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NFA forex dues to increase by February

Felix Shipkevich — Fri, 02 Dec 2011 14:46:08 +0000

The CFTC has approved amendments to NFA bylaws 1301 and 1302, as well as the related interpretive notice “Forex Transactions”. These changes modify the existing annual membership fee structure in order to more effectively account for increased auditing costs. The amendments were initially proposed to the CFTC by rule submission letter in early September.

Under the new fee structure, dues for non-Forex Dealer Member (“FDM”) NFA members will increase from $750 to $2,500. This includes Introducing Brokers (“IBs”), Commodity Pool Operators (“CPOs”) and Commodity Trading Advisors (“CTAs”) that are also designated as forex firms.

FDMs will be subject to a .002% fee on all transactions processed through the NFA’s new reporting platform (Forex Transaction Reporting Execution Surveillance System, or “FORTRESS”). However, the NFA is eliminating a fee of .0002% on the notional value of each initiating forex transaction. Any FDM for which the NFA is not the designated self-regulatory organization will see an increase in annual membership dues from $13,500 to $25,000. Those FDMs for which the NFA is the designated self-regulatory organization will abide by a new graduated schedule based on gross revenue to determine their annual dues.

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NFA finalizes forex amendments

Felix Shipkevich — Mon, 31 Oct 2011 22:00:47 +0000

NFA finalizes forex amendments

The NFA has finalized several proposed amendments to rules governing forex dealer members (“FDM”). These amendments were first proposed September in rule submission letters to the CFTC. One set of changes will come into effect next month, while the second will not be in place until January.

The first set of amendments concerns electronic trading systems and assignee/transferee rules. Notice for Compliance Rule 2-36(e): Supervision of the Use of Electronic Trading Systems has been amended to require forex firms to “accurately and completely” discuss their trading platforms in promotional materials, monitor their proprietary trading activities, and notify all customers affected by any electronic trading disruption, no matter how brief.

The amendments to NFA Compliance Rule 2-40 on assignee/transferee rules add reporting obligations for forex account assignees and transferees. FDMs and IBs that accept assigned or transferred accounts pursuant to bulk transfer rules must obtain personal and financial information from retail clients, provide retail clients with disclosures, and obtain signatures within 60 days of the transfer. Amendments to these rules and notices go into effect on November 15, 2011.

The second set of amendments affects NFA Financial Requirements Section 13 and its related interpretive notice. These amendments require forex dealer members to file daily, monthly, and quarterly reports.

The daily reports must include:

details of the FDM’s capital position;
an assessment of its ability to meet obligations to retail forex customers;
the net aggregate value for all open futures and options forex positions.

The monthly reports must now include:

operational information;
the number of retail and ECP forex customers;
number of active customers, both US and foreign domiciled.

The quarterly reports must include:

up-to-date performance disclosures;
total number of non-discretionary retail forex customer accounts, including the percentage of profitable and not profitable accounts.

The amendments will become effective on January 2, 2012, and the first report is due on January 17.

Read more about these NFA forex amendments.

photo credit: joeltelling

CPO Denver Difference subject to NFA emergency action

Felix Shipkevich — Fri, 21 Oct 2011 12:30:21 +0000

CPO Denver Difference subject to NFA emergency action

The NFA has issued an emergency action against Colorado-based Commodity Pool Operator (“CPO”) Denver Difference Energy, LCC, and the firm’s principal and Associated Person (“AP”) Mukeeze Muwanga. The NFA states that the CPO has failed to cooperate with an investigation into the firm’s finances.

According to the Member Responsibility Action (“MRA”)/Associate Responsibility Action (“ARA”), in April 2011 the CPO filed a financial statement showing the pool received $2,500 in limited partner funds. However, the statement was not accompanied by the required disclosure document, triggering an unscheduled NFA audit. When the audit began earlier this month, the NFA requested bank and trading records for Denver Difference’s pool. No account held more than $1000, and one had a negative balance. The MRA/ARA says that auditors knew at least one participant was still owed $3,000 by Muwanga and his CPO, which the AP had thus far failed to return.

