Colorado CTA CFS Charged with Misusing Customer Funds, Submitting False Material to NFA, Failing to Supervise, Among Other Allegations

CFS Capital Management LLC and Principals Violate NFA Compliance Rules, Forced to Withdraw from NFA Membership

On June 30, 2009, NFA filed a formal Complaint against Colorado commodity trading advisor (CTA) CFS Capital Management LLC (CFS) and two of its principals, Andrew G. Elrod and Brian G. Elrod. In the Complaint, NFA alleged that CFS and the Elrods violated several NFA compliance rules, including the misuse of customer funds, submitting false and misleading material to NFA, and failure to supervise the firm’s futures and forex operations. In a settlement with the NFA, Andrew G. Elrod agreed to permanently withdraw from NFA membership, and Brian G. Elrod agreed to be barred from NFA membership for 5 years and must pay a fine of $30,000 in the event that he reapplies in 5 years. The following outlines the different charges followed by our recommendations on how you and your firm can avoid these issues.

Count I: Violation of NFA Compliance Rules 2-36(b)(1), (b)(6), and (c): Misuse of Customer Funds

CFS was charged with arbitrarily transferring $350,000 of customer funds to customers accounts to conceal the fact that it lost money for some of its customers. NFA alleged that CFS deceived its customers by telling them that the transfer was due to a clearing fund error.

Our recommendations: NFA is very clear about the illegality of misusing customers’ funds. Your customers are trusting you with large sums of their money. Bottom line: do not try to conceal your wrongdoings. If you are losing money, do something about it. Properly notify your customers and do your best to remedy the situation.

Count II: Violation of NFA Compliance Rules 2-2(a) and 2-26(b)(1): Failing to Follow the Terms of the Disclosure Document and Management Agreement

CFS’s Disclosure Document stated that no management fee would be charged for funds allocated to the Capital Preservation and Growth trading program, one of CFG’s trading programs. However, in June 2008, customers were charged $584 in management fees. Also, the management agreement stated that customers would be charged a 10% monthly incentive fee and that CFS could raise this to 20% as long as it gives customers a 7-day notice. In June 2008, CFS began charging its customers the 20% without give them notice, creating over $11,000 of overcharges. Customers were not reimbursed until a year after the overcharges took place.

Our recommendations: Disclosure Documents are taken very seriously by NFA. Do not make promises in them which you do not plan on keeping. If you state that you will not charge your customers a particular fee, do not charge them that fee! If you promise advanced notice, it is to your advantage to actually give it.

Count III: Violation of NFA Compliance Rules 2-29(b)(1), (b)(2), (b)(3), (b)(5)(i), 2-36(b)(1), and 2-22: Using Fraudulent and Misleading Promotional Material

Portions of CFS’ promotional materials downplayed the risks of loss and made claims of profitability that were not consistent with CFS’ actual results. Also, examples in the pamphlets for the CPG program omitted the effect of the 10%-15% fee that CFS stated it would charge on the amount of funds allocated to purchase government securities that were a part of CFS’ trading program. However, instead of charging this fee on only these funds, CFS applied the fee percentage to the customers’ entire invested funds. CFS also made claims that the NFA approved its trading programs, which the NFA does not do.

Our recommendations: NFA makes it very clear that with any statement of potential profit, there must be an equally prominent statement of potential loss. This is very important when putting your promotional materials, such as your website, together. Also, do not charge your customers a fee based on a different amount than initially promised. Remember, your customers are investing their money and their trust in you. The truth will always come out.

Count IV: Violation of NFA Compliance Rules 2-2(f) and 2-36(b)(5): Willfully Submitting False or Misleading Information to NFA.

The Elrods told the NFA that they never charged their customers incentive fees, when in fact they did.

Our recommendation: Do not lie to NFA. NFA repeatedly turns to this compliance rule, which is found in a number of Complaints. It’s just not worth it.

Count V: Violation of NFA Compliance Rules 2-9(a) and 2-36(e): Failing to Diligently Supervise

Andrew G. Elrod represented himself as the “face” of CFS and Brian G. Elrod was the president of CFS and represented himself as being in a supervisory role. According to the above compliance rules, the Elrods had the duty to supervise and ensure the compliance of their firm. Due to the Counts listed above, they did not properly supervise their firm.

Our recommendations: NFA’s compliance rules are important and exist for a reason. Don’t take on a supervisory role if you are unable to comply with NFA’s procedures.

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

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NFA permanently bars Colorado firm CFS Capital Management LLC and sanctions its principals

February 8, Chicago - National Futures Association (NFA) has accepted CFS Capital Management LLC’s (CFS) settlement offer to permanently withdraw from NFA membership. CFS is a Commodity Trading Advisor located in Lakewood, Colorado. Andrew G. Elrod, a principal of CFS, was also ordered to permanently withdraw from NFA membership with no findings that he committed the allegations as charged in an NFA Complaint. Brian G. Elrod, president of CFS and a listed principal, was barred from NFA membership for a period of five years. The Decision, issued by an NFA Hearing Panel, is based on the Complaint filed in June 2009 and a settlement offer submitted by CFS, Andrew Elrod and Brian Elrod.

The Panel found that CFS and Brian Elrod misused customer funds, submitted false and misleading material to NFA and failed to supervise the firm’s futures and foreign currency exchange (forex) operations. Additionally, the Panel found that CFS and Brian Elrod used fraudulent and misleading promotional material and that CFS failed to follow the terms of the firm’s disclosure document and management agreement.

Brian Elrod must also pay a fine of $30,000 in the event he reapplies for NFA membership after the five-year bar.

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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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.

February 12, 2010 | Filed Under Forex Press Release, Uncategorized

 

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