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CFTC Fraud Advisories

  • False Promises of Profits as a Result of Natural Disasters

    Background

    Beware of claims that the damage caused by hurricanes and other natural disasters will increase the profitability of trading in crude oil, wheat, unleaded gasoline, corn, natural gas, cotton, or other commodity futures or options.

    Natural disasters cause extensive damage to various regions of the country throughout the year. In addition to causing great hardship among residents of those regions, the events cause damage to factories, oil drilling stations, and crops.

    Please be advised that whatever effect these events might have on the price of physical commodities, the occurrence of such well-known events do not necessarily increase the likelihood of making profits in commodity futures or options trades that are based on these products or limit the risk in such trades. Any claims of potential profits from trading in futures or options on affected products or commodities based on the effects of the natural disaster are probably fraudulent.

    The Sales Pitch
    Commodity brokerage firms and brokers often use telephone calls and email, along with Internet, television or radio ads, to interest members of the public in trading commodity futures and options. Federal commodities laws prohibit these brokers from overstating the profitability of futures trading, understating risks, and falsifying performance history.

    Some brokers violate this prohibition by claiming that customers can profit based upon well-known events, such as seasonal changes in climate, natural disasters, or global conflict. Such pitches are misleading because they are meant to suggest that the broker has special information that gives him or her an edge in executing a customer’s trades. That is false. It is true that increases in demand or limitations in supply of a particular commodity might affect the commodity’s price. However, when such changes are already known or anticipated by the market, they will not necessarily affect the value of a futures or option position on those commodities. This is because traders in the markets have already factored this information into the price.

    For example, the public, and market professionals in particular, were aware that Hurricane Katrina had a significant effect on the supply of energy products such as crude oil, unleaded gas, and heating oil. Professional traders and investors paid close attention to global economic and political factors that might affect the price of the futures and options that they trade and quickly took into account the possibility that future supplies of those products may be disrupted. As a result, the prices of futures and options quickly reflected that possibility.

    In addition, claims that the risk of purchasing commodity futures and options can be predetermined or fixed are misleading. Purchasers of commodity futures or options contracts can lose every penny given to a broker, and, because futures contracts are “leveraged” or “margined,” customers may be liable for losses in excess of their initial deposits.

    Bottom Line

    Any claims of potential profits from trading in futures or options on affected products or commodities based on the effects of the natural disaster are probably fraudulent.

    If you have questions, are aware of suspicious activities, or believe you have been defrauded, please let the CFTC know immediately. Call the CFTC at 866.366.2382 or visit www.cftc.gov/TipOrComplaint.

See Also:

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