UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC Docket No. 00-30|
|EDWARD MARTIN d/b/a||)||ORDER INSTITUTING PROCEEDINGS|
|Black Gold International,||)||PURSUANT TO SECTIONS 6(c) AND 6(d)|
|)||OF THE COMMODITY EXCHANGE ACT,|
|)||MAKING FINDINGS AND IMPOSING|
The Commodity Futures Trading Commission ("Commission") has reason to believe that Edward Martin ("Martin"), individually and d/b/a Black Gold International ("Black Gold"), has violated Sections 4b(a)(i) and (iii), 4c(b), and 4o(1) of the Commodity Exchange Act, as amended (the "Act"), 7 U.S.C. §§ 6b(a)(i) and (iii), 6c(b), and 6o(1) (1994), and Sections 4.41(a) and (b) and 33.10(a) and (c) of the Commission's Regulations, 17 C.F.R. §§ 4.41(a) and (b), 33.10(a) and (c) (2000). Therefore, the Commission deems it appropriate and in the public interest that administrative proceedings be, and hereby are, instituted to determine whether Martin engaged in the violations set forth in this Order and to determine whether an Order should be issued imposing remedial sanctions.
In anticipation of the institution of this administrative proceeding, Martin has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Without admitting or denying the findings in this Order, and prior to any adjudication on the merits, Martin acknowledges service of this Order. Martin consents to the use of the findings in this Order in this or any other proceeding brought by the Commission or to which the Commission is a party.1
The Commission finds the following:
Edward Martin, d/b/a Black Gold International, sells through an Internet Web site subscriptions to an advisory service that furnishes subscribers with recommendations regarding commodity futures and options trading. Martin falsely claims through this Web site that his trading systems and advisory service have generated high profits with little risk, and that Martin has personally made substantial profits through commodity futures and options trading. In reality, Martin's personal trading during the five year period from 1995 to 1999 resulted in a net loss of $17,488.57. Martin provides trading results on the Web site selected to include only positive results from the limited period of time between 1995 and 1996. However, during this time Martin actually suffered net trading losses of $1,314.23. The Web site also states that "[h]andling a six digit figure account takes a little getting used to," when his actual trading account has never exceeded $13,310.92. In addition, Martin includes 20 specific seasonal-based trades which he again claims have generated high profits. Martin also implies that he successfully made those trades, when he had not. Indeed, the advertised results are purely hypothetical and Martin's own efforts at making these trades resulted in losses totaling $12,854. While Martin's Web site purports to provide a statement concerning the inherent limitations of hypothetical performance results, the statement does not conform to the statement specified by the Commission's Regulations. Martin's activities in fraudulently advertising his advisory service violates Sections 4b(a)(i) and (iii), 4c(b) and 4o(1) of the Act, and Sections 4.41(a) and (b) and 33.10(a) and (c) of the Commission's Regulations.2
Edward Martin, individually and d/b/a Black Gold International, is a sole proprietorship located at 228 New Street, P.O. Box 489, Terre Hill, Pennsylvania 17581. Neither Martin nor Black Gold International has ever been registered with the Commission in any capacity.
1. Products And Services Sold Through The Black Gold Web site
Black Gold, through its principal Edward Martin, sells various products and services to assist clients in trading in commodity futures and options on commodity futures via an Internet Web site, www.b-gold.com. Martin's clients receive a trading manual, periodic commentary regarding where the markets are heading, target dates for entering and exiting the market on specific trades, and information regarding seasonal commodities. Most of this information is provided to customers via a "members only" page on the Web site. Martin also offers various books on commodity trading on the Web site.
2. Claims Concerning Profits
Martin's Web site claims that his advisory service has generated substantial profits. However, during the five year period from 1995 to 1999 Martin's personal trading resulted in a net loss of $17,488.57.
Martin attempts to support his claims regarding potential profits with examples of specific trades he has made. Martin includes seven actual trades in which he claims to have made as much as $4,075 in a few weeks. Although Martin made the profits indicated for these trades in 1995 and 1996, during the same period his overall trading resulted in a net loss of $1,314.23. Nonetheless, the Web site states that "[b]est of all, profits like these are made Month after Month after Month," when in reality Martin was losing money month after month.
Martin's Web site also states that joining his Members Club can enable a client to "MAKE 267% more money in less then [sic] 2 months." In fact, this claim is based on a single trade of $3,058 that yielded $13,311 (including an additional deposit of $2,600) in 1996. The Web site also proclaims that Martin's system will enable the consumer to "get explosive returns" and "create unlimited profits for life," in contrast to Martin's losing personal trading record over the past five years.
