This is a story where millions of investor money were spent on strip clubs, a private jet, luxury cars and more, read all about it.
An increasingly popular device in the forex fraud repertoire of investment scammers consists of the managed forex account. A company that has already been sued by the Commodities Futures Trading Commission for fraud is Capital Blu Management.
According to the CFTC’s complaint filed on March 23, 2009, Capital Blu started soliciting funds to the tune of $17 million as of at least January of 2008. The main defendants named in the lawsuit were Donovan Davis Jr., Blayne Davis and Damian Bromfield.
How the Capital Blu Fraud Began
According to the CFTC complaint, the Capital Blu team told prospective clients that their funds would be pooled together in a fund which was started in September of 2007 by the name of the CBM FX Fund, LP.
However, instead of investing all of the participants’ funds in the CBM FX Fund, only a portion of these funds were invested while the defendants used the remaining funds to buy and sell exchange-traded currency futures and OTC currency options.
The company began showing clients solid monthly profits, so on the surface everything looked aboveboard. Nevertheless, the reason for this was that the company was creating fake account statements for clients which showed the fund’s account was up as much as 7% per month.
While Capital Blu’s clients were kept under the false impression that their investment was making a return of several percentage points per month, the reality was that the funds the fraudsters had actually committed to trading resulted in losses in excess of $7 million.
One of the fraud red flags overlooked by investors was the fact that the investment pool they were funding did not issue individual accounts. Instead, the funds were commingled into one trading account.
Where Did the $17 Million Go?
According to the CFTC complaint, of the $17 million Capital Blu took in from approximately 100 investors, $7.1 million was accounted for as actual trading losses. These losses were deducted from an initial $14.7 million deposited into various trading accounts, of which only a few were in the name of the FX Fund which Capital Blu operated.
The trading accounts were in Futures Commission Merchant or FCM accounts and were used to trade exchange-traded currency futures from January of 2008 until May of 2008. None of the investing clients were informed that their money would be invested this way by trading exchange-traded futures.
Furthermore, of the $14.7 million placed in the FCM accounts, $7.1 million was withdrawn from the FCM accounts and distributed to various Capital Blu bank accounts and were also commingled with funds controlled by Capital Blu.
The CFTC found only $400,000 left in the FCM trading accounts used by Capital Blu. The rest of the money was spent by the company’s officers on luxury cars, strip-clubs, expensive vacations, trips to Las Vegas and a $2 million private jet.
Latest News on Capital Blu
Capital Blu Management’s appointed receiver, the accounting firm of Lewis B. Freeman, has itself been placed in receivership. In the receiver’s last report, the accountant indicated that only $500,000 had been located and that a large amount was spent on vacations, rent, alcohol and adult entertainment.
In a shocking twist, the accounting firm was placed in receivership following an FBI raid in which authorities were trying to trace $3.6 million that the accounting firm was allegedly holding for Capital Blu.
As of April 9th, 2010, an order deeming the termination of the Capital Blu receivership premature was filed in case no. 6:2009cv00508 by the CFTC. Also, a status report is forthcoming shortly from the Successor Receiver by May 15th, 2010 which should cover the assets discussed in the objection. The April 9th filing also states that:
“Plaintiff shall take on certain tasks to assist the Successor Receiver in locating assets, individuals and information helpful to the Receivership estate.”
Has anything happened in the past two years on this case?
The wheels of justice can move slowly, but once they start, the outcome can be swift. After hearing arguments deliberating three weeks, a jury issued its verdict on February 3, 2011 in Orlando, Florida, against Donovan Davis Jr. and Bromfield. The Honorable Judge John Antoon II of the U.S. District Court for the Middle District of Florida has “permanently bars all defendants from engaging in any commodity-related activity, including trading and registering with the CFTC.”
The judge further ruled that,” Capital Blu Management, LLC (Capital Blu) of Melbourne, Fla., Donovan Davis Jr. of Palm Bay, Fla., Damien Bromfield of Ocoee, Fla., Blayne Davis of Naples, Fla., and DD International Holdings, LLC (DDIH) of Palm Bay, Fla., jointly and severally to pay restitution of USD2,463,592.12. Judge Antoon ordered Bromfield and Blayne Davis each to pay a civil monetary penalty of USD4,927,184.24 and ordered Donovan Davis Jr. and DDIH jointly and severally to pay a civil monetary penalty of the same amount.
Defendants claim to have little in the way of assets or professional abilities to pay these fines. The issue of jail time may have to be revisited if no possible restitution of $17 million in investor lost funds can ever be made.