Individual Fined For Fraudulent Operation of Commodity Pools
An individual and two companies he controlled settled CFTC charges for fraudulent solicitation and misappropriation of funds intended for foreign exchange trading and commodity pool operations.
According to the consent order entered by the US District Court for the Southern District of Texas, from approximately October 2020 to May 2022, the individual, along with one of the companies he controlled, solicited funds for participation in a purported commodity pool that would "trade off-exchange leveraged or margined retail foreign currency exchange contracts...or leveraged or margined gold to [US] dollar pair...transactions." The consent order states that the individual and the company he controlled made material misrepresentations and omissions "regarding where they would maintain pool participant funds, how they would trade those funds, who would do the trading, and [the company's] historical trading profits." Based upon the misrepresentations, at least 43 pool participants deposited $470,780. The funds were transferred to bank accounts controlled by another defendant involved in the scheme instead of being directed to a firm that trades forex or leveraged or margined gold to US dollar pair transactions. Furthermore, the pool participants were provided with false weekly account statements and pool funds were commingled with non-pool property.
In March 2022, the NFA initiated an examination of the first company controlled by the individual after the NFA identified "serious concerns" about the company's "lack of oversight and control of investor funds." In response, the individual indicated that he would withdraw pool participant funds from an off-shore trading firm, the entity where he claimed the funds were deposited. After several weeks, the trader received funds from a cryptocurrency business and those funds were used to repay the first company's pool participants. The individual then informed the NFA that the first company was ceasing operations and that he was leaving the financial services industry to pursue another career path. However, in June 2022, the individual formed a new company and resumed soliciting funds. Using many of the same misrepresentations, the new company attracted at least 66 participants who collectively deposited $1,935,079. The new company misappropriated pool participant funds by "transferring approximately half of the funds" to a bank account controlled by another defendant involved in the scheme, and by the individual paying himself trading profits "that did not exist."
The CFTC charged the defendants with violations of CEA Sections 4b(a)(2)(A)-(C) ("Contracts designed to defraud or mislead"), 4o(1)(A)-(B) ("Fraud and misrepresentation by commodity trading advisors, commodity pool operators, and associated persons"), 4k(2) ("Registration of associates of futures commission merchants, commodity pool operators, and commodity trading advisors; required disclosure of disqualifications; exemptions for associated persons") and 4m(1) ("Use of mails or other means or instrumentalities of interstate commerce by commodity trading advisors and commodity pool operators"), along with CFTC Regulations 4.20 ("Prohibited activities") and 5.2 ("Prohibited transactions").
To settle the charges, the defendants agreed to (i) pay a $350,000 civil monetary penalty and approximately $1.65 million in restitution; (ii) permanent trading and registration bans; and (iii) a permanent injunction barring the defendants from further violations of the CEA and CFTC regulations.