CFTC Charges Helmut H. Weber with Forex Fraud; Update on Ronald W. Smith, Jr. Fraud Charges

On the Eve of New Forex Registration Requirements, CFTC Finds More Fraud

In two separate actions, CFTC charged Arizona resident Helmut H. Weber of Weber Capital Management with solicitation fraud and misappropriation of customer funds, and CFTC obtained a preliminary injunction against Virginia resident Ronald W. Smith, Jr. of Safeguard 3030 Investment Club in relation to charges against him for solicitation fraud, misappropriation of customer funds, and the issuance of false account statements to customers.

Overview of Weber Case

Updates on Smith Case

To read about the Smith case, please click here.

To read the Weber Complaint, click here.

To read the Smith Order, click here.

The full text of the CFTC press releases is reprinted below and can also be found by clicking on the following links: Weber and Smith.

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Release: 5794-10

For Release: March 11, 2010

CFTC Charges Scottsdale, Arizona Resident Helmut H. Weber d/b/a Weber Capital Management with Solicitation Fraud and Misappropriation in Forex Scheme

Defendant used three websites to solicit customers and misappropriated approximately $280,000 of customer funds.

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) filed a complaint against Helmut H. Weber d/b/a Weber Capital Management (WCM) of Scottsdale, Arizona, charging Weber with operating a fraudulent off-exchange foreign currency (forex) scheme.

The CFTC complaint, filed in the U.S. District Court for the District of Arizona, Phoenix Division on March 9, 2010, alleges that Weber, through personal solicitations and his websites — www.weberfx.com, www.webercapitalmanagement.com and www.newtempsite.com — fraudulently solicited customers to invest at least $280,000 in forex trading. The complaint also alleges that, contrary to Weber’s representations, only a fraction of customer funds were actually traded and that the majority of the funds were misappropriated to pay for Weber’s lavish lifestyle.

Specifically, the complaint alleges that, from at least June 2008 through January 2009, Weber falsely told customers that he was a successful and experienced forex trader, promised profits of three percent to 10 percent monthly on investments and claimed that WCM was registered with the National Futures Association and the CFTC. Based on these false representations, many of his clients recommended Weber to their friends and family.

Additionally, Weber continued to solicit prospective and existing clients even after the Arizona Corporation Commission, Securities Division, served a “cease and desist” order upon him on September 12, 2008, according to the complaint. The order required him to stop certain forex business activities and to close two of his websites. The state of Arizona subsequently on October 22, 2008, indicted him on 29 criminal violations, including fraud and theft, related to his forex solicitation activities. The criminal charges against Weber remain pending.

In its continuing litigation, the CFTC seeks restitution of funds to defrauded customers, the repayment of ill-gotten gains, civil monetary penalties and permanent trading and registration bans.

The CFTC appreciates the assistance of the Arizona Corporation Commission, Securities Division, and the Office of the Arizona Attorney General.

The following CFTC Division of Enforcement staff members are responsible for this case: Timothy J. Mulreany, Tracey Wingate, Michael Amakor, Paul Hayeck and Joan Manley.

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Release: 5793-10
For Release: March 11, 2010

Federal Court Issues Preliminary Injunction against Virginia Resident Ronald W. Smith, Jr., Doing Business as Safeguard 3030 Investment Club, in Forex Fraud Scheme

Order continues court’s asset freeze against Smith and prohibits him from further federal commodities law violations.

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) obtained a preliminary injunction against defendant Ronald W. Smith, Jr., d/b/a Safeguard 3030 Investment Club, of Vansant, Virginia, after a federal court held at hearing where the defendant also appeared.

The order, arising from a CFTC anti-fraud enforcement action against Smith filed on February 23, 2010, continues the asset freeze the court entered against Smith at the outset of the CFTC’s action. The order also prohibits Smith from further violations of federal commodities law. Chief Judge James P. Jones of the U.S. District Court for the Western District of Virginia entered the order on March 5, 2010.

The CFTC’s complaint charges Smith with fraudulently soliciting at least $800,000 from customers and misappropriating customer funds in an off-exchange foreign currency (forex) scam. The complaint also charges Smith with issuing false statements to customers to conceal the fraudulent misuse of funds. (See CFTC Press Release 5734-10, February 26, 2010, and CFTC v. Ronald W. Smith, Jr. et al., No. 1:10CV00009 [W.D. Va. 2010].)

In its continuing litigation against Smith, the CFTC seeks restitution, disgorgement of ill-gotten gains, civil monetary penalties and a permanent injunction.