Martin's Web site also claims that "[h]andling a six digit figure [sic] account takes a little getting used to." However, Martin's total personal trading account never exceeded $13,310.92.
Finally, Martin's Web site includes four purported client testimonials; however, two of these testimonials come from friends who have never used Martin's advisory service.
3. The Seasonal Trading System
Martin's Web site represents that the secret to high profits is capturing seasonal trends in the markets. The Web site claims that Martin has 20 specific seasonal trades he will recommend to members, from which members can "stack the odds in [their] favor" and realize profits. The Web site includes four seasonal-trend charts purporting to show yearly changes in the prices of certain commodities. The Web site then states that, based on the charts, the "`lowest' price move of each commodity . . . should add up to $27,480. That's the smallest total of 4 trades in a year." However, these results are purely hypothetical and are based on Martin's after-the-fact selection of the entry and exit points chosen to produce his published results. Martin has never made the vast majority of these 20 seasonal trades. In fact, one of the few seasonal trades he has attempted - June unleaded gas, which he describes on his Members Only page as his "bread and butter pick" - resulted in total losses of $12,854 on the two occasions he made the trade. The Web site's depiction of Martin's seasonal trades gives the false impression that Martin was making these trades and profiting from them and does not disclose that those profits are based on simulated or hypothetical trading.
The Web site purports to provide a disclaimer addressing the inherent limitations of performance results based on simulated or hypothetical trading. However, the disclaimer is included in a hyperlink completely separate from the hypothetical trading results and, due to the positioning of the hyperlink, a potential customer is likely to see Martin's hypothetical results without reading the disclaimer. Accordingly, Martin's disclaimer is not "prominently disclosed" as required by Commission Regulation 4.41(b)(2). Finally, the disclaimer statement departs materially from the statement required by Commission Regulation 4.41(b). Martin's Web site omits the required statement that "[s]imulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight." Commission Regulation 4.41(b)(1)(i).
D. Legal Discussion
1. Martin Violated Sections 4b(a)(i) and (iii) of the Act
Sections 4b(a)(i) and (iii) of the Act provide that it shall be unlawful, in or in connection with any order to make or the making of a futures contract, for or on behalf of any other person, (i) to cheat or defraud, or attempt to cheat or defraud, such other person, or (iii) willfully to deceive or attempt to deceive such other person by any means whatsoever in regard to any such order or contract or the disposition or execution of any such contract, or in regard to any act of agency performed with respect to such order or contract for such person. Misrepresentations and omissions of material facts made with scienter regarding futures transactions constitute fraud under Section 4b(a) of the Act.3 Additionally, Sections 4b(a)(i) and (iii) require that the material misrepresentations and omissions of material facts be made "in connection" with futures transactions.4
Martin has violated Sections 4b(a)(i) and (iii) by misrepresenting that recommendations generated by the strategies set forth on his Web site had produced high profits. Respondent made this representation notwithstanding his actual experience in losing money trading during the period in question using the same strategies set forth on the Web site. See CFTC v. Commonwealth Financial Group, Inc., 874 F.Supp. 1345, 1353-54 (S.D. Fla. 1994) (misrepresentations regarding a firm or broker's trading record and experience are fraudulent because past success and experience are material facts to reasonable investors). Moreover, the results portrayed as the results of actual seasonal-based trading were, in fact, the results of hypothetical trading. "Because simulated results inherently overstate the reliability and validity of an investment system, and because extravagant claims understate the inherent risks in commodities trading, a reasonable investor would find [such] fraudulent misrepresentations to be material." R&W Technical Svcs., 205 F.3d at 170. See also CFTC v. Skorupskas, 605 F. Supp. 923, 933 (E.D. Mich. 1985) (misrepresenting performance tables as actual trading results violated Section 4b of the Act).
2. Martin Violated Section 4c(b) of the Act and Section 33.10(a) and (c) of the Regulations
Section 4c(b) of the Act prohibits any person from offering to enter into, entering into, or confirming the execution of any transaction involving commodity options contrary to any regulation promulgated by the Commission. Section 33.10 of the Regulations makes it illegal for any person to (a) cheat or defraud or attempt to cheat or defraud any other person, or (c) deceive or attempt to deceive any other person by any means whatsoever, in connection with an offer to enter into any commodity option transaction. To be liable for violating Section 33.10(a) and (c) a person charged with solicitation fraud must have acted with scienter. In re Staryk, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,206 at 45,810 (CFTC Dec. 18, 1997).
