UNITED STATES OF AMERICA

Before the

COMMODITY FUTURES TRADING COMMISSION

___________________________________________________
)
In the Matter of: ) CFTC Docket No. 00-17
)
MICHAEL P. CALO d/b/a ) ORDER INSTITUTING PROCEEDINGS

FIRST FINANCIAL TRADING,

) PURSUANT TO SECTIONS 6(c) AND 6(d)
) OF THE COMMODITY EXCHANGE ACT

Respondent.

) AND MAKING FINDINGS AND
) IMPOSING REMEDIAL SANCTIONS
___________________________________________________ )


I.

The Commodity Futures Trading Commission ("Commission") has reason to believe that Michael P. Calo d/b/a First Financial Trading ("Calo") has violated Sections 4b(a)(i) and (iii) and 4o(1)(A) and (B) of the Commodity Exchange Act, as amended (the "Act"), 7 U.S.C. 6b(a)(i) and (iii), 6o(1)(A) and (B), and Sections 4.41(a) and (b) of the regulations promulgated under the Act (hereafter the "Regulations"), 17 C.F.R. 4.41(a) and (b). Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted to determine whether Calo engaged in the violations set forth herein and to determine whether any order should be issued imposing remedial sanctions.

II.

In anticipation of the institution of these administrative proceedings, Calo has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Without admitting or denying the findings herein, Calo acknowledges service of this Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Act and Findings and Order Making Findings And Imposing Sanctions ("Order"). Calo consents to the use of the findings contained in this Order in this proceeding and in any other proceeding brought by the Commission or to which the Commission is a party.1

III.

The Commission finds the following:

A. SUMMARY

From early 1996 through December 1999, Calo published two daily newsletters, INSIDERS REPORT and INSIDERS S&P REPORT, each of which had a subscription cost of approximately $1,000 a year or $200 a month. In these newsletters, Calo provided futures trading recommendations and the purported results of his prior futures trading recommendations to subscribers and potential subscribers. Calo's futures trading results in his newsletters were based on hypothetical trading, but the newsletters failed to disclose that fact. Moreover, the hypothetical results were based upon Calo's after-the-fact selection of the entry and exit points upon which he chose to base his published results. Calo defrauded his clients and potential clients by failing to disclose the hypothetical nature and the after the fact selection of prices.

Calo's website, www.insiders-report.com, provided general information about Calo, the newsletters, and summary results of Calo's futures trading recommendations for 1998. Calo also committed fraud by failing to disclose in his website the same information he failed to disclose in his newsletters.

B. RESPONDENT

Michael P. Calo d/b/a First Financial Trading maintained offices at 49 Field Street, Bristol, Connecticut 06010-6132, where the newsletters INSIDERS REPORT and INSIDERS S&P REPORT were published. Prior to operating First Financial Trading, Calo provided mortgage and investment advice to real estate projects and project-related finance companies. Calo was registered with the Commission as a CTA between July 1997 and November 1998; his registration was terminated when he failed to pay his annual registration fee.

C. FACTS

In January 1996, Calo began publishing his two newsletters, INSIDERS REPORT and INSIDERS S&P REPORT. These newsletters provided futures trading recommendations as well as the purported results of his prior futures trading recommendations. Calo's website, www.insiders-report.com, provided general information about Calo, the newsletters and summary results of Calo's futures trading recommendations for 1998.

The Newsletters

Calo promoted the INSIDERS REPORT and INSIDERS S&P REPORT newsletters and solicited subscriptions through Calo's website, postings on Internet newsgroups and classified advertisements in Futures Magazine. Subscriptions to these newsletters cost approximately $1,000 per year or $200 per month. Calo would provide potential subscribers with a free trial subscription ranging in length from two weeks to a month. Calo sent out an average of three to five newsletters as free trial issues daily.

In his solicitations for potential customers of the INSIDERS REPORT and INSIDERS S&P REPORT newsletters, Calo stated that the newsletter was "designed for the average futures trader looking for daily recommendations" and that a subscription was "like having your own personal trading advisor." Calo further advertised that INSIDERS REPORT and INSIDERS S&P REPORT "is the most successful and profitable day and short-term trading system you can find."

The INSIDERS REPORT and INSIDERS S&P REPORT were sent out by Calo daily, via e-mail and facsimile, either at the end of the trading session with recommended futures trades for the following day, or early in the morning with that day's futures trading recommendations. Although Calo published these newsletters daily, there were days when there were no new trade recommendations.2 BUY and SELL signals contained in the newsletters usually stated the exact price of the buy, sell or market entry orders. In many of these trades, Calo recommended that a protective stop be moved to the entry point.