The following CFTC Division of Enforcement staff are responsible of this case: August A. Imholtz III, Kara Mucha, James Garcia, Kassra Goudarzi, Michelle Bougas, Michael Solinsky, Gretchen L. Lowe and Phyllis J. Cela.

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Other related forex law articles include:

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.

March 18, 2010 | Filed Under Forex Press Release

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NFA Indicates Support of Higher Leverage for Retail Forex

By Bart Mallon, Esq.
(www.forexregistration.com)

At the NFA regulatory conference at the beginning of this month, the topic of the first session was the current regulatory and legislative changes which are currently taking place in the industry.  Perhaps not surprisingly, the panel (which included NFA’s Dan Driscoll) completely avoided any discussion of the CFTC proposed forex regulations until prompted by two audience questions.

The first question was about the retail forex regulations in general.  Mr. Driscol, the Exectuvie Vice President and Chief Operating Officer of the NFA, gave a fairly bland overview of the issue involved and noted that the CFTC had received thousands of comments from the public, most in opposition of the reduced leverage requirements.  Mr. Driscol also discussed how the NFA is planning to deal with the significant increase in the applications by building out their computer systems.

As a follow-up question, I asked about the February 26, 2010 meeting between the NFA and the CFTC (see CFTC’s note to file).  According to memo, CFTC Commission Jill Sommers met with Dan Roth of the NFA and they primarily discussed the proposal with respect to the significant reduction in leverage.  Dan Driscoll of the NFA answered my question by noting that the NFA would not comment publicly about what was said in the meeting.  However, he did note that the NFA would be submitting a comment letter on the proposed rules as well.  Significantly, Mr. Driscoll went on to discuss the fact that the NFA itself recently reduced the leverage for those NFA Member Firms who are forex dealers.  Those reductions were to 100:1 for the major currencies and 25:1 for all other currencies (for background, see NFA Forex Leverage Reduction Proposal).

While I do not purport to speak for Mr. Dirscoll, the import of his discussion seems to be that the NFA is going to provide a comment to the CFTC which provides some of the background and reasoning on how the NFA came to adopt the leverage requirements just a few months ago.  The comment period ends soon so it will be interesting to see how the NFA decides to comment on the proposal.

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Other forex law blog articles include:

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through www.forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.

March 15, 2010 | Filed Under Laws and Regulations, forex registration

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Senator Orrin Hatch Comments on Proposed Forex Regulations

“Concerned” about “severe impact” of regulations

On March 9, 2010, Utah Senator Orrin G. Hatch submitted a comment letter to the CFTC regarding the proposed retail forex regulations.  Senator Hatch takes the stance that the CFTC should not reduce the levergage requirement from 100:1 to 10:1.

“I am told this provision may result in many retail Forex trading jobs moving offshore to jurisdictions where regulators do not limit retail Forex leverage, and 200:1 leverage is more common,” Hatch stated.  The comment goes on to say that “higher margin on leverages [sic] for Forex would make the U.S. retail Forex market uncompetitive” and that the “United States is at risk of losing jobs from this proposed regulation.”  Hatch also notes, like many previous commenters, that “the CFTC cannot adequately regulate retail Forex trading if it moves offshore.”

For more information, see Orrin Hatch Forex Comment.

There were no press releases on Senator Hatch’s website at the time of this post.

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Other forex law blog articles include:

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through www.forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.

March 14, 2010 | Filed Under Laws and Regulations, forex registration

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GAIN Capital Holdings, Inc. Opens Hong Kong Office, Expands Asian Presence

GAIN Capital Announces New Hong Kong Office and White Label Agreement with Polaris Securities

GAIN Capital Holdings, Inc. (operator of well-known site forex.com) has expanded its presence in Asia by opening a new office in Hong Kong. It currently has offices in Tokyo and Seoul, as well as in New York, New Jersey, and London.

The CEO of GAIN Capital, Glenn Stevens, said, “Hong Kong is a key global financial center in Asia with a robust regulatory framework. Our Hong Kong office will act as a regional business development hub and help us reach and address the needs of our clients and partners locally”.

In addition to its new office, the company announced its new white label agreement with Polaris Securities (Hong Kong) Ltd. Polaris Securities is “one of the top securities firms and the largest market-maker of index futures and options in Taiwan”. This partnership will allow Polaris to expand its Leveraged Foreign Exchange business.

The PR Newswire press release is reprinted below and can also be found here.

To learn more about the new forex registration requirements, visit www.forexregistration.com.

