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From Securities Regulation Daily, September 6, 2017

CFTC charges Monex entities in massive precious metals fraud

By Lene Powell, J.D.

In what CFTC Enforcement Director James McDonald called one of the biggest precious metals fraud cases in CFTC history, three companies and two principals have been charged with defrauding thousands of retail customers nationwide out of hundreds of millions of dollars. According to the CFTC, the defendants deceptively pitched leveraged precious metals trades as safe, but more than 12,000 customer accounts have lost over $290 million over the course of almost six years. Many customers lost their life savings (CFTC v. Monex Deposit Company, September 6, 2017).

"Fraud in our markets, like that alleged here, undermines confidence, reduces transparency, and harms competition. As this investigation shows, we’ll work tirelessly to detect and prosecute fraud of the sort that’s alleged here," said McDonald.

Precious metals fraud. The CFTC brought the action in the district court for Northern Illinois against three related California-based companies (Monex Deposit Company, Monex Credit Company, and Newport Services Corporation; collectively, Monex) and their owner/controllers, Michael Carabini and his father Louis Carabini.

According to the CFTC, Monex solicits retail customers by phone to open trading positions in gold, silver, platinum, and palladium. Monex accepts customer funds and provides loans to customers, and also leases precious metals to customers. The trades take place on Monex’s own unregulated trading platform instead of a regulated exchange or board of trade, and Monex acts as the counterparty to every transaction.

The CFTC alleges that Monex uses high-pressure sales tactics, with sales representatives falsely portraying themselves as fiduciaries, systematically over-representing the likelihood of profit, and misrepresenting the risk of loss. For example, Monex claims that customers can’t lose their investment because metals will always have value, but fails to disclose the significant number of customers who have had trading positions force-liquidated at a loss.

The CFTC also says that Monex has structured the Atlas program using outsized price spreads, commissions, interest on loans, and administrative fees, so that customer losses are all but inevitable and Monex stands to gain as a result of these losses. For example, Monex price spreads for a single trade can be 100 times larger than price spreads for a similar trade on a regulated exchange. The CFTC said that about 90 percent of Monex customers have lost money between 2011 and 2017, and some have lost almost all of their money. One man got back only $8,900 out of $400,000, which was his entire life savings.

Sanctions sought. In addition to the fraud claims, the CFTC alleges that Monex operates the program in violation of governing laws designed to regulate leveraged retail commodity trading. Under the Commodity Exchange Act, Monex is required to conduct this type of leveraged commodity transaction on a regulated exchange and to register with the Commission, but does not and has not.

Commissioner Sharon Bowen, who is leaving the CFTC at the end of the month, said she was very proud of CFTC staff for their dogged pursuit of the investigation, noting that Monex failed to produce trading data in response to a lawful subpoena.

"Matters such as this go to the heart of our core mission and further reinforce the need for sufficient funding to better protect the everyday citizen," said Bowen.

The CFTC seeks restitution, a civil monetary penalty, and permanent trading and registration bans.

The case is No. 1:17-cv-06416.

Attorneys: Joseph A. Konizeski for the CFTC.

Companies: Monex Deposit Co.; Monex Credit Co.; Newport Services Corp.

MainStory: TopStory CommodityFutures Derivatives Enforcement FinancialIntermediaries FraudManipulation CaliforniaNews IllinoisNews

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