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REGULATORS & COURTS

Futures Ponzi Schemes Continue to Emerge

It looks like there is an epidemic of futures-related scams, with new ones coming to light every week. But the large number of incidents may be a result of regulators becoming more aggressive in investigating and taking action.

Since the last issue of OFI two weeks ago, the US Commodity Futures Trading Commission announced the following enforcement actions:

A federal court froze the assets of an Illinois Commodity Pool Operator run from Toronto, Canada. CFTC charged that Brookshire Raw Materials Management LLC and its Canadian managers – John M. Marshall and Stephen Z. Adams – took more than $4.6 million in a Ponzi Scheme from September 2006 to December 2008. They were supposed to invest client proceeds in a portfolio of commodity futures and forward contracts designed to replicate the investment methodology of corresponding indexes developed by another Brookshire firm. According to the CFTC, in December 2008 Messrs. Marshall and Adams closed their offices, destroyed company data stored on computer servers and failed to acknowledge redemption requests. The Ontario Securities Commission worked with the CFTC on the case. Regulators are seeking further penalties.

CFTC charged Hawaii-based Marvin Cooper and Billion Coupons Inc. with defrauding deaf people in a $4.4 million foreign currency scheme. Mr. Cooper allegedly attracted customers with promises of 15% to 25% monthly returns from foreign exchange trading. He lured 125 deaf Americans and Japanese, using his own deafness to relate to them. The CFTC says he spent more than $1.4 million of client money for such items as flying lessons and a $1 million home and used $1.6 million to pay out fake profits as well as commissions. A court froze his and the firm's assets and appointed a temporary receiver.

CFTC sought to freeze the assets of Mark Trimble of Edmond, Oklahoma, and his company, Phidippides Capital Management LLC, for deceiving some 60 investors in the Phidippides hedge fund. Mr. Trimble allegedly operated the $34 million fund from 2005 on and since at least October 2007 issued false account statements to cover up multi-million trading losses while paying redeemers from other investors' money. In addition, he is charged with taking over $1 million in management fees based on false reports of profits.

Stephen Obie, acting director of the CFTC enforcement division, says “The CFTC continues to zealously prosecute these lecherous schemes, so that as many assets can be preserved as possible as we fulfill our vital mission to protect customers from fraud and abuse.”

Frank Anthony DeSantis III of Florida was sentenced to 108 months in prison and over $2 million in tax penalties for wire fraud and conspiracy to defraud the Internal Revenue Service while operating and having a stake in several commodity investment and telemarketing schemes in Southern Florida. He misrepresented material facts to potential customers in order to convince them to invest in foreign currency options and deliberately failed to tell customers that more than 95% of customers lost money and that he was previously barred by the CFTC from acting as a commodities broker.

CFTC ordered a former employee of the Bank of America to pay a $360,000 penalty for false trading reports he submitted to the bank, in addition to a restitution of the $12 million loss he caused. Michael Moster, currently of New York, was a proprietary trader for the Bank of America in January 2004, when he falsely reported that he purchased 4,000 Treasury futures contracts. This concealed the risk associated with large unauthorized positions in Treasury bonds that he had established, by making it appear as if the long futures position hedged the Treasury bond risk. By the following week, the fictitious trades inflated the value of his trading book by over $12 million. The sale of the unauthorized Treasury bond position caused a loss of $12.2 million. In the criminal case against him, he is required to compensate the bank for the loss.

On a separate matter, the CFTC seeks public comment on a proposal to change the requirements for Acknowledgment Letters. These are letters that a futures commission merchant or derivatives clearing organization must obtain from any depositor holding segregated customer funds or funds of foreign futures or foreign options customers. The proposal can be obtained from the website, www.cftc.gov and those interested can submit their comments via email to secretary@cftc.gov. All comments are to be posted on the website.