The NFA alleges that the financial records showed suspicious withdrawals from company accounts and deposits into Muwanga’s personal bank account. When auditors demanded additional bank records, the AP ignored the request and filed to withdraw the CPO’s NFA membership. These actions lead the auditors to conclude that Muwanga had improperly handled client assets, and prompted this emergency action.

The MRA/ARA suspends Denver Difference and Muwanga from NFA membership, and prohibits them from disbursing or transferring any customer funds without approval. The actions will remain in effect until the members can prove that they are in compliance with all Association regulations. The CPO and AP may request a hearing to plead their case.

CTA receives NFA BCC complaint

Felix Shipkevich — Wed, 19 Oct 2011 20:39:39 +0000

CTA receives NFA BCC complaint

The NFA’s Business Conduct Committee has issued a complaint against Commodity Trading Advisor (“CTA”) Golden Forex. According to the NFA, Golden Forex submitted misleading information to the Association about its listed Associated Person (“AP”), Kathie Bui.

Golden Forex is a California based CTA, and a member of the NFA since May 2009. The company is owned by Linh Ngoc Nguyen, and Nguyen is listed as the firm’s principal, but not its AP. The only person ever listed as the firm’s AP is Kathie Bui. The complaint alleges that in June 2009, Bui left Golden Forex, and requested that Nguyen remove her listing as the AP in NFA records. Nguyen, as the only person with access to the company’s NFA Online Registration System account, was responsible for doing so. After repeated requests, Nguyen indicated to Bui that her name had been removed from the CTA’s AP list.

However, the NFA claims that in June 2011 Bui learned that she was in fact listed listed as Golden Forex’s AP. She again contacted Nguyen, who told her the firm would have to withdraw from the NFA if she was removed, and offered to pay her if she would remain registered. Bui refused, and contacted the NFA. The NFA then conducted an audit, which confirmed Bui’s story.

Golden Forex withdrew its NFA membership in September 2011. Nguyen has the opportunity to submit an answer to the complaint. If the committee finds against Nguyen, the defendant may be censured, fined, or permanently barred from NFA membership. So far, no other allegations have been made against the CTA.

Unregistered CPO accused of commodity fraud

Elan Mendel — Fri, 30 Sep 2011 21:21:55 +0000

Unregistered CPO accused of commodity fraud

The CFTC has charged Oscar Hernandez and his companies Midway Trading Company and Conquest Investment Group with operating a commodity pool Ponzi scheme. The defendants did business as unregistered Commodity Pool Operators (“CPO”) and allegedly misappropriated $3 million from participants’ funds.

According to the CFTC, between 2006 and 2009, Hernandez told friends and acquaintances that he had developed a successful futures day-trading program, and that his investments in commodities and overseas stock markets were returning 180 percent annually, risk-free. He failed to ever disclose the risks associated with commodity futures trading, and exaggerated the potential for profit. In this manner, he was able to solicit more than $3 million from various individuals.

Allegedly, when the CPOs placed the participants’ funds in commodity futures trading accounts, they lost $1.3 million. The defendants also misappropriated another $1.8 million for personal use, to make car, mortgage, and credit card payments. To perpetuate the scheme, funds were also misappropriated to make Ponzi payments to participants expecting profits.

The enforcement action is a joint effort between the CFTC, the U.S. Attorney’s Office, and the FBI. The USAO has filed criminal charges against Hernandez as well. The CFTC is seeking restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, civil monetary penalties, and permanent injunctions against further violations of federal commodities laws from the CPOs.

Accountant fined for inadequate FCM audit

Felix Shipkevich — Mon, 26 Sep 2011 14:31:22 +0000

Accountant fined for inadequate FCM audit

The CFTC has filed and settled charges against public accounting firm McGladrey & Pullen, LLP, and firm partner David Shane. When McGladrey and Shane performed an audit on registered Futures Commission Merchant (“FCM”) One World Capital Group, LLC, they failed to report the many misstatements and inadequacies in One World’s financials and procedures. The firm has been ordered to pay $900,000 in civil monetary penalties and restitution to the FCM’s defrauded customers, and Shane will pay a separate penalty personally.