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GAIN Capital Continues Asian Expansion with New Office in Hong Kong

Company Also Enters Into White Label Partnership with Polaris Securities (HK) Limited, A Subsidiary of One of Taiwan’s Largest Securities Firms

NEW YORK, LONDON, and HONG KONG, Feb. 2 /PRNewswire/ — GAIN Capital Holdings Inc., a global provider of online trading services, announced today the opening of its newest office in Hong Kong, further extending its presence in theAsia-Pacific region alongside offices in Tokyo and Seoul.  The company received regulatory approval from the Hong Kong Securities and Futures Commission (SFC) in 2009.

“Hong Kong is a key global financial center in Asia with a robust regulatory framework,” said Glenn Stevens, CEO, GAIN Capital.  ”Our Hong Kong office will act as a regional business development hub and help us reach and address the needs of our clients and partners locally.”

GAIN’s office, located in the central business district, is being managed by Brian Tsui.  Mr. Tsui was formerly the head of retail FX at MF Global Hong Kong.

The company also announced it has signed a white label agreement with Polaris Securities (Hong Kong) Ltd (”Polaris (HK)”), a wholly owned subsidiary of Polaris Securities Co., Ltd.  A leader in online trading and financial innovation, Polaris Securities is one of the top securities firms and the largest market-maker of index futures and options in Taiwan. The new partnership with GAIN enables Polaris (HK) to expand its Leveraged Foreign Exchange business.

“By partnering with GAIN Capital, we were able to come to market much faster with an offering that speaks to the particular needs of our sophisticated clients, who demand best of breed online trading tools,” commented James Hsu, managing director, Foreign Exchange Division, Polaris (HK).  ”GAIN brought to the partnership a fully localized Chinese trading platform, technical resources and a local support team that enabled us to quickly customize and deploy the Polaris (HK) offering according to our specific business and regulatory requirements.  We are now accepting clients at www.polaris.com.hk.”

About GAIN Capital

GAIN Capital Holdings, Inc. is a global provider of online trading services, specializing in foreign exchange (forex or FX) and contracts for difference (CFDs). Customers and trading partners in more than 140 countries have utilized the company’s award-winning trading platform which transacts nearly $200 billion per month.

A pioneer in online forex trading, GAIN Capital operates FOREX.com (www.forex.com), one of the largest and best-known brands in the retail forex industry.  It also provides execution, clearing, custody and technology products and services to an institutional client base including asset managers, broker/dealers and other financial services firms.

With offices in New York City; Bedminster, New Jersey; London; Seoul; Tokyo; and Hong Kong, GAIN Capital and its affiliates are regulated by the Commodity Futures Trading Commission (CFTC) in the United States, the Financial Services Authority (FSA) in the United Kingdom, the Financial Services Authority (FSA) in Japan, and the Securities and Futures Commission (SFC) in Hong Kong.

GAIN’s investor group includes private equity firms 3i, VantagePoint Venture Partners, Tudor Ventures, Edison Venture Fund and Cross Atlantic Capital Partners.  For company information, visit www.gaincapital.com or www.forex.com.

SOURCE GAIN Capital Holdings Inc.

RELATED LINKS
http://www.gaincapital.com
http://www.forex.com
http://www.polaris.com.hk

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Other related forex law articles include:

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.

March 13, 2010 | Filed Under Forex Press Release

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New IB Coalition Challenges Guaranteed Introducing Broker Requirement, Among Others

Forex IB Firms Form IB Coalition to Challenge CFTC Proposal, Cite Contradictions Between Futures and Forex Regulations

We recently wrote an article on the new guaranteed introducing broker (IB) proposed rule with regard to the CFTC’s Forex Proposal because we were curious as to why little was being said about this significant change for IBs. Evidently, we had our timing just right—today, a group of top Forex IBs who have joined together to challenge the new guarantee requirements, among other issues, released a press release announcing their formation of IBcoalition.org.

About IB Coalition/Issues

The coalition is made up of the following IBs: ATC Brokers, BackBay FX, Currensee, Fast Trading Services LLC d/b/a FastBrokers.com, Forex On The Go, LLC, and Gecko Financial Services, Inc. In the press release (which we have reprinted in full below), IB Coalition attacks the new guarantee rule by arguing that,

By asking IBs to enter into an exclusive arrangement with only one FDM, IBs are limited in where they can refer customers, which creates a conflict of interest and is not aligned with the best interest of the customer. Independent IBs bring a valuable service to the retail trader. By carefully matching a trader’s style and needs with the right broker as it relates to spreads, trading platforms and customer service offerings, independent IBs help retail customers make the decision that’s right for them.