The same conduct by Martin that violated Section 4b(a)(i) and (iii) of the Act also violated Section 4c(b) of the Act and Regulation 33.10(a) and (c) because Martin's fraudulent conduct was in connection with his advisory service, which gave trading advice concerning options on futures contracts as well as commodity futures contracts. The language of Regulation 33.10 parallels that of Section 4b of the Act, thus, most of the case law interpreting Section 4b applies to Regulation 33.10. See In re Staryk, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶26,701 at 43,923-24 n.60 (ALJ June 5, 1996) aff'd in part, vacated and remn'd in part, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27,206 (CFTC Dec. 18, 1997) on remand, [1998-1999 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27,515 (ALJ Dec. 4, 1998).
3. Martin Violated Section 4o(1) of the Act and Section 4.41(a) and (b) of the Regulations
Section 4o(1) of the Act prohibits CTAs from (a) employing any device, scheme or artifice to defraud any client or prospective client, or (b) engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. Section 4.41(a) of the Regulations prohibits a CTA or principal thereof from advertising in a fraudulent or misleading manner. Section 4.41(b) of the Regulations makes it unlawful for a CTA to fail to include the required warnings about the limitations of trading performance numbers based upon hypothetical or simulated data.5
In order to establish a violation of Section 4o of the Act and Section 4.41(a) and (b) of the Regulations, the Division must prove that the respondent was (i) a CTA or, with respect to Section 4.41(a) and (b) of the Regulations, a principal thereof, and (ii) either (a) employed any device, scheme, or artifice to defraud any client or prospective client, or (b) engaged in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. Section 4o(1) of the Act, which also requires the use of the mails or any means or instrumentality of interstate commerce, prohibits both registered and unregistered CTAs from defrauding their clients. CFTC v. Savage, 611 F.2d 270, 281 (9th Cir. 1979) (enforcement action charging defendant with making false reports to customers, engaging in "wash" trades and holding himself out to public as a CTA without being registered with Commission). Section 4.41(a) and (b) of the Regulations also applies to all CTAs, regardless of whether those CTAs are required to be registered.
Under Section 1a(5) of the Act, in order to establish that someone is a CTA, it must be shown that the person (i) advised another about the value or advisability of trading in futures contracts, (ii) "either directly or through publications, writings or electronic media," (iii) for compensation or profit. Section 1a(5) of the Act, 7 U.S.C. § 1a(5).6 Martin gave commodity futures trading advice for compensation or profit and, therefore, is a CTA. 7
Martin's claims concerning the profits associated with his advisory service and trading systems violate Section 4o(1) of the Act and Section 4.41(a) of the Regulations for the same reasons as they violate Section 4b(a)(i) and (iii) and 4c(b) of the Act and Section 33.10(a) and (c) of the Regulations. In re R&W Technical Services, Comm. Fut. L. Rep. (CCH) ¶27,582 (CFTC March 16, 1999) ("Because we have found that [respondents] violated Section 4b(a) of the Act and that they acted as CTAs, further analysis is not needed to conclude that [respondents] also violated Section 4o(1) of the Act"), aff'd in relevant part, R& W Technical Services v. CFTC, 205 F.3d 165 (5th Cir. 2000); Skorupskas, 605 F.Supp. at 932-33. Martin has violated Sections 4o(1) and Regulation 4.41(a) by misrepresenting that the trading recommendations generated by his advisory service had generated substantial profits and that he had personally made substantial profits trading commodity futures and options. Martin also represented that the twenty specific seasonal trades he recommended had generated high profits, knowing that such claims were not based on actual trading, but rather hypothetical or simulated trading. Martin also violated Section 4.41(b) of the Regulations by presenting hypothetical or simulated performance results without accompanying those results with the prescribed cautionary statement. Because Martin placed his disclaimer on a separate hyperlink, completely distinct from the portions of the Web site including hypothetical trading results, his disclaimer is not prominently disclosed as required by Section 4.41(b)(2). CFTC v. AVCO Financial Corp., 28 F. Supp.2d 104, 119-20 (S.D.N.Y. 1998) (disclaimer placed on separate page from promotional materials including hypothetical trading results was not prominently disclosed). Moreover, Martin failed to provide the complete statement required by Section 4.41(b)(1)(i), as Martin's disclaimer does not state that "[s]imulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight." Commission Regulation 4.41(b)(1)(i).