In 2006, McGladrey issued an opinion that One World’s financial statements were free from material misstatements, and stated that it did not find any material inadequacies in the firm’s internal controls. According to the CFTC order, the FCM had both misstatements in its financial records and significant problems in its internal controls. Additionally, the order finds that McGladrey did not conduct its audit in compliance with generally accepted auditing standards (GAAS).

One World’s financial statements contained a number of inaccuracies. For example, the 2006 Statement of Financial Condition asserts that the FCM’s liabilities payable were over $6.9 million, in in fact that figure was closer to $15 million for just forex customers alone. More generally, One World’s financial statements did not reflect that the firm served as a counter party to its forex customers in over 90% if its business.

Furthermore, McGladrey did not report the many failings of One World’s internal controls and accounting system. The FCM did not keep a customer ledger, and the system did not properly identify the number of forex customers or the amount of customer liabilities. These inadequacies led to the misstatements made during the 2006 audit.

In 2007, the CFTC sued One World, and the FCM shut down in 2007. The CFTC enforcement director is adamant that auditors be held accountable for their work: “Auditors of Commission registrants perform a critical gatekeeper role in protecting the financial integrity of the futures markets and the investing public. Auditors must understand the business operations of their clients, and conduct financial audits in accordance with GAAS. As demonstrated by today’s action, the Commission will not hesitate to impose significant sanctions on auditing firms and hold individuals personally responsible when they fail to adhere to their professional obligations as regrettably happened here.”

As part of its settlement, McGladrey must hire an independent consultant to review and improve its auditing program and develop a mandatory continuing professional education program which focuses on FCMs that conduct forex business.

CTA charged with solicitation fraud, misrepresentation

Felix Shipkevich — Fri, 16 Sep 2011 15:54:51 +0000

CTA charged with solicitation fraud, misrepresentation

The CFTC has brought charges against Commodity Trading Advisor (“CTA”) Paron Capital Management and the firm’s principal James D. Crombie for alleged false statements made to the NFA during an audit and for fraudulent solicitation.

According to the CFTC brief, between August 2010 and March 2011 the defendants used various promotional materials, including a PowerPoint Presentation called the “Flip-Book”, a monthly newsletter, and a Due Diligence Questionnaire to solicit clients to invest with the CTA. These materials significantly misrepresented Crombie’s trading expertise and performance history. Crombie and Paron falsified Crombie’s trading history and the firm’s total assets, among other things.

In March 2011, the NFA received anonymous complaints accusing the defendants of using fictitious performance data and alerting the Association to past lawsuits against Crombie when he worked for another trading firm. Accordingly, the NFA commenced an investigation. When shown the promotional materials in use at Paron, auditors requested evidence verifying the historical returns cited by Crombie. Allegedly, Crombie provided the NFA with false statements, which the NFA discovered when they asked the entities in question to provide copies of the same statements. Crombie also denied the existence of any lawsuits against him, another false statement.

The NFA brought a Member Responsibility Action (MRA) and an Associated Responsibility Action (ARA) against Crombie and the CTA. However, the charges were settled out of court, and Crombie neither confirmed nor denied the allegations. The CFTC is seeking return of ill-gotten gains, restitution to defrauded customers, civil monetary penalties, and trading and registration bans. No figure is placed on how much money the defendants actually fraudulently solicited.

Read our ongoing coverage of the Crombie/Paron case.
photo credit: redjar

FCM principal barred from NFA

Felix Shipkevich — Wed, 14 Sep 2011 19:13:03 +0000

FCM principal barred from NFA

The Appeals Committee of the NFA has announced a decision to bar Robert F. Gray, principal of ex-Futures Commission Merchant (“FCM”) Forex Liquidity, permanently from NFA Membership. The FCM and Forex Dealer Member is currently under receivership in California.

According to the NFA, during a 2007-2008 investigation, Gray allegedly told the Association that Forex Liquidity’s capital rested in a $50 million bond from ABN AMRO, currently held by a registered broker dealer called Malory Investments. He provided account statements to support this claim, and the NFA received confirmation from Malory that it held this bond. However, in late November of 2007, the NFA received word from FINRA that it was investigating Malory after several states brought regulatory actions against the firm. Gray was instructed to move the bond into a U.S. regulated entity, and Gray told the investigators he had moved it to Commonwealth Financial Network. When he produced supporting documents, they were labeled Commonwealth Financial P.M.S., an unaffiliated entity.

