This week's regulatory actions:
CFTC charges Lions Wealth, 20/20 Precious Metals, and Bharat Adatia in fraudulent precious metals scheme
The U.S. Commodity Futures Trading Commission (CFTC) filed an injunctive enforcement action in the U.S. District Court for the District of Nevada against three Nevada corporations: Lions Wealth Holdings, Inc. and Lions Wealth Services, Inc., both doing business as Lions Wealth Capital, and 20/20 Precious Metals, Inc., and their principal Bharat Adatia of San Juan Capistrano, Cal. The CFTC charges that the three companies and Adatia took in more than $2.4 million in customer funds between July 2011 and February 2013, while fraudulently marketing illegal, off-exchange trading of precious metals on a leveraged, margined or financed basis.
According to the CFTC, the defendants falsely claimed to sell gold, silver, platinum, and palladium to retail customers in retail commodity transactions. The complaint further alleges that the defendants offered to arrange for loans to customers to purchase physical metals and the storage and transfer of customers’ physical metals to an independent depository. The complaint further alleges that these statements were false, in that the defendants did not sell or transfer ownership of any physical metals, did not disburse funds as loans, and did not cause any metals to be stored in any depositories for or on behalf of Lions Wealth and 20/20 Metals customers. Rather, the complaint states that defendants forwarded customer funds to a third-party, Hunter Wise Commodities, LLC and its various subsidiaries and related entities, which also did not purchase or hold metals in the customers’ names. The CFTC alleges that defendants nevertheless charged customers storage fees and other charges on metals that did not exist and interest on loans that were never made.
According to the CFTC, Lions Wealth and 20/20 Metals collectively took in $2,474,207 in customer funds between July 16, 2011 and Feb. 22, 2013. During that same time, at least 44 Lions Wealth retail customers collectively incurred at least $1,807,712 in trading losses, commissions, interest charges and other fees, and at least 30 20/20 Metals retail customers collectively incurred at least $570,266 in trading losses, commissions, interest charges and other fees, according to the complaint.
The CFTC sued Hunter Wise in the U.S. District Court for the Southern District of Florida on Dec.5, 2012, charging it with engaging in illegal, off-exchange precious metals transactions, as well as fraud and other violations. On Feb. 25, 2013, the U.S. District Court issued a preliminary injunction against Hunter Wise, froze the firm’s assets, and appointed a corporate monitor to assume control over those assets. The CFTC also brought actions against other purported precious metals dealers that solicited and introduced customer accounts to Hunter Wise..
ADMIS fined $425,000 for commingling customer funds with funds in non-customer accounts
The CFTC issued an order filing and simultaneously settling charges against ADM Investor Services, Inc. (ADMIS), for unlawfully commingling customer funds with funds held in its non-customer accounts. ADMIS must pay a civil monetary penalty of $425,000, cease and desist from violating the CEA and CFTC rules and to implement improved procedures, to the extent that it has not already done so, to ensure the proper classification of such accounts.
FCMs are required to segregate funds held on behalf of customers and are not permitted to commingle customer funds with the funds of any other person. The CFTC states ADMIS treated the accounts of multiple of its affiliates as customer accounts, notwithstanding that ADMIS’s parent corporation, Archer Daniels Midland Company (ADM), had ownership interests in the affiliates ranging from 16% to 100%, and voting interests in each of the affiliates (by virtue of ADM’s authority to appoint representatives to the affiliates’ governing boards or equivalent governing bodies).
The CFTC order finds that as a result of ADM’s ownership and voting interests in ADMIS and the affiliates, ADMIS was prohibited from commingling its customers’ funds with funds held in the affiliates’ accounts. Further, the order finds that by combining funds of its commonly controlled affiliates with funds of its customers, ADMIS unlawfully commingled its customers’ funds with funds in ADMIS’s proprietary accounts. The order finds that, in July 2011, ADMIS transferred the affiliates’ positions and associated funds out of customer segregated accounts.
FXDirectDealer ordered to pay $275,000 penalty
The CFTC filed and simultaneously settled charges that, between November 2010 and December 2012, FXDirectDealer, LLC (FXDD), a CFTC-registered retail foreign exchange dealer (RFED) and FCM headquartered in New York, failed to comply with minimum financial requirements for RFEDs and FCMs.
Effective Oct. 18, 2010, the CFTC adopted comprehensive rules to protect members of the public who buy foreign currency contracts from, or sell forex contracts to, forex firms. Under these rules, RFEDs and FCMs that offer or engage in retail forex transactions must at all times maintain adjusted net capital of $20 million, or more in certain circumstances.
According to the CFTC, FXDD did not maintain its required adjusted net capital during at least 18 separate months between November 2010 and December 2012, with month-end adjusted net capital computations showing that FXDD was undercapitalized by more than $7.5 million at one point. Because FXDD reported its adjusted net capital on a consolidated basis with its subsidiary, FXDD apparently did not realize that, on the required stand-alone basis, it failed to satisfy its adjusted net capital requirements throughout most of this period, the order finds.
The order imposes a $275,000 civil monetary penalty and a cease and desist order against FXDD for its violations.
RJO ordered to pay $125,000 for violation of customer protection regulation
The CFTC filed and settled charges against R.J. O’Brien & Associates LLC,a CFTC-registered FCM based in Chicago, for unlawfully commingling secured foreign futures and options customer funds with segregated domestic futures and options customer funds. The CFTC Order requires RJO to pay a $125,000 civil monetary penalty and orders RJO to cease and desist from further violations of CFTC Regulation 30.7(d).
The CEA and CFTC regulations contain provisions to protect the funds of customers trading on both U.S. and foreign exchanges. In relation to customers trading on foreign exchanges, an FCM must account for and maintain money, securities, and property in an amount at least sufficient to cover or satisfy all of its current obligations to foreign futures and options customers in a separate “secured account.” Regulation 30.7(d) prohibits secured customer funds from being commingled and deposited into the same accounts separately held for segregated domestic futures and options customer funds.
