Monex barred from trading futures or options after losing $38m fraud case with CFTC

Rick Steves

Monex Deposit Company, Monex Credit Company, Newport Services Corporation, and their owners Louis Carabini and Michael Carabini, have settled with the CFTC after a complaint filed on September 6, 2017.

The CFTC alleged defendants acted as a common enterprise, executed illegal, off-exchange leveraged retail commodity transactions for thousands of customers, and engaged in pervasive fraudulent sales solicitations.

The settlement will include the payment of $33 million in restitution to customers, and a $5 million civil monetary penalty.

In addition, the deal bars the defendants from trading futures or options on a regulated market, unless such trading is for the purpose of hedging.

It also bans the defendants from registering in any capacity with the CFTC for 10 years, and permanently enjoins them from engaging in off-exchange leveraged retail commodity transactions or fraud.

A historic case for CFTC with implications far beyond metals trading

“This settlement resolves a long-standing and significant precious metals case that CFTC Enforcement staff fiercely and successfully litigated at the district court level, up to the court of appeals, and back to the district court,” said Acting Director of Enforcement Gretchen Lowe.

“First, the CFTC won a judgment against the defendants for illegally offering leveraged retail commodity transactions and established important law on the meaning of ‘actual delivery’ of commodities under the CEA. This settlement resolved the remaining charges of fraudulent solicitation that lured unsuspecting customers into the highly risky leveraged trades, and obtained significant restitution for the victims of the unlawful conduct. The CFTC will take any action necessary to prevent and terminate such illegal transactions and return funds to the defrauded customers. I thank the team for their tenacious commitment to this case and ultimate success.”

General Counsel Rob Schwartz said, “This is a historic case for the agency with implications far beyond metals trading. Not only did staff put a stop to a large-scale fraud and shut down an illegal, unregistered trading platform, but in the process developed important caselaw on the subject of actual delivery of any commodity, and fortified the agency’s strong anti-fraud authority. This comes at a critical time when the agency is contending with fraud across a broad range of commodity assets, both traditional and digital.”

The order comes after substantial litigation, including two appeals to the Ninth Circuit, entry of a preliminary injunction against the defendants, an order granting summary judgment in favor of the CFTC on the charges relating to the offering and execution of illegal retail commodity transactions, and also imposing a permanent injunction prohibiting the defendants from engaging in leveraged retail commodity transactions.

Monex staff pushed customers into leveraged trading, claimed profitability

Between 2011 and 2021, the defendants operated a retail over-the-counter trading platform, known as “Atlas,” which allowed customers to speculate on precious metals price movements, with Monex acting as the counterparty to every transaction.

The defendants executed thousands of leveraged trades with retail customers, all of which were required to be executed on a regulated exchange, but were not, as found by the court in an earlier order.

The majority of these trades resulted in losses for Monex’s customers and the defendants engaged in fraud in the solicitation of customers.

The order found that Monex touted the importance of precious metals as a hedge against economic uncertainty. To that effect, Monex highlighted profits, claiming that precious metals offer “outstanding price appreciation” and “outstanding profit potential.”

Monex trained its sales representatives to pitch leveraged trading with descriptions of the possibility of “30-40% net gains,” “annualized rate of return of 20% or more” and “unlimited upside potential” according to the order.

Monex also trained its sales force to gain customers’ trust in order to make sales. In addition, Monex incentivized its sales staff to push customers into leveraged trading with increased commissions and bonuses, the order finds.

Despite claims of profitability of leveraged trading of precious metals, the majority of its customers lost money. Louis and Michael Carabini controlled Monex and are liable for its illegal activities, the order found.

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