FINRA revealed that Commonwealth Financial P.M.S. was an unregistered broker-dealer, at which point Gray was ordered to move the bond into a U.S. bank. Rather than do so, Gray tried to prove that Forex Liquidity could meet its capital requirements without the bond. An NFA review revealed that this was false.

Gray has been barred from membership after an NFA Hearing Panel found that Gray not only failed to cooperate with, but provided false and misleading information to the NFA while the Association investigated Forex Liquidity. Gray also failed to adequately supervise the FCM’s financial health. However, the Panel noted that Gray was unaware that the purported location of the bond was false, but he was “completely inept at running a regulated business.” The Hearing Panel initially imposed a ten year membership ban on Gray, the the Appeals Committee extended the ban permanently based on the gravity of the principal’s misconduct.

Hunter and CTAs charged with futures and forex fraud

Elan Mendel — Mon, 12 Sep 2011 18:02:14 +0000

Hunter and CTAs charged with futures and forex fraud

The CFTC has obtained an emergency order freezing the assets of Toby D. Hunter and his companies, Prestige Capital Advisors and D2W Capital Management in connection with foreign exchange (“forex”) and commodity futures solicitation fraud charges. D2W and Prestige are both registered Commodity Trading Advisors (“CTAs”) The order prohibits the destruction of books and records, and Hunter has been ordered to appear in court on October 3, 2011.

According to the complaint, the North Carolina man and his two CTAs fraudulently solicited customers to invest funds in commodity futures, options on futures, and managed forex accounts beginning in April 2008. Hunter show prospective clients allegedly false historical returns, both via email and on the website BarclayHedge. Hunter later admitted that he had no data to back up statistics posted on the website. In this manner, Hunter was able to solicit $2.36 million from 17 people. This money was placed into bank accounts to be managed by CTA D2W.

The CFTC says that accounts managed by D2W traded at a net loss for the relevant period, but Hunter sent false account statements showing profits to his clients. In total, D2W customers lost $1.61 million, about 68% of their total funds. In 2010, Hunter formed a second CTA, Prestige, purportedly to trade spot currency, precious metals, commodity futures, and other financial instruments. He told clients that Prestige would not co-mingle investor funds, and posted allegedly false “Monthly Performance Updates” on BarclayHedge, enabling him to solicit $4.65 million. $1.16 million was lost in trading, $84,000 was returned to participants, $370,000 is still in Prestige accounts, and $3.04 million remains unaccounted for. At least one participant was sent a false account statement which did not reflect the substantial losses sustained in trading.

The NFA noticed inconsistencies in the CTAs’ accounts were noticed during an audit, the details of which were reported on in a previous CFTC Law story. The CFTC is seeking the return of ill-gotten gains, restitution to defrauded customers, civil monetary penalties, and trading and registration bans.

CPO/CTA SureInvestment suspended in NFA emergency action

Elan Mendel — Fri, 02 Sep 2011 20:50:41 +0000

CPO/CTA SureInvestment suspended in NFA emergency action

The NFA has taken emergency action against SureInvestment, LLC and Cosby Wood. SureInvestment, a registered Commodity Pool Operator (“CPO”) and Commodity Trading Advisor (“CTA”), and Wood, the firm’s Associated Person (“AP”) and principal, are suspended from NFA membership until further notice.

The NFA launched an investigation of SureInvesment following an action taken by the United Kingdom’s Financial Services Authority (“FSA”) against Benjamin Wilson, another SureInvestment AP. According to the NFA, throughout the investigation Wood and principal Tim Hirt not only failed to cooperate with the Assocation, they misled the auditors.

SureInvestment’s records show that it collected $4.3 million from capital investors and $1.5 million from commodity pool investors. However the NFA states that it can only account for approximately $1.1 million – all losses – from that $6 million that the CPO and CTA took. Accordingly, the NFA has issued a Member Responsibility Action and an Associate Responsibility action preventing SureInvestment, Wood, or any other person working on the firm’s behalf from disbursing or transferring funds without prior NFA approval.

Read more about this NFA enforcement action.
photo credit: Jason Rojas