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:

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:

• Foreign Exchange Dealers Coalition (FXDC) Evaluates New CFTC Rules On New Website
• Firm Charged for Illegal Off-Exchange Forex Trading
• Retail Forex Registration Regulations Proposed
• Series 34 Exam

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.

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:

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:

• 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.

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.

Overview

• CFTC filed complaint against Willie Lee Cloud, Jr. (Cloud), principal and agent of C & R Financial, Inc. in Texas, for soliciting at least $200,000 from nine investors which he claimed would be put in individual forex trading accounts
• Cloud advertised to customers that he would “double or triple” their investments in one year
• Instead, Cloud put approximately $169,000 intro trading accounts in his own name; of this amount, Cloud lost over $88,000 trading forex and withdrew over $81,000 from the accounts, leaving the accounts empty
• Cloud sent false account statement to investors claiming that their “accounts” were up 259% in less than 6 months
• Cloud charged with misappropriating customer funds

Violations

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

• cheating/defrauding customers
• providing customers with false account statements
• deceiving customers
• not acting in good faith

Potential Punishment

• Court order finding that Cloud and his company violated Section 4b(a)(2)(A)-(C) of CEA
• Permanent injunction prohibiting Cloud and C & R Financial and any of their agents, servants, employees, assigns, attorneys, and persons in concert or participation with them from essentially:
  • trading any commodity (commodity futures, options on commodity futures, commodity options, forex contracts)
  • having any of the above commodities traded on their behalf
  • controlling or direction trading, in any capacity, for the above commodities
  • soliciting , receiving, or accepting funds from any person for the purpose of trading the above commodities
  • applying for registration with or claiming exemption from CFTC
  • acting as a principal, agent, or other officer/employee of anyone registered, exempted from registration, or required to be registered with CFTC
• Court order for them to repay the investors and to rescind all contract/agreements with any of the investors whose funds were misappropriated
• Court order to pay a fine for each violation, and other costs/fees

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:

• CFTC Stops Another Ponzi Scheme
• Capital FX LLC Violates NFA Compliance Rules, Permanently Banned from NFA Membership
• Forex Fraudster Jailed For Violating Court Orders in CFTC Anti-Fraud Action

Related Blogs

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• Essentials of Foreign Exchange Trading | Insider's to Forex …
• The Growth of Managed Futures – Choosing the Right CTA For You

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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

• Hallmarks of a forex scam are ridiculous returns and blatantly false information about trading
• Prominence given to internet activity including YouTube videos (for more information, see NFA’s new social media policies)
• Ultimately, the big count was under 4b(a)(2)(A)-(C) of the Commodity Exchange Act for fraudulent solicitation, misappropriation, and false statements

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:

• Capital FX LLC Violates NFA Compliance Rules, Permanently Banned from NFA Membership
• Forex Fraudster Jailed For Violating Court Orders in CFTC Anti-Fraud Action
• Forex Hedge Fund Fraudsters Fined by CFTC
• Foreign Exchange Currency Fraud - CFTC Alert on Forex Fraud

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:

• Mallon P.C. Creates NFA Self-Exam Checklists for Forex CTAs, CPOs, and IBs
• Failure to Comply with NFA Rules Could Result in NFA Membership Suspension or Expulsion and/or Fines
• Retail Forex Registration Regulations Proposed

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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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:

As we’ve discussed in related posts, the CFTC has proposed rules regulating the off-exchange spot forex industry (see Retail FOREX Registration Regulations Proposed). The CFTC has requested comments from the public and there are currently about 100 public comments on CFTC’s website written in response to the new rule. The comments mainly focus on:

• Leverage reduction rule (approx. 75/100 comments)
• Forex industry becoming inaccessible to smaller traders (approx. 35/100 comments)
• Threat of investors moving their money to offshore firms (approx. 25/100 comments)
• Opposition to government interference/regulation (approx. 20/100 comments)

[Note: over the weekend the CFTC published some of the backlog of comments it received. Much of this article was written prior to review of these extra comments (which total approximately 3,663). We will provide an update on such comments in the future.]

To view all of the comments, click here.

