charges that defendants defrauded retail precious metals customers and engaged in illegal, off-exchange retail commodity transactions from July 16, 2011, through the present. 

According to the complaint, Worth purported to sell physical metal, including gold, silver, platinum, and palladium, on a fully-paid basis, as well as on a financed basis, to hundreds of retail customers located throughout the United States.  The CFTC alleges that Worth falsely represented to customers that, within 28 days of a customer’s purchase, Worth would deliver metal either to the customers directly or to a depository that would hold the metal for the customer.  Allegedly, Worth took in over $73 million in customer funds between July 18, 2011, and December 31, 2012. 

As alleged, in connection with fully-paid transactions, customers paid the full purchase price to Worth for metals, having been told that Worth would deliver metal in return.  The Complaint alleges that from at least August 15, 2011, through November 8, 2012, however, Worth did not actually deliver metal to most customers.  Instead, rather than deliver actual metal, Worth’s typical practice after receiving customer money was to purchase metals derivatives in accounts owned by Worth.  These derivatives purportedly “covered” customer transactions, but, contrary to Worth’s representations to customers, did not involve the purchase, transfer, or physical delivery of precious metals to Worth, let alone to its retail customers. 

Retail customers engaging in financed transactions with Worth were told that they were borrowing money to purchase precious metals.  Under the Dodd-Frank Act, a financed transaction such as that conducted by Worth is an illegal off-exchange transaction unless it results in actual delivery of metal within 28 days.  The complaint alleges that Worth often failed to make such delivery on a timely basis, therefore defrauding customers and subjecting them to undisclosed exposure to Worth’s credit, as they were left with only Worth’s commitment to deliver metal rather than the promised metal itself. 

The complaint further alleges that as persons controlling Worth’s precious metals operations, Wilshire and Mildner are liable for Worth’s violations of the Commodity Exchange Act and a CFTC Regulation. 

In its continuing litigation against the defendants, the CFTC seeks preliminary and permanent civil injunctions in addition to other remedial relief, including restitution, civil monetary penalties, and disgorgement of ill-gotten gains. 

This is the third action the CFTC has brought against entities and individuals who purport to buy precious metals and transfer ownership of those metals to customers, when insufficient metal, or no metal at all, is in fact purchased and delivered.

“The rules of the new Dodd-Frank law are simple: Companies and individuals who purport to sell precious metals to the retail public, and who say they are supplying real metal, must actually deliver real metal,” said David Meister, the CFTC’s enforcement director. “As today’s case shows, along with previously filed Complaints against Hunter Wise Commodities, LLC and AmeriFirst Management, LLC, we will not hesitate to pursue wrongdoers who say they are providing investments in real precious metals to the American public when in fact they are providing nothing of the sort.”   

Florida

CFTC obtains default judgment against Christopher Smithers for fraud in connection with futures contracts 

Judge Kenneth A. Marra of the U.S. District Court for the Southern District of Florida entered an order of default judgment and permanent injunction against Christopher Smithers of Jupiter, Fla.  that requires Smithers to pay a $590,940 civil monetary penalty and $196,980 in restitution, imposes permanent trading and registration bans against Smithers, and prohibits Smithers from violating the Commodity Exchange Act (CEA) and CFTC regulations, as charged.

The court’s order, entered on July 31, 2013, stems from a CFTC complaint filed on Oct. 22, 2012, charging Smithers with violating anti-fraud provisions of the CEA and CFTC regulations as well as provisions of the CEA proscribing violations of a court order. 

The court’s order finds that from October 2008 to March 2009, Smithers misrepresented to customers that his commodity futures trading was profitable when it actually resulted in losses of $220,000.  Further, the court’s order finds that from June 22, 2011, through November 2011, Smithers falsely represented to various futures commission merchants the identity of the person who opened and controlled commodity futures trading accounts that, in reality, he had opened and controlled.  Smithers made such misrepresentations to circumvent prior U.S. District Court orders that prohibited him from trading commodity futures contracts. 

In addition, the court’s order finds that in 2011, Smithers misappropriated $162,980 of a customer’s funds that were provided to him for the purchase of gold bullion, and that he fraudulently solicited a customer for funds with which to trade commodity futures.  Finally, the court’s order finds that Smithers’ commodity futures trading was in violation of two previous U.S. District Court for the Southern District of Florida Orders of permanent injunction entered against him. 

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