CFTC Charges Precious Metals Company with Fraud
The CFTC filed a complaint against a Florida-based precious metals dealer for engaging in illegal and fraudulent off-exchange transactions. The complaint ("Complaint") was filed in the U.S. District Court for the Southern District of Florida.
The Complaint alleges that the company and its principals solicited low net worth retail customers unlawfully through telemarketing and a commercial Web site in order to buy and sell stored precious metals such as gold, silver, platinum and palladium on a fully paid or leveraged, margined or financed basis. The company's customers did not qualify as eligible contract participants, nor did the company itself acquire, deliver and store any financed metal on behalf of its customers. Additionally, the transactions did not result in actual delivery of metal to the company's customers. As a result, the defendants' precious metals transactions constituted unlawful off-exchange retail commodity transactions.
The Complaint alleged that the company defrauded retail customers by misrepresenting and omitting to disclose material facts regarding (i) the past performance of the precious metals it marketed, (ii) the price that the metals needed to reach for the customers to break even on their purchases and (iii) the nature of the relationship between the company and its retail customers.
Finally, the CFTC alleged that the company charged customers for commissions and fees that totaled as much as 37.5 percent of the customers' investments. The company also failed to inform customers that more than 80 percent of customers who purchased stored precious metal from it in the past, failed to cover storage costs, interest charges and other fees, or earn a profit on their investments.
The CFTC seeks disgorgement of ill-gotten gains, restitution for the benefit of customers, civil monetary penalties, permanent registration and trading bans, and a permanent injunction from future violations of the CEA.
Commentary
This matter is significant in two respects: First, the CFTC is applying its new CFTC Rule 180.1 ("Prohibition on the employment, or attempted employment, of manipulative and deceptive devices"), which was adopted to beef up the agency's anti-manipulation authority (that is, to make it easier to prove manipulation), but which is really an anti-fraud rule a la SEC Rule 10b-5. Second, one of the allegations attributes fraud to the defendants for failing to disclose to potential customers that 80% of the firm's retail customers failed to earn enough during the relevant period to cover the costs associated with their investment. Does that mean that futures commodity merchants and retail foreign exchange dealers now are required to inform potential customers about the success rate of their customers (many of whom day trade for excitement if not for profit) in the futures and forex markets, respectively?
The problem with the CFTC's allegations is that if they prove true, they were made against a firm that likely engaged in material violations of the law and so will not be in a position to defend itself against the charge of failure to provide information about past performance. However, the CFTC ought not to seek to make disclosure rules (if that is what is going on here) through enforcement actions. General disclosure requirements should be adopted through a rulemaking process.