The following is our summary of the comments which have been made thus far.

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Leverage Reduction

Approximately 75 of the 100 comments mention a strong or very strong opposition to the new leverage proposal of 10:1. The issue with a reduction of leverage to 10:1 is that investors will have to invest much more money in order to trade what they can currently trade with less capital. Comments regarding leverage include phrases like “strongly object”, “terrible idea”, “unintelligent”, and “strongly oppose”.  The majority opinion is that people should have the freedom and the choice to trade with a higher amount of leverage, and that the federal government’s attempts to lower leverage to 10:1 are “unnecessary” and “intrusive”. John Yeatman Jr. writes,

Please DO NOT reduce leverage in US Forex trading to 10:1…THIS WOULD HAVE A MAJOR IMPACT ON TENS OF THOUSANDS OF TRADERS AND THEIR FAMILIES WHO RELY ON 100:1 LEVERAGE AVAILABILITY TO SUPPORT THEIR FAMILY AND THIS ECONOMY. Please do your part in helping to keep this country great and it’s [sic] freedoms true BY NOT ALLOWING ANYTHING LESS THAN 100:1.

Other comments regarding the leverage proposal include:

• … strongly objects to new leverage of 10:1
• … proposed reduction not consistent with futures, which allow a significantly higher leverage
• … virtually no flexibility trading at 10:1 leverage unless trader has gigantic account balance
• …reduction in leverage not fair to public…bad for America
• … new leverage line “out of line with general idea of protecting consumers”
• …limiting leverage to 10:1 is “a bad idea”
• …current leverage limit is “more than enough”
• … CFTC is “unintelligent” to change leverage to 10:1
• … terrible idea to lower leverage
• … leverage change is “perversion of the free markets”
• …leverage restriction “grave injustice” for many who work to secure the American dream of prosperity for themselves and families
• …leverage limits would delay achievement of financial independence
• …leverage not dangerous; misuse is
• …leverage decrease will kill forex business and worsen economic situation in states and worldwide
• …amount of leverage needs to be at discretion of investors

Smaller Traders

Another argument is that lower leverage will making trading inaccessible for smaller traders but leave the door wide open for larger institutions, since lower leverage requires higher margin (meaning that more money needed to be invested in order to trade). Comments regarding this proposed rules potential affect on smaller traders include:

• …will stamp out small-time investor
• …drive smaller guys out of market or offshore
• …anything lower would be insane for small-time traders
• …gets rid of investors with small capital so rich can stay rich and poor can stay poor
• …pushes out small-time investor
• …denies small trader opportunity
• …disparate and unintended impact on small traders with lower capital
• …leave the small, independent traders alone
• …small businesses are heart of US economy
• …all small-scale actors will be stifled
• …10:1 leverage will have unintended consequence of locking out hundreds or thousands of small traders
• …quit treating the small guy like an idiot
• …are you trying to allow only rich to trade forex?

Government Interference/Regulation

Many of the comments suggest anger with the government for interfering too much with the forex industry. Michael Thomas writes,

I do not live here in this “free” society to have someone from the government babysitting me. The message that your proposed rules send is that 1) we are not free to make our own choices. 2) The federal government believes that we the general public are too stupid to make decisions for ourselves….I don’t need you, or do I want you getting in the way of my being able to trade as I wish in the United States of America.

Other comments regarding an opposition to increased government interference include:

• …don’t add more government
• …not intention of our ancestors to create government which controlled/regulated all aspects of citizens’ lives
• …the government has no right to control my ability to make profit
• …unnecessary for Federal government to regulate against individual’s ability to take risks
• …don’t need government protection; we’re adult traders
• …not responsibility of government to take away choice from consumers
• …”big brother” attempt to protect people from “evil” traders and forex hedge funds
• …stay out of trying to run my personal life

In terms of the new regulation proposal as a whole, some people support more industry regulation while others are against the idea entirely. Bradford Smith writes,

I feel that regulation of firms is needed…regulation is needed to help people understand the risks such as risk disclosure. [Regulating] the  retail forex market in a similar fashion to how commodities and futures are regulated is a good idea. Stopping companies from trading against their clients is a high priority issue that needs to be stopped.