On or about Feb.10, 2012, RJO, as carrying broker and depository for a non-clearing FCM, transferred $1,586,000 from the non-clearing FCM’s secured omnibus customer account (approximately $605,268 of which represented secured foreign futures or foreign options customer funds) and held, commingled, and deposited the secured customer funds in the non-clearing FCM’s segregated omnibus customer account, the Order finds. RJO transferred the funds to reduce a margin deficiency in the non-clearing FCM’s segregated omnibus account, without knowing whether the funds were part of the non-clearing FCM’s secured account requirements. Further, the CFTC finds that RJO did not make a margin call to the non-clearing FCM and did not notify the non-clearing FCM that it was transferring the funds from the non-clearing FCM’s secured omnibus account.
According to the CFTC, on Monday, Feb. 13, 2012, the non-clearing FCM discovered that as a result of the transfer, it had insufficient funds in its secured accounts to meet its obligations to its secured customers. The non-clearing FCM had sufficient funds otherwise available in other accounts to satisfy the segregated funds margin call if RJO had not on its own moved funds from the secured omnibus account. The non-clearing FCM contacted RJO to reverse the transfer, which RJO effected that morning. The non-clearing FCM reported to the CFTC on the same morning that it did not have sufficient funds to meet its obligations to its secured customers.
COMEX broker Dominick Anthony Cognata charged with failing to produce required documents
The CFTC filed two separate administrative proceedings against Dominick Anthony Cognata, a registered COMEX floor broker. In one proceeding, a complaint charges Cognata with failing to produce to the CFTC certain records relating to his brokerage activities. In the other proceeding, the CFTC seeks to revoke Cognata’s registration as a floor broker.
As alleged by the CFTC, on or about Aug. 14, 2012, the CFTC’s Division of Enforcement, as part of an ongoing investigation, issued a subpoena to Cognata for the production of documents, including trading cards, order tickets, and other documents relating to his trading of gold or silver futures or options on futures, which were required to be made, kept and produced by floor brokers pursuant to the CEA and CFTC Regulations. .To date, Cognata has failed to produce any documents in response to the subpoena. As a result of Cognata’s violations, the CFTC is seeking a civil monetary penalty and an order that Cognata cease and desist from violating the provisions of the CEA and CFTC Regulations, as charged.
The CFTC is seeking the revocation of Cognata’s registration as a floor broker for “good cause.” It is alleged that the facts constituting “good cause” include, in addition to Cognata’s failure to produce records to the CFTC, the settlements and findings in two exchange disciplinary actions against Cognata since 2011. In one exchange disciplinary action, pursuant to an offer of settlement, a panel of the COMEX Business Conduct Committee (the Panel) found that on various dates from October through December 2008, Cognata engaged in noncompetitive, prearranged trades of silver and gold options. In the other exchange disciplinary action, pursuant to an offer of settlement, the Panel found that on three occasions in June and July 2011, Cognata prearranged trades in silver options for the purpose of receiving money passes from other COMEX members. In both disciplinary actions, Cognata neither admitted nor denied any rule violations in his offers of settlement.
TOTE Fund, MJS Capital Management and Michael J. Siegel with commodity pool fraud
The CFTC filed a civil enforcement action in the U.S. District Court for the District of New Jersey, charging two California firms, TOTE Fund LLC and MJS Capital Management LLC, and their principal, Michael J. Siegel of Northfield, NJ, with misappropriating funds in connection with two commodity pools.
Allegedly, from August 2007 through at least October 2010, TOTE, MJS, and Siegel, operated two commodity pools, the Monarch Futures Fund LLC and the QEP Futures Fund LLC. Pool participants placed approximately $1.375 million in the QEP and Monarch pools.
The CFTC further alleges that, from at least January 2008 through at least October 2010, the defendants misappropriated funds totaling approximately $191,689 from Monarch and QEP pool participants by withdrawing money from the pools for non-pool expenses and taking fees to which they were not entitled. As alleged in the complaint, despite earning incentive, management, and administrative fees of approximately $319,909 based on his trading for Monarch and QEP, Siegel transferred approximately $511,598 from bank accounts in the names of Monarch, QEP, and TOTE to his personal bank accounts, to a credit card account, and to at least one individual. Siegel used some of these funds to pay personal expenses, and MJS and Siegel also misappropriated funds by failing to return funds to at least two pool participants.
As further alleged, TOTE, acting through Siegel, also failed to provide Monarch pool participants with copies of monthly statements received by TOTE from FCMs.
CFTC charges ethanol trader John Aaron Brooks with fraud
The CFTC filed a civil injunctive enforcement action charging John Aaron Brooks with defrauding an affiliate of a large commercial bank where he then worked by scheming to conceal trading losses from the bank and its affiliate. As alleged in the CFTC’s complaint, Brooks effectuated his scheme by inflating the value of New York Mercantile Exchange Chicago Ethanol (Platts) futures contracts to conceal trading losses he was incurring. The losses concealed ultimately grew to cause the bank and its affiliate to suffer over $40 million in realized losses before Brooks’s fraud was detected, leading to his termination. Brooks resides in Houston, Texas.
The CFTC’s civil complaint, filed Sept. 27, 2013, in the U.S. District Court for the Southern District of New York, alleges that for the majority of the days for nearly 11 months beginning in or about November 2010, and continuing through on or about Oct. 20, 2011, Brooks, then employed as director in the commodities business of the bank affiliate, knowingly entered false inflated prices into an internal trade booking and valuation computer software system to effectuate his scheme to conceal trading losses.
For previous Blotters.