CFTC slams binary options marketers for attempt to extract settlement concessions

An attempt by binary options marketers to challenge a lawsuit brought by United States Commodity Futures Trading Commission (CFTC) has resulted in a stark reaction by the US regulator.

The case targets a number of binary options brokers, as well as binary options marketers Michael Shah and his company Zilmil, Inc. According to the CFTC allegations, between July 2012 and the present, Shah and Zilmil made more than $18.6 million in proceeds from their fraudulent scam.

Using fraudulent misrepresentations, the defendants induced people to deposit money with illegal binary options trading websites that purported to offer customers the ability to trade so-called binary options contracts online. The defendants acted as marketers for a number of binary options websites, such as LBinary, Global Trader 365, Vault Options, TraderXP, Trade Rush, Banc de Binary, Citrades, OptionMint, OptionRally, RBOptions, Bloombex Options, Redwood Options, BeeOptions, Amber Options, OptionsXO, and SpotFN. None of these websites or their operators are or ever have been registered to offer binary options contracts to the public.

The marketers convinced customers to deposit money with the binary options websites by offering miracle software “trading systems” with names like 2014 Millionaire, Binary Genetic, and Millionaire Money Machine. For each person who deposited money with one of these trading websites, the marketers received a commission of as much as $450.

Zilmil and Shah claimed in emails and websites that their trading systems would automatically place profitable trades for the user or provide “signals” for the user to make profitable trades. A customer who signed up for one of the Zilmil Defendants’ trading systems would be instructed to deposit money with a binary options website. Customers who deposited money with a binary options website rarely, if ever, received any money back. Their money was typically misappropriated by the binary options website operators.

The defendants have tried to rebuff these allegations. Their latest attempt to do involves the filing of the so-called “Rule 11 motion”. Rule 11 provides that sanctions are available where a party files a pleading or motion that has no factual basis, which espouses a legal theory that has no reasonable chance of succeeding, or which was filed for an improper purpose. In short, Shah and Zilmil argue that the CFTC’s action against them has no such factual basis.

On Friday, October 5^th, the US regulator replied to the defendants’ motion, calling it desperate and meritless. Also, according to the CFTC, the defendants’ motion is a transparent attempt to multiply the proceedings and extract settlement concessions. Furthermore, the CFTC requests further that sanctions be imposed on the Zilmil Defendants for their extraordinary misconduct in filing the Rule 11 motion.

The CFTC argues that its filings are replete with evidence of the Zilmil Defendants’ fraudulent scheme involving their binary options autotrading systems. The CFTC notes that it has submitted evidence from Zilmil Defendants’ business partners, Shah’s own Skype chats, and account holders including affiliate marketplaces and financial institutions. Taken together this evidence overwhelmingly proves the CFTC’s claims.

For instance, in his messages (spelling errors in the originals), Shah discusses his binary options trading systems, and how they are a “scam” or “b.s.”:

[8/10/2014 7:53:26 PM] MIKE S: Ladies and Gentlmen and Imran,

****

I want to gratefully ask you for support with my new scam.

2014 Millionaire goes live at exactly 3AM EST Monday morning, as that’s when all the brokers start their scammy days. I have a TEN broker rotation with some backups, so every one of your leads will get the utmost scam…

In addition, in its motion for summary judgment, the CFTC adduced the declaration of its investigator, Heather Dasso, who undertook an analysis of the Zilmil Defendants’ revenues. In her analysis, Ms Dasso concluded that the Zilmil Defendants received more than $7 million directly from operators of unregistered binary options websites, and more than $10 million from so-called aggregators or affiliate networks that forward commissions to marketers like the Zilmil Defendants.

The Zilmil Defendants argue that the CFTC cannot prove that anyone viewed their fraudulent marketing materials, e.g., websites, videos, and SPAM emails. But a representative from one email marketing firm utilized by the Zilmil Defendants, Critical Impact, testified that hundreds of thousands of people opened SPAM emails sent by the Zilmil Defendants and clicked on the links therein.

The CFTC argues that the binary options marketers’ Rule 11 motion was filed for an improper purpose. The circumstances of its filing strongly suggest the defendants “intended to use their meritless Rule 11 motion to extract settlement concessions from the CFTC”. The defendants counsel has contacted counsel for the CFTC to discuss the Rule 11 motion and also settlement, piling up pressure on the regulator to accept settlement proposal by the defendants.

Given the duplicative nature of the Zilmil Defendants’ arguments, i.e., the fact that they are copied from earlier briefs, it is hard to imagine that the Rule 11 motion was filed for any purpose other than harassment, the CFTC says.

The regulator explains that a party who is made to respond to a meritless Rule 11 motion can obtain sanctions. The purpose of these sanctions is to deter the offending party from further violations of the Rules. These sanctions may include a payment of attorney’s fees to the prevailing party, or the payment of a fine.

According to the CFTC, sanctions are necessary here to deter the Zilmil Defendants from further violations of the Rules. Merely denying the Zilmil Defendants’ motion will send the message that there is no downside to filing frivolous and abusive filings. The CFTC should not have had to respond to the Zilmil Defendants’ meritless and duplicative Rule 11 motion. The Court should not have had to read it, the regulator says.

The case, captioned Commodity Futures Trading Commission v. Scharf et al (3:17-cv-00774), continues at the Florida Middle District Court.