Another issue presented by IB Coalition is the differential treatment given to Futures IB, who are allowed to operate independently, and Forex IBs, who, if the new rule passes, will not. We asked the CFTC for an explanation and were directed to the text of the CFTC Proposal which states,

The Commission [CFTC] believes that by requiring guarantee agreements between all off-exchange retail forex IBs and the FCM/RFED counterparties to which they introduce off-exchange retail forex customers, the counterparties will be forced to more carefully vet the persons who solicit business on their behalf and the practices those persons employ…The Commission believes that the guarantee requirement serves the public’s interest in a marketplace where improper practices by IBs are discouraged while still permitting FCMs and RFEDs to make use of outside salespeople.

IB Coalition challenges this reasoning by stating,

Furthermore, these proposed rule changes are contradictory to the current CFTC policy in place for the on-exchange futures market, which allows independent IBs to introduce business to multiple Futures Commission Merchants thus enabling IBs to do what is in the best interest of their clients. The IB Coalition views the CFTC proposed rules as needlessly restricting legitimate Forex activities…By asking IBs to enter into an exclusive arrangement with only one FDM, IBs are limited in where they can refer customers, which is not aligned with the best interest of the customer. Independent IBs bring a valuable service to the retail trader. By carefully matching a trader’s style and needs with the right broker as it relates to spreads, trading platforms and customer service offerings, independent IBs help retail customers make the decision that’s right for them.

Next Steps

IB Coalition encourages their supporters to send in public comments on CFTC’s website, and its website includes a Take Action page where visitors can send in their comments directly from IB Coalition’s website.

We will continue to monitor this issue and will be posting all updates here on ForexLawBlog.com.

To visit IB Coalition’s website, click here.

The full text IB Coalition Press Release is reprinted below and can be found here.

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Leading Forex Introducing Brokers form coalition to challenge proposed CFTC rulings

Forms IBcoalition.org and proposes fair industry-based alternatives to regulations

Boston, MA – March 11, 2010 – Today, a group of leading Forex Introducing Brokers (IBs) announced the formation of www.ibcoalition.org, an organization comprised of independent, regulated Forex Introducing Brokers who have joined together to challenge the proposed CFTC rules titled “Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries,” 75 FR 3282 (Jan. 20, 2010).

The main mission of the IB coalition is to suggest significant changes to the proposed CFTC regulations. The IBs currently participating in www.ibcoalition.org are ATC Brokers (NFA Member #0358522), BackBay FX (NFA Member #0388617), Currensee (NFA Member #0403251), Fast Trading Services LLC d/b/a FastBrokers.com (NFA Member #0342002), Forex On The Go, LLC (NFA Member #0409594) and Gecko Financial Services, Inc. (NFA Member #0402367).

“We formed IBcoalition.org to come together as regulated IB businesses to oppose the proposed CFTC regulations that, if passed, will significantly change our businesses,” said Dave Lemont CEO Currensee. “Those of us in the IB Coalition are, we believe, the types of firms the Commission should be supporting as alternatives to the fraudulent unregistered solicitors the Commission has spent so much time and effort shutting down over the years. Unfortunately, though, in its zeal to curtail fraudulent solicitation practices, the Commission is proposing a set of rules that needlessly restrict legitimate Forex activities and will, if adopted, seriously undermine our ability to operate successfully as regulated alternatives. We welcome the opportunity to meet with the Commission and present our comments directly.”

The pending CFTC rulings propose that a Forex IB must enter into a guarantee agreement with a CFTC-regulated Forex Dealer Member (FDM), along with a requirement that the Forex IB may be a party to only one guarantee agreement at a time. By asking IBs to enter into an exclusive arrangement with only one FDM, IBs are limited in where they can refer customers, which creates a conflict of interest and is not aligned with the best interest of the customer. Independent IBs bring a valuable service to the retail trader. By carefully matching a trader’s style and needs with the right broker as it relates to spreads, trading platforms and customer service offerings, independent IBs help retail customers make the decision that’s right for them. Furthermore, these proposed rule changes are contradictory to the current CFTC policy in place for the on-exchange futures market, which allows independent IBs to introduce business to multiple Futures Commission Merchants thus enabling IBs to do what is in the best interest of their clients. The IB Coalition views the CFTC proposed rules as needlessly restricting legitimate Forex activities and capable of pushing Forex business off-shore, creating new opportunities for non-regulated or fraudulent businesses who don’t care about U.S. regulatory requirements.

