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:
- 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.
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.
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