A little too late: Europe’s lax policy on binary options hampers US enforcement actions

Maria Nikolova

The CFTC’s claims about illegal activities of marketing companies associated with Banc de Binary are challenged because… the broker used to be licensed by CySEC.

There has been a lot of industry havoc about the new rules that the European Securities and Markets Authority (ESMA) is about to introduce to the offering of CFDs and binary options to retail investors. These measures, which appear harsh with regard to binary options, however, might have come a little too late, given the years of lax attitude of the authorities in Europe towards binary options brokers and the call centres and other marketing affiliates of this type of entities.

This lax policy, which has allowed binary options companies to proliferate in European jurisdictions like Cyprus, Malta, Bulgaria and even the UK, is now making it hard to take enforcement action against binary options entities that committed violations in the past.

A stark example comes from Florida, the United States, where the Commodity Futures Trading Commission (CFTC) is encountering hurdles as it is suing a number of binary options brokers – Citrades.com, AutoTradingBinary.com, A&J Media Partners, and their marketing affiliates Zilmil and Michael Shah.

The CFTC alleges that, from June 2013 through the present, the Citrades Defendants operated a massive scam in which they fraudulently solicited customers to enter into illegal, off-exchange investments in binary options. The firms received at least $16 million in customer funds. The Zilmil Defendants acted as third-party ‘affiliate marketers’ who drove internet traffic to the Citrades Defendants by fraudulently soliciting customers to sign up for or purchase binary options autotrading systems. They instructed the customers to send money to the Citrades Defendants and made gross revenues of more than $4 million from sales of its autotrading systems and another $500,000 in commissions from the Citrades Defendants.

The CFTC action has led to the inception of a receivership on the assets of the defendants. The latest receiver report shows that he has frozen or recovered a total of $7,945,053.32 in funds held in accounts at multiple financial institutions and in an attorney’s trust account.

But the defendants are now challenging the receivership. Earlier this week, the CFTC faced severe opposition to the evidence that it has produced with regard to the marketing affiliates of the defendant binary options brokers. One of the main points for Zilmil’s claims against the CFTC is that many binary options brokers operate legitimate businesses outside of the Commission’s jurisdiction and the marketing company did nothing wrong in working with them.

The example Zilmil provides is (drumroll, please)… Banc de Binary!!!

The CFTC alleges that Zilmil received $881,000 from Banc de Binary in 2014. But, according to the marketing company, the Commission never actually alleged that any transaction Zilmil had with Banc de Binary was illegal, nor provided any such evidence.

The defendants argue that “many dealers operated legitimate legal businesses outside the Commission’s jurisdiction through which Zilmil generated revenues”. For example, Banc de Binary was licensed by the Cyprus Securities and Exchange Commission (CYSEC) to operate in the European Union, the defendants say. Throughout the Relevant Period, the United Kingdom and other jurisdictions outside the USA considered binary options to be gambling, not a financial product, and the Commission has no evidence that payments from Banc de Binary or any other dealers were for binary options sold within its jurisdiction.

The case launched by the Securities and Exchange Commission (SEC) against Banc de Binary is also mentioned, of course. But Zilmil argues that the Commission’s allegations about the marketing company’s ties to Banc de Binary refer to a period after the broker was enjoined from selling binary options to U.S. Investors (July 2013).

Zilmil now requests the dissolving of the receivership and discharging of the Receiver. The CFTC indicated on Thursday, April 19, 2018, that it opposes the demands of the defendants.

The case is captioned Commodity Futures Trading Commission v. Scharf et al (3:17-cv-00774).

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