Internet Newsgroup Postings

In postings on various Internet newsgroups, INSIDERS REPORT and INSIDERS S&P REPORT made extravagant profitability claims. For example, Calo claimed in a December 17, 1998 posting in the Dejanews alt.invest.technical-analysis newsgroup that "[f]rom January through November 1998, the INSIDERS REPORT is up over 344% in profit . . . . During the same period, our INSIDERS S&P REPORT gained a whopping 373% profit. . . . For 1996 and 1997 INSIDERS [REPORT] & INSIDERS S&P [REPORT] were both up over 300%."3 A posting that was repeated on various newsgroups, including a January 6, 1999 posting on Dejanews misc.invest.futures, offered "308% return on your investment . . . with No Sleepless Nights."4

On at least three days in 1999, and at least one day in 1998, Calo also posted on Internet newsgroups his INSIDERS REPORT and INSIDERS S&P REPORT newsletters containing specific trading recommendations.

The Website

Calo's website provided potential subscribers with general background information about Calo and INSIDERS REPORT and INSIDERS S&P REPORT, subscription information and Calo's purported 1998 futures trading track record for INSIDERS REPORT and INSIDERS S&P REPORT.

Calo's False Claims

Calo's reported track records based on recommendations made in his newsletters were highly misleading. Calo selected prices at the end of the trading day for the track record and based his over 300% return on this after-the-fact price selection. In effect, Calo did not have a trading system at all. Calo failed to disclose to his clients the hypothetical nature and the after the fact selection of prices.

Neither Calo's postings in Internet newsgroups, his website nor summary performance data disclosed the hypothetical nature of these trading recommendations. Subscribers to these newsletters did not receive a copy of the subscription agreement, which discloses the hypothetical nature of the trading recommendations only on the second page, until after their trial issues expired. Additionally, several subscribers never received the second page.

Calo made some oral representations that conflicted with the subscription agreement; such as INSIDERS REPORT's and INSIDERS S&P REPORT's performance was based on "real time" trades which had been executed on a contract market. Another such representation was "I have personally traded, and continue to trade the currencies followed in INSIDERS since I began trading." Based on these representations, many if not all of INSIDERS REPORT's and INSIDERS S&P REPORT's subscribers believed that those publications' claimed trading performances were the result of actual trading.

D. VIOLATIONS OF THE ACT AND COMMISSION REGULATIONS

1. Calo 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 order or 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.5 Additionally, Sections 4b(a)(i) and (iii) require that the material misrepresentations and omissions of material facts be made "in connection" with futures transactions.6

Calo's knowingly false representations that INSIDERS REPORT and INSIDERS S&P REPORT trade recommendations generated large profits, overwhelmingly picked winning trades and involved little or no risk of loss, as well as his knowing misrepresentation that all of these claims were based on actual trading results, constitute fraud.7 Calo, through his newsletters, provided specific advice on trading commodities and falsely represented that the recommended trades had been executed by Calo when in fact these trades were hypothetical results. Calo promoted INSIDERS REPORT and INSIDERS S&P REPORT and solicited subscriptions by misrepresenting that his trading performance was the result of "real" trades (the performance table states that the results are net of commissions and fees) rather than hypothetical trades. Calo's trading record falsely represented results of hypothetical trading by cherry-picking those entry and exit prices, consistent with his previous trading recommendations, that would support his allegations of over 300% returns.

2. Calo Violated Section 4o(1) of the Act and Section 4.41 of the Regulations

Section 4o of the Act prohibits CTAs from (a) employing any device, scheme or artifice to defraud any client or participant or prospective client or participant, or (b) engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant. 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. 8

In order to establish a violation of Section 4o of the Act and Section 4.41 of the Regulations, the Division must prove that the respondent was (i) a CTA or, with respect to Section 4.41 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.9 Section 4.41 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, unless that person 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."10 Calo gave commodity futures trading advice for compensation or profit and, therefore, is a CTA. 11

INSIDERS REPORT and INSIDERS S&P REPORT advised subscribers to purchase or sell particular futures contracts. Subscribers were given specific BUY and SELL signals regarding entry and exit prices or were advised to enter at the market entry orders. Subscription fees averaged $1,000 a year. Moreover, Calo's furnishing of futures trading advice, through his newsletters and Internet newsgroup postings, was not "incidental to the conduct" of his business.12 Rather, providing futures trading advice was his business. Thus, Calo fits squarely within the definition of a CTA under Section 1a(5)(A) of the Act.

Calo's misrepresentations and misleading statements regarding the profitability of INSIDERS REPORT and INSIDERS S&P REPORT, and its hypothetical track record, constitute "devices, schemes or artifices to defraud" or "practices or courses of business which operate as a fraud or deceit" on Calo's subscribers in violation of Section 4b of the Act. These fraudulent representations included in INSIDERS REPORT's website and postings on Internet newsgroups also violate Section 4.41 of the Regulations. Neither the website nor the postings on Internet newsgroups contain a warning that the performance statistics reported are based upon hypothetical data. Therefore, these fraudulent representations violate Section 4.41 of the Regulations.

IV.

