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From Securities Regulation Daily, June 6, 2013

SEC and CFTC Charge Cyprus-Based Company With Illegal Sales of Binary Options

By Amy Leisinger, J.D.

In separate proceedings, the SEC and the CFTC have filed complaints against Banc de Binary, Ltd., a Cyprus-based company holding itself out as having an office in New York, charging the company with illegally selling binary options through an online trading platform to U.S. investors. Binary options are securities that provide a payout contingent upon the price movement of an underlying asset; upon expiration, a holder will receive either a pre-determined amount or nothing at all, depending on whether the underlying asset increases (a “call” option) or decreases (a “put” option) in value.

According to the complaints, investors can purchase binary options on Banc de Binary’s website. The customer first selects the underlying asset and then chooses whether he or she wants a call or a put option. Next, the customer inputs the investment amount and selects an expiration period. Banc de Binary then states the payout amount for the binary option, and the Banc de Binary customer can click to purchase.

Banc de Binary allows investors to open online trading accounts with as little as $250, which can be charged to a credit card. It also urges customers to deposit additional money to qualify for profitable trading signals and trading advice and offers to supplement investor accounts with “trading bonuses.” The complaints state that Banc de Binary does not attempt to ascertain whether prospective investors are accredited investors, nor does it inquire into customers’ net worth or prior trading history.

Each time an investor loses on a binary option trade, Banc de Binary keeps the purchase price that the investor paid for the option.

SEC complaint. In its complaint, the SEC charged Banc de Binary with operating an unregistered offering of securities in violation of Securities Act Section 5, noting that the binary options being offered are securities under the federal securities laws that Banc de Binary offered and sold, and continues to offer and sell, to U.S. investors in unregistered transactions through general solicitations and advertisements online and via telephone. The SEC further alleged that, by trading these binary options on account of U.S. investors, Banc de Binary acted, and continues to act, as a broker-dealer without being registered as such, in violation of Section 15(a)(1) of the Exchange Act.

The SEC seeks preliminary and permanent injunctions against Banc de Binary, as well as an accounting, disgorgement with prejudgment interest, and civil penalties.

CFTC complaint. In its complaint, the CFTC alleged that Banc de Binary has violated the Commission’s ban on off-exchange trading of commodity option contracts in relation to Sections 4c(b), 2(e), and 4(a) of the Commodity Exchange Act and certain regulations thereunder by its offerings and by soliciting and accepting orders and funds from U.S. customers, including those who were not “eligible contract participants” (ECPs). Options not excepted or exempted from the Commission’s ban include binary options betting on the prices of wheat, oil, gold, platinum, sugar, coffee, corn, foreign currency (forex) pairs, and stock indices.

The CFTC further alleges that Banc de Binary has operated as an unregistered futures commission merchant (FCM) and solicited and accepted orders from U.S. customers, including customers who were not ECPs, in violation of Sections 2(c)(2)(B)(iv)(I)(aa) and 4d(a) of the Act and underlying regulations.

The CFTC further noted that Banc de Binary has never been designated as a contract market by the Commission, is not an exempt board of trade, and is not a bona fide foreign board of trade.

The CFTC seeks civil monetary penalties, an injunction preventing Banc de Binary from engaging in certain commodity options activity with U.S. customers, and other remedial ancillary relief, including restitution, disgorgement, and rescission.

Investor alert. In connection with these charges, the SEC’s Office of Investor Education and Advocacy and the CFTC’s Office of Consumer Outreach have jointly issued an Investor Alert to warn investors about binary options and potential fraudulent activities, such as refusal to reimburse funds and identity theft. The alert notes that some binary options are listed on registered exchanges or traded on a designated contract market subject to regulatory oversight, but other parts of the binary options market operate through online trading platforms that are not necessarily in compliance with applicable U.S. laws and regulations. Potential investors are warned to take precautions before investing on a binary options trading platform.

Attorneys: John W. Berry for the SEC. Kathleen Banar for the CFTC.

Companies: Banc de Binary, Ltd.

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