Fraud Update: The CFTC Continues to Arrest Forex Crooks with Impunity

Much of the recent press in the forex industry has focused on the new rules that have been promulgated by the CFTC to bring more safety and soundness to the world of retail forex trading, but even though the CFTC has generally been constrained by tight budgets and low manpower resources, rest assured that they continue to police our industry with a vengeance. Press releases from the agency bare witness to the fact that the unscrupulous element in our industry can run, but they cannot hide from the long arm of the law.

Scott Rothstein sentenced to 50 years in prison.

Bernard Madoff was sentenced to more than 100 years in prison.

Joel Nathan Ward got 9 years behind bars.

The CFTC efforts give results

The Commodities Futures Trading Commission has done much over the past decade to rid retail forex of fraudulent brokers and fund managers and to make consumers aware of what might constitute an outright scam to deceive. Millions have been lost to fraud, but at least 26,000 investors have benefited from recoveries of over $476 million in the past decade, all due to the continued efforts of the CFTC. In a recent press release, the agency has recapped a year of more arrests, more investigations, and millions more in recovered funds for unsuspecting, but defrauded investors.

The recent recession caused many investors to request unexpected withdrawals from many of these crooks, thereby revealing the ongoing antics of fund managers to deceive their shareholder base through various variations on the Ponzi scheme scenario. Consequently, managers have been put on notice that engaging in fraudulent conduct, making misrepresentations to potential or existing investors, attempting to deceive regulators, or doing anything that does not comply with the legal framework of their business activities as spelled out in offering documents are all unacceptable activities that will be punished under the law.

Increasing number of enforcement actions from CFTC

The enforcement division of the CFTC has been hard at work over the past year with 57 enforcement actions and 419 opened investigations, a record high for the division. A full 25% of the actions related to retail forex fraud, while the filings consist of alleged manipulation, fraud, abuse and other violations of the Commodity Exchange Act. yielding more than $186 million in civil monetary penalties, restitution and disgorgement. A quick recap of their efforts is as follows:

Enforcement Actions Investigations Opened

FY 2010 57 419

FY 2009 50 251

FY 2008 40 NA

Commodity funds and their managers and advisors provided another 25% of the enforcement activity for the past year. As the recession put a hold on new sources of funding, unscrupulous fund managers ran for the hills when withdrawal requests clogged their respective inboxes. Trevor Cook, a Minneapolis fund manager, still holds the current record for the year’s highest forex related scandal. He bilked 1,000 investors for more than $190 million while claiming to have a fail-safe forex trading arrangement with Islamic banks that promised to forego interest. With the aid of a popular radio talk show host in the area, this “affinity” Ponzi scheme got legs early, but soon floundered when the global economy took a turn for the worst.

The propensity for fraud has risen

Investors must exercise increased due diligence whenever considering a managed fund approach. The propensity for fraud has risen to new levels in nearly all investment vehicles. It even seems that one must be suspect of “men of the cloth” in Idaho. The pastor, Jeremiah Christian Yancy, was brought down in Idaho after a real estate swindle had gone sour. The crafty minister quickly switched to a forex Ponzi scheme, targeting members of his congregation and others to the tune of $462,000. As is typically the case, investors were promised exorbitant returns of 20 to 40%, given false statements, and at times told that their principal was guaranteed. The statements turned out to be screen shots from forex demo accounts, a new unintended purpose for these helpful programs. The similarity, even at this smallish level, seems to suggest that Ponzi thieves frequently share ideas from the same playbook.

Internet opens up new possibilities for criminals

The Internet has also been the great enabler of our time, especially with regards to retail forex trading, but it has also enabled a number of criminal types that are bent on deceit and hide easily behind the cloak of anonymity provided by cyberspace. However, the CFTC has charged a Virginia man, Ronald W. Smith, with fraud for using a YouTube video to trick 34 investors out of $800,000 for his unique forex Ponzi scheme. You would think that anyone claiming to have had 95% winning forex trades and a return of 298% is just 17 trading days would encounter at least a modicum of suspicion or skepticism, but apparently not. Mr. Smith even went so far as to claim an SEC probe put a freeze on his deposits, an obvious excuse for slow payments on withdrawal requests, and later advised all that he had been completely exonerated.

Do your due diligence on your business partners

One interesting turn of events occurred in the California office of a crooked hedge fund manager. Four disgruntled investors appeared unexpectedly dressed in intimidating SWAT-like garb and claiming to be the FBI. They proceeded to demand that funds be wired to a credit union account, but the attempted “shakedown” was not successful. They were soon arrested for impersonating law enforcement officers. A plea bargain prevented incarceration, but the court handed down a sentence of two years on probation. They are assisting the current probe into the alleged Ponzi scheme of Equity Investment Management and Training Inc. (EIMT) that had raised over $40 million.

The criminal element in our society is both organized and clever in developing their various schemes to separate us from our hard earned capital. No one ever suspects that they could be a victim of a con man, until it happens. Awareness is key for prevention, but having a healthy dose of skepticism is a must when an unsolicited huckster beckons, especially from an unknown website that is most likely offshore where the CFTC cannot easily perform its task. Exercise more due diligence when selecting your business partners, and remember that it is always better to be safe than sorry.

Read more about CFTC efforts.

Learn more about Ponzi scams and HYIP programs.

Chris Lee

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