The IB Coalition recently submitted a 10-page letter to the CFTC and, among other points, suggested the following changes to the proposed rulings

• First, the IB Coalition urged the CFTC to revise the proposed rules to permit a Forex IB to operate either as an independent IB subject to the same minimum capital requirements that apply to a futures IB or as a guaranteed IB.

• Second, the IB Coalition asked the CFTC to undertake a study of the retail Forex markets to assure that the rules it ultimately adopts are based on a solid factual understanding of the markets and are tailored accordingly.

• Third, the IB Coalition proposed the CFTC defer to NFA to set appropriate leverage restrictions as it relates to the proposed 10:1 leverage. An onerous leverage restriction, such as this, creates opportunities for unregistered fraudulent schemes to exploit U.S. customers is contrary to the public interest.

“As an IB, our job is to be objective and help the trader make the best decision about which broker best suits their needs,” says Stephen Leahy, President Back Bay FX. “The proposed CFTC rulings compromise the objectivity we are able to bring to our clients and completely disregards the best interest of the customer. Joining forces with the other IBs participating in IBcoalition.org is an important step in articulating our concerns both from a business and consumer-protection perspective. We welcome other IBs to join us in opposing the CFTC proposed rulings as it is currently written.”

The IB Coalition urges traders to make their voice heard by submitting their comments at www.ibcoalition.org.

About IBcoalition.org

IBcoalition.org is an organization comprised of independent, regulated Forex Introducing Brokers who have joined together to challenge the proposed CFTC rules titled “Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries,” 75 FR 3282 (Jan. 20, 2010). The main mission of the IB coalition is to suggest significant changes to the proposed CFTC regulations and a number of Introducing Brokers have already joined the group. To get more information or find out how to join, please visit www.ibcoalition.org.

For more information, please contact:

Jenna Brown

Inkhouse Media + Marketing

781.791.4558

press@ibcoalition.org

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Other forex law blog articles include:

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.

March 11, 2010 | Filed Under Forex Press Release

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Frontline Financial, Inc. Permanently Banned From NFA; Owner Charles G. Rice Must Withdraw from NFA for 5 Years

Dallas CPO/CTA Frontline Financial, Inc. & Owner Charles G. Rice Charged with NFA Compliance Violations

On February 18, NFA issued a press release detailing its settlement with Dallas-based commodity pool operators (CPOs) and commodity trade advisors (CTAs) Frontline Financial, Inc. (FFI), Frontline Advisors LLC (FAL), and Charles G. Rice (Rice). FFI and FAL agreed to be permanently banned from NFA membership. Rice was the president, sole principal, and sole owner of both firms, and was also an associated person (AP) of FFI and FAL and an NFA Associate. In the settlement, Rice agreed to withdraw from NFA membership for 5 years, and he must pay a fine of $10,000 if he reapplies for membership after the five-year bar.

Charges

Rice and FFI were charged with failing to disclose the following material information to participants of the pool they operated:

In addition, NFA charged that FFI and Rice failed to file an exemption notice, disclosure document, or annual financial statement for their fund.

Takeaways

The takeaways from this case are to be very careful about who you are doing business with and to ensure that you are in complete compliance with all regulations. It’s better to err on the side of caution when it comes to following NFA’s compliance rules. If you’re not sure about a requirement, ask NFA. Failure to comply with all rules can result in a temporary—if not permanent—ban from NFA membership.

Details of the violations are summarized below.

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Count I: Violation of NFA Compliance Rules 2-36(b), 2-36(c), 2-2(a), and 2-4

In September 2007, one of the four pools operated by FFI and FAL, Frontline Advisors Fund LLC (Fund), invested $50,00 in The Forex Project (Project), a fund operated by convicted felon Luis Rivas (Rivas). The Project promised to pay 10% interest/month for one year and return the principal balance of $50,00 after the final interest payment. In March 2008, ten new participants joined the Fund and contributed about $1 million in addition assets, reducing FFI’s investment in the Fund to less than 5%.

NFA alleged that from October 2007 to February 2008, the Project paid $5,000 in interest each month to the Fund. Also, FFI took about $4,800 of redemptions per month from the Fund during this same time. Soon after the participants invested in the Fund, the Project stopped making interest payments to the Fund, but Rice and FFI still reflected the $50,000 investment in their books (as well as accrued interest), without giving any disclosure to the other Project participants.

Even when the Project stopped making interest payments, FFI and Rice withdrew $28,700 from the Fund and charged investing participants a month management fee. By May 31, 2008, FFI and Rice wrote of the investment with the Project, but the Fund’s investment accounted for less than 5% of the Fund’s assets, so investors had to bear the brunt of the write-off. Also, FFI and Rice did tell the Fund participants of the write-off until April 2009 when NFA asked them to.

