The CFTC has done a yeoman’s task in cleaning up the industry from unscrupulous brokers over the years and educating consumers on the arts of the con man. Closing down the bad guys or assessing large fines on firms like FXCM for “slippage” abuse is one thing. Putting pooled account managers behind bars takes more time and effort, but eventually the crooks are made to pay, even when they operate outside of the United States.
David A. Smith, a citizen of Jamaica, will go down in history as one of these cross-border criminals that deceived investors with high-return promises in currency trading to the tune of $220 million. He lived the high life in Windermere, Florida, and bandied about precious gemstones, precious metals and jewelry as if they were modest toys of the wealthy. In the process, over 6,000 investors were fleeced before they became aware that their high returns were actually fictitious trading activities.
Prosecutors have pieced together that Smith, in 2005, set up a Jamaican firm known as Overseas Locket International Corp. (OLINT). He quickly expanded his scope of operations to the Turks and Caicos Islands, a playground for the rich and prosperous, by forming another firm known as OLINT TCI Corp. Ltd. Like the true Ponzi schemer that he was, he attracted investors with promises of 10% monthly returns from forex trading (read more about the risk of unrealistic returns). He created an elaborate infrastructure to impress prospective clients, but there was no evidence that he ever did engage in active currency trading.
A number of shell corporations were also formed to facilitate moving funds to the United States to finance his extravagant lifestyle. Some of these “sister” companies did have access to the foreign exchange market, but what little trading was done was carried at a loss. As is the rule in these operations, account reports were falsified to deceive investors. Contributions to both political parties in Jamaica also provided cover, but his firms were described as “private investment clubs”, one trick used to avoid local regulation.
Mr. Smith’s con game also falls in to the category of “affinity” fraud. Successful word-of-mouth campaigns spread the news far and wide within Jamaican communities outside of their homeland. Jamaicans delivered deposits from the USA, Canada, and the UK, among other countries. When the “Great Recession” hit and investors began requesting withdrawals, charges of money laundering, wire fraud, and conspiracy started to surface. Smith was apprehended and arrested in late 2008 in the Turks and Caicos, and then later brought to trial in the United States in 2010.
Smith actually carried out his conspiracy while in Seminole County, Florida, where he ultimately attempted to channel money into a local bank. In late 2011, David Smith received a 30-year jail sentence. He will serve the first six and a half years in the Turks and Caicos and the balance in a United States prison. There are also un-named co-conspirators that will be indicted for acting as “intermediaries that would become known as feeder clubs and ‘pigs’.”
The lesson is clear – Be wary of promises of exorbitant returns, whether from the fund manager or from his loyal cohorts or duped clients.
For further reading:
Learn the fantastic story about Bernard Madoff’s Ponzi scheme.