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January 30, 2013

Investment Bank and Principal to Pay $3 Million for Lying to NFA Auditors

By Anne Sherry, J.D.

An investment bank and its principal must pay approximately $3 million in disgorgement, prejudgment interest, and civil penalties for covering up commission payments to an unregistered commodity trader and lying to the National Futures Association (NFA) about the payments. Angus Jackson, Inc. (AJI) and its principal, Martin Harold Bedick, paid trading commissions to Martin Rosenthal, who had previously been barred from trading by the CFTC and thus could not register with NFA, and lied about it in 2005 and 2008 NFA audits (CFTC v. Angus Jackson, Inc., January 28, 2013, Cohn, J.).

Cover-up. To conceal the fact that he was paying large commissions to an unregistered trader, Bedick instructed Rosenthal to create false invoices for services, such as computer programming and training. In 2005, the NFA conducted a routine audit during which Bedick told the NFA that a $25,000 payment to Rosenthal's company was for software development and a meeting, when in fact it was for trading commissions. He made similar statements about payments in a 2008 routine NFA audit. In 2010, mediation brought by the holder of one of the accounts in which Rosenthal traded uncovered the payments. In response, the NFA conducted another audit, during which Bedick admitted that the payments were for commissions.

Violations. The NFA determined that the false statements were material and violated NFA Compliance Rules 2-2(f) and 2-4 and Bylaws 1101 and 301(b). The NFA obtained relief, affirmed on appeal, suspending AJI and Bedick from NFA membership for seven years and permanently barring Bedick from acting as a principal of an NFA member.

The CFTC's complaint against AJI and Bedick (Rosenthal settled with the CFTC) alleged that the defendants violated Commodity Exchange Act Section 9(a)(4) by willfully concealing material facts and making false statements or misrepresentations and sought a permanent injunction, disgorgement, and civil penalties. The defendants denied liability but admitted to making false statements during the 2005 and 2008 (but not 2010) audits. The defendants also argued that Rosenthal was operating under a registration exemption.

Judgment and relief. The court granted summary judgment for the CFTC with respect to the 2005 and 2008 audits but in the defendants' favor with respect to the 2010 audit. The court found that the misrepresentations made during the 2005 and 2008 audits were material even if Rosenthal was exempt from registration, which the record refuted: "Concealing the true nature of commission payments to CTAs, regardless of whether those payments are lawful, is a serious matter that impedes the NFA from performing its duties under the Act." However, the defendants were not liable with respect to the 2010 audit; the court believed that Bedick came clean at this audit and said that even if the Commission's version of events were true, the alleged statements would not constitute a separate violation.

Finding that Bedick's conduct was willful and deliberate and that he showed little remorse, the court issued an injunction permanently barring the defendants from violating the CEA and engaging in any commodity trading activities. The court also ordered disgorgement of $955,000 and prejudgment interest against the defendants jointly and severally. Finally, although the CFTC requested civil penalties of three times the defendants' gain, the court imposed a joint and several penalty of two times the gain, $1.91 million. The Commission's claims were based on Bedick's statements during the 2005, 2008, and 2010 audits, but the fact that Bedick admitted the full truth during the 2010 audit mitigated the offense. The case is No. 12-60450-CIV.

Attorneys: Kenneth McCracken for the U.S. Commodity Futures Trading Commission. Martin Harold Bedick, pro se.

Companies: Angus Jackson, Inc.

Litigation Enforcement: CommodityFutures Enforcement FloridaNews

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