Finding of Violations
Based on the foregoing the Commission finds that Martin violated Sections 4b(a)(i) and (iii), 4c(b) and 4o(1) of the Act and Regulations 4.41(a) and (b) and 33.10(a) and (c).
Offer of Settlement
Martin has submitted an Offer of Settlement ("Offer") in which, without admitting or denying the findings of fact in this Order, he:
A. Admits the jurisdiction of the Commission with respect to all matters set forth in the Order;
B. Acknowledges service of the Order;
1. the filing and service of a Complaint and Notice of Hearing;
2. a hearing;
3. all post-hearing procedures;
4. judicial review by any court;
5. any objection to the staff's participation in the Commission's consideration of its Offer;
6. all claims which he may possess under the Equal Access to Justice Act, 5 U.S.C. § 504 (1994) and 28 U.S.C. § 2412 (1994), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104-121, §§ 231-232, 110 Stat. 862-863, and Part 148 of the Regulations, 17 C.F.R. §§ 148.1, et seq. (2000), relating to, or arising from, this action, and he shall not assert any right under the Equal Access to Justice Act to seek costs, fees, or other expenses relating to, or arising from, this proceeding; and
7. any claim of double jeopardy based upon the institution of this proceeding or the entry in this proceeding of any order imposing a civil monetary penalty or any other relief;
D. Stipulates that the record basis on which this Order is entered consists solely of this Order and its findings to which he has consented in the Offer, which are incorporated in this Order; and
E. Consents, solely on the basis of the Offer, to the Commission's issuance of this Order, which makes findings and:
1. orders Martin to cease and desist from violating Sections 4b(a)(i) and (iii) and 4o(1) of the Act and Sections 4.41(a) and (b) and 33.10(a) and (c) of the Regulations; and
2. orders Martin to comply with his undertakings as set forth below.
Accordingly, IT IS HEREBY ORDERED THAT:
A. Martin cease and desist from violating Sections 4b(a)(i) and (iii), 4c(b) and 4o(1) of the Act and Sections 4.41(a) and (b) and 33.10(a) and (c) of the Regulations;
B. The Commission notes the appropriateness of a civil monetary penalty based on Martin's conduct, but waives the assessment of a civil monetary penalty based on sworn financial statements submitted by Martin. Martin has submitted a sworn Financial Disclosure Statement and has provided other evidence regarding his financial condition and has asserted a financial inability to pay a civil monetary penalty. If at any time following entry of this Order, the Division of Enforcement (the "Division") obtains information indicating that Martin's representations concerning his financial condition were fraudulent, misleading, inaccurate or incomplete in any material respect at the time they were made, the Division may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Martin provided accurate and complete financial information at the time such representations were made; (2) determine the amount of civil penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Martin's Offer had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Martin was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil penalty to be imposed, and whether any additional remedies should be imposed. Martin may not, by way of defense to any such petition, contest the validity of, or the findings in, this Order or assert that payment of a civil penalty should not be ordered; and
C. Martin shall comply with the following undertakings:
1. Martin shall not misrepresent, expressly or by implication:
a. the performance, profits or results achieved by, or the results that can be achieved by, users, including himself, of any commodity futures or options trading system or advisory service; and
b. the risks associated with trading pursuant to any commodity futures or options trading system or advisory service.
2. Martin shall not present the performance of any simulated or hypothetical commodity interest account, transaction in a commodity interest or series of transactions in a commodity interest unless such performance is accompanied by the following statement, as required by 17 C.F.R. § 4.41(b):
Hypothetical or simulated performance results may have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
In doing so, Martin shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results.
3. Martin shall not make any representation of financial benefits associated with any commodity futures or options trading system or advisory service without first disclosing, prominently and conspicuously, that futures and options trading involves high risks with the potential for substantial losses.
4. Martin shall not represent, expressly or by implication:
a. the performance, profits or results achieved by, or the results that can be achieved by, users, including himself, of any commodity futures or options trading system or advisory service;
b. the risks associated with trading pursuant to any commodity futures or options trading system or advisory service;
c. that the experience represented by any user, testimonial or endorsement of the commodity futures or options trading system or advisory service represents the typical or ordinary experience of members of the public who use the system or advisory service; unless: (i) Martin possesses and relies upon a reasonable basis substantiating the representation at the time it is made; and (ii) for two (2) years after the last date of the dissemination of any such representation, Martin maintains all advertisements and promotional materials containing such representation and all materials that were relied upon or that otherwise substantiated such representation at the time it was made, and makes such materials immediately available to the Division of Enforcement for inspection and copying upon request.