John M. Bland, on the other hand, who views the proposal as “unfair”,  writes,

…the CFTC has done a lot in recent years to correct many of the problems in the industry…this decision is unfair and anti-competitive.

Other comments regarding opposition to the proposal and/or government interference include:

• …new rules will destroy US financial firms business and lead to loss of thousands of jobs during the worst economy in decades
• …regulation should be aimed at encouraging economic growth and innovation vs. restricting it
• …against proposal
• …how did forex regulation get in the Farm Bill?
• …whoever initiated proposal has no knowledge of forex…this rule is utter nonsense…rules for forex in the USA are already quite strict
• …you are busybody bureaucrats with intrusive minds…you are interested in only one thing: bureaucratic power and complete control of every microscopic aspect of life…you are monsters
• …rules will harm people who make an honest living trading currency
• …important to educate and inform, not regulate and ban
• …proposal is a disaster-in-warning for traders
• …if it ain’t broke, don’t fix it
• …proposal is lunacy-communist-legislation
• …I do not support the proposal…proposal closes doors for forex investors and will make forex market accessible to financial institutions only
• …vehemently against new, narrow-sighted legislation

Offshore Threat

In at least 25 of the comments, the public is arguing that the new rules, specifically lower leverage, will drive traders offshore to overseas brokers who may or may not be regulated. Further, a major argument is that the forex industry in the United States will essentially cease altogether as a result of traders moving their forex activities offshore. Comments regarding this offshore threat include:

• …will send business to London and unregulated offshore markets
• …consumers will take accounts offshore
• …will drive smaller guys out of markets entirely or to offshore, unregulated brokers
• …when traders move accounts offshore, CFTC and NFA will have no control of clients’ trading
• …I’ve already moved my account offshore
• …people will do business with offshore brokers

Agreement/Disagreement with Proposal

Many of the comments discuss that education about forex and trading risk is the best solution. On a similar note, many traders expressed the fact that anyone who trades in the forex market is aware of the inherent risks, so people who decide to trade are willing to take these risks. There is a general consensus that it is the individual’s, and not the government’s, responsibility to evaluate the level of risk that s/he is willing to take. Remember, higher leverage will be reflected in both your profits and your losses. Thus, if you have high leverage and profit, you will profit a lot more than if your trading had not been leveraged. But the same goes for losses; if you lose, you will lose a lot more based on the higher leverage.

Conclusions Thus Far

The biggest concern thus far is the proposed reduction in leverage to 10:1. Almost every comment mentioned a strong opposition to this rule. Furthermore, most people seem to be concerned that the new regulations will significantly decrease forex activity in the US—if not kill it off—and drive most investors overseas to offshore firms. We will continue to monitor comments received until the March 22 due date. Please leave us a comment below with your feedback. Should you feel inclined, you may submit your own comment to the CFTC through the methods listed below.

To view CFTC’s proposed rules, click here.

How to Comment

Comments must be received by March 22, 2010 and can be submitted the following ways:

• Through the Federal eRulemaking Portal: http://www.regulations.gov/search/index.jsp. Follow the instructions for submitting comments.
• By e-mail: secretary@cftc.gov. Include “Regulation of Retail Forex” in the subject line of the message.
• By fax: (202) 418-5521.
• By mail: Send to David Stawick, Secretary, Commodity Futures Trading Commission, 1155 21st Street, NW., Washington, DC 20581.
• Courier: Same as Mail above.

(Note that all comments received will be posted without change to http://www.cftc.gov, including any personal information provided.)

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Other related forex law articles include:

• Forex Industry Overwhelmingly Against Lower Leverage
• Retail Forex Registration Regulations Proposed
• Series 34 Exam

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.

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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Other related forex law articles include:

• Failure to Comply with NFA Rules Could Result in NFA Membership Suspension of Expulsion and/or Fines
• NFA Interpretive Notice Re: Past or Projected Performance
• Forex Dealer Member Barred From Industry
• Retail Forex Registration Regulations Proposed
• Series 34 Exam

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.