This month's regulatory actions:
Federal Court orders Thomas B. Breen, to pay $1.75 million to settle fraud charges
The U.S. Commodity Futures Trading Commission (CFTC) announced that it obtained a federal court order against a principal of National Equity Holdings, Inc. , Thomas B. Breen, of Orange County, Cal., requiring Breen to jointly pay restitution to defrauded customers in accordance with a restitution order set in a related criminal action of $1,059,096, and imposes a civil monetary penalty of $700,000 against Breen, as well as permanent trading and registration bans.
The order stems from a CFTC Complaint filed on Nov. 8, 2011, against defendants National Equity, Robert J. Cannone, Francis Franco, and Breen, charging them with fraudulent solicitation, misappropriation, and registration violations.
The order finds, and Breen acknowledges, that from at least June 2009 to May 2010, Breen, by and through National Equity, fraudulently solicited and accepted over $1.4 million to trade commodity futures contracts through a pool. In their solicitations, Breen, by and through National Equity, (1) falsely claimed to have a successful and experienced trader (Franco) for the pool, (2) misrepresented the likelihood of profits and the risks associated with trading commodity futures, (3) failed to disclose that they were not properly registered with the CFTC to operate a pool, and (4) failed to disclose their intended uses of pool participant funds.
The order further finds that Breen and National Equity traded only a portion of the pool participant funds in proprietary accounts, and sustained overall and significant losses. Breen and National Equity concealed their fraud and trading losses from the pool participants by issuing false account statements reflecting profits. Approximately-one year later, they claimed that participants’ fund were all lost in trading, but promised to return their funds.
The CFTC’s litigation continues against defendant Francis Franco to determine the appropriate amount of a civil monetary penalty to be imposed and whether a personal trading ban should be imposed. However, on April 11, 2013, the court entered a consent order of permanent injunction against defendants National Equity and Cannone, requiring them to pay over $3.6 million of restitution and monetary penalties, among other sanctions, to settle the CFTC action.
In related actions, Cannone and Franco, pled guilty to criminal violations of the Commodity Exchange Act (CEA) as amended. Cannone was sentenced to 27 months in federal prison, and ordered to pay the $1.05 million in restitution, jointly and severally with the other defendants. Franco was sentenced to 25 months, while Breen was sentenced to 40 months.
Federal Court orders Lyndon Parrilla to pay over $17 million in forex fraud scheme
A federal court awarded restitution for defrauded customers, disgorgement, and a civil monetary penalty totaling more than $17 million against defendant Lyndon Parrilla, of California, in connection with an off-exchange foreign currency fraud scheme in which Parrilla and his company, Green Tree Capital, defrauded over 50 customers in the United States of over $4 million.
Judge Joseph L. Tauro of the U.S. District Court for the District of Massachusetts entered the final judgment and permanent injunction Order on Oct. 24, 2013, requiring Parrilla to pay restitution of $4,197,342 to defrauded customers, disgorgement of $3,353,925, and a $10 million civil monetary penalty. The order also imposes permanent trading and registration bans against Parrilla and prohibits him from further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.
The order stems from a CFTC Complaint filed on April 12, 2011, that charged Parrilla and Green Tree with fraud, misappropriation, and other CEA violations. The court previously entered judgment against Green Tree on June 30, 2011.
The final judgment order is based on the court’s findings set forth in an earlier order, entered on Sept. 30, 2013, that finds that Parrilla and Green Tree fraudulently solicited over $4 million from at least 50 customers in the United States, from approximately October 2009 until April 2011, for the purported purpose of trading off-exchange forex contracts on a leveraged or margined basis in managed accounts.
In soliciting the funds, the order finds that Parrilla, on behalf of Green Tree, misrepresented that Green Tree had a record of delivering consistently profitable returns when, in fact, it incurred trading losses since its inception, and almost 80% of customer funds was never traded or invested in any manner. In fact, according to the order, Parrilla misappropriated over $3.3 million of customer funds to pay personal and entertainment expenses, including Las Vegas casino expenses, purchase automobiles and clothing, and ATM or cash withdrawals. To disguise these misrepresentations, trading losses, and misappropriations, Parrilla sent false Green Tree account statements to customers by email. Further, the Order finds that Parrilla misrepresented his experience and expertise, and failed to disclose that the National Futures Association (NFA) permanently barred him from NFA membership.