5. By neither admitting nor denying the findings of fact or conclusions of law, Martin agrees that neither he nor any of his agents or employees under his authority or control shall take any action or make any public statement denying, directly or indirectly, any findings or conclusions in the Order, or creating, or tending to create, the impression that the Order is without factual basis; provided, however, that nothing in this provision affects Martin's (i) testimonial obligations; or (ii) right to take factual or legal positions in other proceedings in which the Commission is not a party. Martin will undertake all steps necessary to assure that all of his agents and employees under his authority and control understand and comply with this agreement.
Unless otherwise specified, the provisions of this Order shall be effective on this date.
|By the Commission.|
|Dated: September 6, 2000||______________________|
|Jean A. Webb|
|Secretary to the Commission|
Commodity Futures Trading Commission
1 Martin does not consent to the use of the Offer or this Order, or the findings to which he has consented in the Offer, as the sole basis for any other proceeding brought by the Commission other than a proceeding brought to enforce the terms of this Order. He does not consent to the use of the Offer or this Order, or the findings to which he has consented in the Offer, by any other person or entity in this or any other proceeding. The findings to which he has consented in the Offer, as contained in this Order, are not binding on any other person or entity in any other proceeding.
2 The Internet is a highly beneficial medium that facilitates the dissemination of information, but which also enables potential violators to reach millions of people worldwide quickly and at very low cost. By this proceeding and the other proceedings being filed contemporaneously, as well as the ten proceedings brought on May 1, 2000, the Commission is addressing fraud committed on the Internet to promote the integrity of representations made on the Web concerning commodity futures and options trading systems.
3 In the Matter of R&W Technical Services, Ltd.., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27,582 at 47,740-47,741 (CFTC Mar. 16, 1999), aff'd in relevant part, R&W Technical Svcs., Ltd. v. CFTC, 205 F.3d 165 (5th Cir., 2000). See, e.g. Saxe v. E.F. Hutton, 789 F.2d 105, 110 (2d Cir. 1986); Kelley v. Carr, 442 F. Supp. 346, 351-54 (W.D. Mich. 1977), aff'd in part, rev'd in part, 691 F.2d 800 (6th Cir. 1980); CFTC v. J.S. Love Associates Options, Ltd., 422 F. Supp. 652, 655 (S.D.N.Y. 1976).
4 For example, fraudulent statements that induce members of the public to purchase software that generates specific buy and sell signals for commodity futures trading satisfy the "in connection with" requirement of Section 4b(a). R&W Technical Svcs., 205 F.3d at 170. See also Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977) (noting that the "in or in connection with" requirement should be interpreted flexibly to include deceptive conduct that occurs prior to the opening of an actual commodity trading account).
5 Section 4.41(b) provides, in relevant part: "(1) No person may present the performance of any simulated or hypothetical commodity interest account, transaction in a commodity interest or a series of transactions in a commodity interest . . . unless such performance is accompanied by one of the following: (i) The following statement: `Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown'; or (ii) A statement prescribed pursuant to rules promulgated by a registered futures association pursuant to Section 17(j) of the Act; (2) If the presentation of such simulated or hypothetical performance is other than oral, the prescribed statement must be prominently displayed."
6 Section 1a(5) specifically excludes from the definition of a CTA anyone who is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" if such publisher's or producer's provision of commodity futures trading advice is "solely incidental to the conduct of [its] business or profession," and thus Section 4o(1) of the Act and Section 4.41 of the Regulations do not apply to such persons. This exclusion is designed to protect incidental publishers of advice, such as general magazines and newspapers, not publishers who specifically concentrate on commodities advice. R&W Technical Svcs., 205 F.3d at 174.
7 See CFTC v. British American Commodity Options Corp., 560 F.2d 135, 141 (2d Cir. 1977), cert. denied, 438 U.S. 905 (1978) (a firm that "offer[ed] opinions and advice, and issued analyses and reports concerning the value of commodities" to customers, was a CTA under the Act); Gaudette v. Panos, 644 F. Supp. 826, 839 (D. Mass. 1986) (defendants who represented their advisory skills to be exemplary, suggested that plaintiffs open a commodity account and then recommended certain futures contracts for investment were CTAs).