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…
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.”
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.
CFTC charges AmeriFirst Management and its owners, in multi-million dollar fraudulent precious metals scheme
The CFTC filed a civil injunctive enforcement action in the U.S. District Court for the Southern District of Florida against AmeriFirst Management LLC (AML) of Fort Lauderdale, Fla., and its owners, John P. D’Onofrio of Fort Lauderdale, George E. Sarafianos of Lighthouse Point, Florida, and Scott D. Piccininni of Fort Lauderdale. The CFTC charges the defendants with operating a precious metals scheme where the defendants marketed illegal, off-exchange financed commodity transactions and fraudulently misrepresented the nature of those transactions.
According to the complaint, filed on July 29, 2013, AML held itself out as a precious metals wholesaler and clearing firm, operating through a network of more than 30 precious metals dealers. As alleged, these dealers solicited retail customers to invest in financed precious metals transactions, where a customer gave a percentage deposit of the total value of the metal, typically 20%, and the dealer supposedly made a loan to the customer for the remaining 80%, supposedly sold the customer the total metal amount, and supposedly allocated the total metal amount at a depository to be held for the customer.
The CFTC alleges that AML created customer documents that represented that the dealer had in fact made such a loan and sold and allocated the total metal amount to the customer. However, these documents were false because the dealer never made a loan to the customer, nor did the dealer sell or allocate any metal to the customer, according to the complaint. Further, allegedly that although there was no loan and no metal was allocated to the customer, AML charged the customer finance and storage fees.
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 customers, disgorgement of ill-gotten gains, and civil monetary penalties.
CFTC orders William J. Hionas and Pan American Metals to pay restitution and a monetary penalty for fraudulent off-exchange transactions in precious metals
The CFTC issued an order filing and settling charges against two Miami, Florida, companies, Pan American Metals of Miami, LLC and Pan American Metals of Miami Beach, Inc. (together, the Pan American Companies), and their owner and principal, William J. Hionas, for engaging in illegal, fraudulent off-exchange financed transactions in precious metals with retail customers. The Pan American Companies are based in Miami Beach, Florida, and Hionas resides in Sunny Isles, Florida. Neither has ever been registered with the CFTC.
The CFTC order, filed on July 29, 2013, requires Hionas and the Pan American Companies jointly to pay restitution of approximately $3.2 million to defrauded customers and a $1.5 million civil monetary penalty. The order also imposes permanent trading and registration bans against Hionas and the Pan American Companies and permanently prohibits them from further violations of federal commodities law, as charged.
The order finds that, from July 2011 to at least April 2012, the Pan American Companies fraudulently solicited and accepted more than $4.7 million from retail public customers throughout the United States and Canada to engage in illegal off-exchange financed transactions in gold, silver, platinum, and palladium, in which a retail customer purportedly purchases physical commodities and pays just a portion of the purchase price.
Specifically, the order finds that the Pan American Companies falsely claimed to (1) sell and transfer ownership of physical metals to customers, (2) provide loans to customers to purchase the physical metals, and (3) arrange for storage and store customers’ physical metals in independent depositories. In fact, the Order finds that in their retail financed transactions, the Pan American Companies did not sell or transfer ownership of any physical metals, did not disburse any funds as loans, and did not store physical metals in any depositories for or on behalf of customers.
The order also finds that the Pan American Companies defrauded customers and potential customers by misrepresenting and failing to disclose material facts relating to (1) their experience and expertise dealing in retail financed transactions, (2) actual trading results other customers had achieved, and (3) the profit potential and risks associated with engaging in off-exchange metals transactions on a financed basis, among other things.
The order finds that 180 of the 189 Pan American Companies’ customers lost money, with much of the approximate $3.2 million they lost going to pay commissions and fees to the Pan American Companies, which totaled over $1.68 million – equivalent to approximately 35 percent of the more than $4.7 million accepted from customers.
The order further finds that Pan American Metals of Miami (PAMOM) provided customers a risk disclosure document stating that “[f]inancing precious metal trading is not an appropriate investment for retirement funds”; however, PAMOM solicited at least 46 individuals over 65 years of age, four over 90 years old, and one was solicited while in hospice care.
Furthermore, the CFTC order states that when the Pan American Companies engaged in these illegal transactions they were acting for Hunter Wise Commodities, LLC, which the CFTC charged with fraud and other violations in federal court in Florida on December 5, 2012.
Federal court orders Bradley Scott Schiller to pay restitution and a civil monetary penalty for commodity futures fraud
Judge Thomas M. Durkin of the U.S. District Court for the Northern District of Illinois entered a consent order for permanent injunction requiring defendant Bradley Scott Schiller, of Chicago, Ill., to pay restitution of approximately $4.565 million and a civil monetary penalty of $3 million for commodity futures fraud. The order also imposes permanent trading and registration bans, among other sanctions.
The order stems from a CFTC Enforcement complaint filed on May 24, 2012, which found that from at least January 2008 through approximately May 2012, Schiller fraudulently solicited approximately $7.8 million from at least six investors for trading futures, and that Schiller misappropriated investors’ funds and issued false account statements to customers in order to perpetuate his fraud. Schiller, a former floor broker, told prospective investors that he was a successful trader and showed prospective investors altered account statements to bolster his claims when he was soliciting funds. However, according to the order, Schiller opened no accounts in the name of his investors, misappropriated approximately $3 million to pay for personal expenses and to re-pay earlier investors and lost approximately $1.6 million in trading in an account in his own name.
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