As a result of a parallel criminal action brought by the U.S. Attorney’s Office in November 2012, Parrilla was sentenced to, among other things, a term of 97 months imprisonment and ordered to pay restitution in the amount of $4,675,156.
CFTC obtains restraining order against AlphaMetrix, alleging misappropriation of pool funds and sending false or misleading statements
The CFTC filed a complaint in the U.S. District Court for the Northern District of Illinois on Nov. 4, 2013, against AlphaMetrix, LLC, a Chicago-based commodity pool operator (CPO) and commodity trading advisor (CTA). The CFTC alleges that AlphaMetrix misappropriated funds belonging to commodity pools it operated and sent false or misleading account statements to at least some of the pool participants. On Nov.5, 2013, Federal District Judge Joan H. Lefkow issued a consent restraining order that freezes AlphaMetrix’s assets, protects books and records, and appoints a corporate monitor to oversee the distribution of pool funds to participants.
According to the CFTC, AlphaMetrix operates approximately 90 pools that had approximately $700 million in assets under management as of Aug. 31, 2013. The Complaint alleges that AlphaMetrix had agreements with some participants in which AlphaMetrix agreed to rebate certain fees by reinvesting the funds in the pools for the participants. However, as alleged, between at least Jan. 1 and Oct. 31, 2013, AlphaMetrix failed to reinvest at least $2.8 million of the rebates owed to participants and instead transferred the funds to its parent company, AlphaMetrix Group, LLC, which had no legitimate claim to those funds and is named as a relief defendant in the complaint. the complaint states that AlphaMetrix nevertheless sent the participants account statements, which included the funds that were supposed to have been invested in calculating the net asset value of their interests, and, as a result, misstated to participants the true value of their investments.
In its continuing litigation, the CFTC seeks preliminary and permanent injunctions against AlphaMetrix, enjoining AlphaMetrix from committing further violations of the Commodity Exchange Act, as charged, and ordering it to pay restitution, disgorgement, and a civil monetary penalty, among other appropriate relief. The CFTC also seeks an order requiring AlphaMetrix Group, LLC, to disgorge funds it received as a result of AlphaMetrix’s unlawful conduct.
CFTC charges Donald R. Wilson and DRW Investments with price manipulation
The CFTC filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Donald R. Wilson and his company, DRW Investments, LLC . The CFTC’s complaint charges Wilson and DRW with unlawfully manipulating and attempting to manipulate the price of a futures contract, namely the IDEX USD Three-Month Interest Rate Swap Futures Contract (Three-Month Contract) from at least January 2011 through August 2011. The complaint alleges that as a result of the manipulative scheme, the defendants profited by at least $20 million, while their trading counterparties suffered losses of an equal amount.
According to the complaint, in 2010 the Three-Month Contract was listed by the International Derivatives Clearinghouse (IDCH) and traded on the NASDAQ OMX Futures Exchange, and was publicized as an alternative to over-the-counter, i.e., off-exchange, products. Wilson and DRW believed that they could trade the contract for a profit based on their analysis of the contract. At the end of 2010, Wilson caused DRW to acquire a large long (fixed rate) position in the Three-Month Contract with a net notional value in excess of $350 million. The daily value of DRW’s position was dependent upon the daily settlement price of the Three-Month Contract calculated according to IDCH’s methodology. As Wilson and DRW knew, the methodology relied on electronic bids placed on the exchange during a 15-minute period, the “settlement window,” prior to the close of each trading day. In the absence of such bids, the exchange used prices from over-the-counter markets to determine its settlement prices. Wilson and DRW anticipated that the value of their position would rise over time.
The market prices did not reach the level that Wilson and DRW had hoped for and expected, according to the CFTC. Rather than accept that reality, Wilson and DRW allegedly executed a manipulative strategy to move the Three-Month Contract market price in their favor by “banging the close,” which entailed placing numerous bids on many trading days almost entirely within the settlement window, none of which resulted in actual transactions as DRW regularly cancelled the bids. Under the exchange’s methodology, DRW’s bids became the settlement prices, and in this way DRW unlawfully increased the value of its position, according to the CFTC.
Gretchen L. Lowe, the CFTC’s Acting Director of Enforcement, stated: “Traders cannot engage in manipulative acts to affect the price of futures contracts to achieve their desired profits, regardless of the so-called motive. Today’s action demonstrates that the Commission will vigorously prosecute such cases to protect the integrity of the markets.”