In addition to the above misconduct, FFI and Rice were charged with not conducting proper due diligence, specifically regarding the criminal background of Rivas. Furthermore, at the time authorities began to investigate Rivas, Rice invested $190,000 with six forex traders who were associated with Rivas. The Fund entered into written agreements with these traders who failed to repay the Fund in the manner agreed upon. The six traders promised to give the Fund and Rice copies of their monthly trading statements, but FFI and Rice never received them, and, therefore, could not monitor these traders’ trading activity. As a result, Rice did not realize that the traders had lost most of the money lent to them by the Fund and had opened accounts in their own names instead of in the Fund’s.

Count II: Violation of NFA Compliance Rule 2-13

FFI did not file an exemption notice for the Fund, nor did it disclose the Fund’s existence to NFA or comply with regulatory requirements. For example, FFI’s soliciting disclosure documents did not comply with all of CFTC’s regulations and were not approved by NFA. Also, FFI did not provide Fund participants with an annual financial statement, as required, nor did it file one with NFA.

The full text of the NFA press release in reprinted below and can also be found here.

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For Immediate Release

For More Information Contact:

Larry Dyekman (312) 781-1372, ldyekman@nfa.futures.org

Karen Wuertz (312) 781-1335, kwuertz@nfa.futures.org

Dallas firms Frontline Financial, Inc. and Frontline Advisors LLC ordered to permanently withdraw from NFA membership

February 18, Chicago - National Futures Association (NFA) has accepted a settlement offer from Frontline Financial, Inc. (FFI) and Frontline Advisors LLC (FAL) to permanently withdraw from NFA membership. FFI and FAL are Commodity Pool Operators and Commodity Trading Advisors located in Dallas, Texas. The Decision, issued by an NFA Hearing Panel, is based on an NFA Complaint filed in August 2009 and a settlement offer submitted by FFI, FAL and its principal, Charles G. Rice. Rice agreed to withdraw from NFA membership for a period of five years. Rice must pay a fine of $10,000 in the event that he reapplies for NFA membership after the five-year bar.

The Complaint charged that FFI and Rice failed to disclose material information to the participants in a pool which they operated, e.g., that the pool would loan money to third parties in exchange for promissory notes; that the issuers of these promissory notes defaulted on the notes causing the pool to incur losses; that FFI charged pool participants a monthly management fee even after one of the notes was in default; that FFI redeemed its interest in the pool; and that FFI ultimately wrote off the notes without providing details of the write-offs to pool participants. Additionally, the Complaint charged that FFI failed to file an exemption notice, disclosure document or annual financial statement for the fund.

The complete text of the Complaint and Decision can be found on NFA’s website (www.nfa.futures.org).

NFA is the premier independent provider of innovative and efficient regulatory programs that safeguard the integrity of the futures markets.

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Other related forex law articles include:

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.

March 11, 2010 | Filed Under Forex Press Release, Laws and Regulations

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CFTC Charges Texas-Based Willie Lee Cloud, Jr., Principal & Agent of C & R Financial, with Operating Ponzi Scheme

Cloud, Jr. Charged with Violating CEA, Misappropriating Customer Funds, Providing False Account Statements

Overview

Violations

Section 4b(a)(2)(A)-(C) of Commodity Exchange Act (CEA):

Potential Punishment

Takeaways

We have seen this same type of “ponzi scheme” over and over again. If you misappropriate funds, provide false account statements to customers, and act in poor faith, you should expect to be caught by the CFTC. The bottom line: be honest with your customers and yourself. Those who invest their money with you are instilling trust in you; deceive them, and you will be caught!

To view the complaint, click here.

The full text of the CFTCpress release is reprinted below and can also be found here.

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Release: 5791-10

For Release: March 9, 2010

CFTC Charges Texas Resident Willie L. Cloud, Jr. and His Investment Company, C & R Financial, with Operating a Foreign Currency Ponzi Scheme

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it charged Willie L. Cloud, Jr. and his investment company, C & R Financial, Inc., both of Houston, Texas, with operating a Ponzi scheme in connection with foreign currency (forex) trading.

The CFTC’s complaint, filed on March 4, 2010, alleges that, since at least April 2008, Cloud and C & R Financial solicited at least $200,000 from individuals for the sole purpose of trading forex. Allegedly, the defendants promised several customers that they would each have personal accounts at a registered futures commission merchant, through which defendants would trade forex for them. The defendants allegedly lured customers with promises of doubling or tripling their investments within a year through forex trading gains.

