FCM failed to supervise foreign IB

The CFTC has filed and settled charges against registered Futures Commission Merchant (“FCM”) Velocity Futures, LLC, for failing to adequately supervise the third-party handling of its customer accounts.

According to the CFTC, from July 2003 through December 2007, the FCM neglected to create and use a monitoring strategy for customer accounts held by third parties. Such a system would, among other things, protect customer accounts against “churning”–an abusive and illegal practice defined by excessive trading on a discretionary account to generate commissions. Velocity particularly failed to thoroughly research and supervise foreign Introducing Broker (“IB”) and Commodity Trading Advisor (“CTA”) El Toro and its principal Norbert Grupe.

The order states that the FCM entered into an agreement with El Toro to trade customer accounts after only a cursory background check. However, when Velocity later learned an individual with the same name as the firm’s principal was a convicted felon in Florida, it neglected its responsibility to investigate further. This allowed Grupe to continue to introduce and trade customer accounts through 2007, even though he was in fact a convicted felon and a fugitive.

While those accounts remained under Grupe’s control, Velocity had no system to review El Toro’s trading methods. Any adequate system would have spotted the commission-to-equity ratios that signaled potential churning. However, the FCM never mentioned or challenged the IB’s handling of customer accounts.

The final order requires Velocity to pay an $180,000 civil monetary penalty. It also places a cease and desist order on the FCM, and specifies that the firm create and implement supervisory procedures.

Read more about this CFTC enforcement action.
Creative Commons License photo credit: *ade

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