Defendants, however, opened an account in Cloud’s name, deposited only a portion of customers’ funds into the account and misappropriated at least $75,000 of customer funds for personal use, according to the complaint. The complaint also charges that defendants sent false account statements to customers showing large profits, when, in fact, defendants’ forex trading resulted in substantial losses. Defendants allegedly returned approximately $36,000 to customers as redemption of principal and purported “profits.” Because the defendants lost a substantial portion of customer funds in forex trading, the complaint alleges that the redemptions and purported “profits” came from the principal invested by existing or subsequent customers, thus constituting a Ponzi scheme.

Federal Court Sets Preliminary Injunction Hearing for April 1, 2010

On March 9, 2010, the Honorable Gray H. Miller of the U.S. District Court for the Southern District of Texas ordered Cloud and C & R Financial to appear in court on April 1, 2010 at 1:00 pm for a preliminary injunction hearing.

In the continuing litigation, the CFTC seeks restitution, disgorgement of ill-gotten gains, civil monetary penalties and a permanent injunction prohibiting further violations of the federal commodities laws.

The following CFTC Division of Enforcement staff members are responsible for this case: Andrew Ridenour, Patrick Pericak, Michael Loconte, Jessica Harris, Kenneth McCracken, Rick Glaser and Richard Wagner.

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Other forex law blog articles include:

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.

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March 10, 2010 | Filed Under Forex Fraud

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CFTC Stops Another Forex Ponzi Scheme

CFTC Charges VA Resident Ronald W. Smith, Jr. with Fraudulent Solicitation and Misappropriation of $800,000+ in Customer Funds

Overview

CFTC charges Smith with providing false account statements to his customers and using at least $800,000 of his customers’ investment money to pay for personal expenses. CFTC claims that Smith traded hardly any of the funds in his customers’ accounts. Additionally, Smith is charged with luring customers in to his trading scam by promising too-good-to-be-true returns on investments, as well as using online media websites like YouTube.com to promote his corrupt trading program. The Court ordered a freeze of assets held or controlled by Smith and relief defendants Angela A. Duty Smith and Tigre Systems, Inc.

Major Takeaways

To view the Order, click here.

To view the Complaint, click here.

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CFTC Charges Virginia Resident Ronald W. Smith, Jr., Doing Business as Safeguard 3030 Investment Club, in Forex Fraud Scheme

Smith allegedly misappropriated approximately $800,000; court orders defendants’ assets frozen.

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today charged Ronald W. Smith, Jr., of Vansant, Va., doing business as Safeguard 3030 Investment Club, with operating a Ponzi scheme involving the fraudulent solicitation of at least $800,000 from at least 34 customers in connection with off-exchange foreign currency (forex) trading. The CFTC complaint also charges the defendant with misappropriating approximately $800,000 of customer funds for personal use and to pay out purported profits and with issuing false customer statements to conceal the fraudulent misuse of funds.

Two relief defendants, including Smith’s wife, named in the federal lawsuit

The Honorable James P. Jones of the U.S. District Court for the Western District of Virginia, on February 23, 2010, the same day the complaint was filed, entered an order freezing assets held or controlled by Smith and relief defendants Angela A. Duty Smith andTigre Systems, Inc. (Tigre) and prohibiting document destruction. The order also requires Smith and the relief defendants to account for assets. The CFTC complaint names Angela Smith and Tigre as relief defendants because they allegedly received customer funds to which they had no entitlement. Relief defendant Duty Smith, the treasurer of Tigre, is defendant Smith’s wife.

Defendant Smith allegedly used a video posting on www.youtube.com to lure and solicit customers

Specifically, the CFTC complaint charges that, since at least January, 2009, defendant Smith fraudulently operated a forex trading scam, luring customers to trade managed forex accounts or pooled forex investments by claiming forex trading success and offering promises of quick and large returns, such as 30 percent in 30 days. Smith allegedly claimed that 95 percent of his trades are winning trades. Smith also used a website and a video posting on www.youtube.com to solicit customers, according to the complaint.

In reality, however, Smith used little, if any, of the funds to trade forex. Instead, he used customer funds for personal expenses, such as for pool services, carpeting and furniture, according to the complaint. Customer funds also were allegedly used for purported profit payouts and for business expenses.

Relief defendants Tigre and Duty Smith opened and maintained the bank account into which defendant Smith directed customers to deposit their funds. As further alleged, no funds from this bank account appeared to be directed to any trading; instead the account was used as a personal checking account of the Smiths.

Judge schedules preliminary injunction hearing on March 5

Judge Jones ordered defendant Smith to appear in court on March 5, 2010, at 10:00 a.m. for a preliminary injunction hearing. The CFTC, in its continuing litigation, seeks restitution, disgorgement of ill-gotten gains, civil monetary penalties and a permanent injunction against further violations of the federal commodities laws.

The following CFTC Division of Enforcement staff are responsible of this case: August A. Imholtz III, James A. Garcia, Kassra Goudarzi, Michelle Bougas, Kara Mucha, Michael Solinsky, Gretchen L. Lowe and Phyllis J. Cela.

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Other forex law blog articles include:

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.

March 8, 2010 | Filed Under Forex Fraud

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Recent Issues with NFA Annual Questionnaire | Forex Law Blog

As we discussed in an earlier post on NFA Annual Questionnaire, NFA Member Firms are required to complete the questionnaire on an annual basis.  The information helps the NFA in a variety of ways and the NFA encourages members to update their questionnaire on a regular basis, although firms are only required to complete it, at a minimum, on the anniversary of their NFA Membership date.

Number of Half-turn Trades Issue

One issue that we are seeing clients deal with is the last question which applies to commodity trading advisors (CTAs) and commodity pool operators (CPOs).   The question is as follows:

For CTAs and CPOs only: Provide the following information for accounts held by CTAs and/or CPOs: How many total domestic futures and options trades (half-turns) did your firm place directly with an FCM in the last 12 months? Please include trades for customer, commodity pool (both regulated pools and pools exempt pursuant to CFTC Part 4 Regulations) and proprietary accounts, but do not include trades that were actually placed by another money manager on behalf of any of these accounts.

The issue is that the question asks for the total amount of half-turn trades were completed over the last 12 months.  This could be an absolutely huge number and it would be onerous for a CTA or a CPO to go back and actually count each trade (unless the broker/clearing firm was keeping track for the CTA or CPO). Accordingly, I have now talked with the NFA twice about this issue and they have confirmed that an approximate or estimated number is sufficient for the purposes of the questionnaire.  While such informal guidance is not binding, it seems like the NFA wants to have a general idea of the trading volumes and is not going to “ding” a manager if the exact number is not determined.

Issues for Forex CTAs and Forex CPOs

Even before the forex registration regulations were proposed, many forex-only managers registered with the CFTC as either forex CTAs or CPOs.  I asked the NFA compliance department how such managers should answer the above question as would not make sense in the spot forex context.  The NFA said that such managers should answer the above question by placing a 0 (zero) in the appropriate box (assuming there was only spot forex trading).

If you have other questions or issues when you are completing the annual questionnaire, you can either call the NFA or your compliance professional.  Also, please let us know what your issues are so we can update this article accordingly.

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Other related NFA compliance articles include:

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.


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March 2, 2010 | Filed Under Forex Resources

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NFA Talks with CFTC about Proposed Forex Leverage Reduction

President of NFA Dan Roth and CFTC Commissioner Jill Sommers Discuss Leverage Proposal

On Friday, Dan Roth, the president and CEO of the National Futures Association met with CFTC Commissioner Jill Sommers regarding the proposed forex regulations. According to the text of the CFTC comment file regarding the meeting, the discussion primarily centered around the reduction in leverage from 100:1 to 10:1 which has created a backlash from the retail spot forex industry.

Many groups within the industry suspect that the CFTC was trying to force retail investors into the currency futures markets, but industry comments have revealed that if leverage is reduced in such a manner, U.S. retail traders are likely to move to overseas brokers who will offer greater leverage.  This meeting may be a sign that the regulators are taking the comments of the industry to heart.  We will keep reporting on this issue.

The full text of the comment file is reprinted below and can also be found here.

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MEMORANDUM

TO: Comment File

FROM: Commissioner Jill Sommers

DATE: February 26, 2010

SUBJECT: Proposal to Regulate Off-Exchange Retail Foreign Exchange Transactions and Intermediaries

On February 25, 2010, Commissioner Sommers met with Dan Roth of the National Futures Association.  The Commission’s proposed rulemaking regarding the regulation of retail foreign exchange transactions and intermediaries was discussed, primarily with respect to the proposal to restrict leverage in customer accounts to a 10-to-1 limit.  Marcia Blase and Andrew Morton of commissioner Sommers’ staff were also present at the meeting.

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Other forex law blog articles include:

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.

March 1, 2010 | Filed Under Forex Press Release, forex registration

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