OFFERS OF SETTLEMENT

Calo has submitted an Offer in which he, without admitting or denying the findings herein: (1) admits the jurisdiction of the Commission with respect to the matters set forth herein; (2) acknowledges service of the Order; (3) waives the filing of a complaint, notice of hearing, a hearing, all post-hearing procedures, judicial review by any court, any objection to the staff's participation in the Commission's consideration of the Offer, all claims which Calo 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 Pub. L. No. 104-121, 231-32, 110 Stat. 862-63 (1996), and Part 148 of the Commission's Regulations, 17 C.F.R. 148.1, et seq. (1997), relating to or arising from this action, and any claim of Double Jeopardy based upon institution of this proceeding or the entry of any order imposing a civil monetary penalty or any other relief; (4) stipulates that the record basis on which the Order may be entered shall consist solely of the Order and findings in the Order consented to in the Offer; and (5) consents to the Commission's issuance of this Order, which makes findings as set forth below and: (a) orders Calo to cease and desist from violating the provisions of the Act and Regulations that he has been found to have violated; (b) notes the appropriateness of a civil monetary penalty, but does not impose one based upon Calo's demonstrated inability to pay; and (c) orders Calo to comply with the undertakings as set forth in the Order.

V.

FINDINGS OF VIOLATIONS

Solely on the basis of the consent evidenced by the Offer, and without any adjudication on the merits, the Commission finds that Calo violated Sections 4b(a)(i) and (iii) and 4o(1)(A) and (B) of the Act, 7 U.S.C. 6b(a)(i) and (iii), 6o(1)(A) and (B), and Sections 4.41(a) and (b) of the Regulations, 17 C.F.R. 4.41(a) and (b).

VI.

ORDER

Accordingly, it is hereby ordered that:

1. Calo shall cease and desist from further violations of Sections 4b(a)(i) and (iii) and 4o(1)(A) and (B) of the Act, 7 U.S.C. 6b(a) (i) and (iii) and 6o(1)(A) and (B), and Sections 4.41(a) and (b) of the Regulations, 17 C.F.R. 4.41(a) and (b).

2. The Commission notes the appropriateness of a civil monetary penalty but, based upon Calo's sworn representations and other evidence provided by Calo regarding his financial conditions, the Commission is not requiring Calo to pay a civil monetary penalty. The determination not to impose a civil monetary penalty is contingent upon the accuracy and completeness of Calo's sworn statement and other evidence provided by Calo regarding his financial condition. If at any time following the entry of this Order, the Division of Enforcement obtains information indicating that any of Calo's representations concerning his financial condition was fraudulent, misleading, inaccurate or incomplete in any material respect at the time it was made, the Division of Enforcement may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Calo provided accurate and complete financial information at the time such representation was 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 Calo's offer had not been accepted. No other issues shall be considered in connection with this petition other than whether any of the financial information provided by Calo 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. Calo may not, by way of defense to any such petition, contest the validity of or the findings in this Order, contest the allegations in the Complaint, or assert that payment of a civil penalty should not be ordered.

3. Calo is directed to comply with his undertakings:

1. Calo 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 him/herself, 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. Calo 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 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, Calo shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results.

3. Calo 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 trading involves high risks with the potential for substantial losses.

4. Calo 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 him/herself, of any commodity futures or options trading system or advisory service;

b. the risks associated with trading using 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) Calo 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, Calo 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, Calo 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 a factual basis; provided, however, that nothing in this provision shall affect Calo's (i) testimonial obligations, or (ii) right to take factual and legal positions in other proceedings to which the Commission is not a party. Calo 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.

Dated: May 1, 2000 BY THE COMMISSION
_________________
Jean Webb
Secretary of the Commission
Commodity Futures Trading Commission



NOTES:

1 Calo does not consent to this use of his Offer or the findings in this Order, consented to in his Offers, as the sole basis for any other proceeding brought by the Commission, other than a proceeding brought to enforce the terms of this Order. Calo also does not consent to the use of his Offer or the findings in the Order by any other person or entity in this or in any other proceeding. The findings made in the Order are not binding on any other person or entity named as a defendant or respondent in this or any other proceeding.

2 On any given day, Calo provided futures trading recommendations only on certain markets. Trading recommendations would be triggered when futures prices reached values established by Calo's trading system. This system purportedly was comprised of industry recognized indicators, proprietary indicators which tracked fundamental movement as well as direction and momentum. If futures prices did not reach the value established by this trading system, no trade advice would be recommended.

3 These claims purportedly were based on a $15,000 margin account for INSIDERS REPORT and a $25,000 margin account for INSIDERS S&P REPORT and did not include commissions or fees. However, Calo did not maintain any such futures trading accounts nor trade any such account on behalf of another person.

4 This claim purportedly was based on a $25,000 margin account.

5 In the Matter of R&W Technical Services, Inc., [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., Inc. v. CFTC, 2000 WL 217498 (5th Cir. Feb. 24, 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).

6 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., 2000 WL at 217498 . 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).

7 See, e.g., CFTC v. Skorupskas, 605 F. Supp. 923, 933 (E.D. Mich. 1985) (misrepresenting performance tables as being actual trading results violated Section 4b of the Act); Muniz v. Lassila, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,225 at 38,650 (CFTC Jan. 17, 1992) (misrepresenting a theoretical, untested approach to trading as an established, successful trading program is material and was a violation of Section 4b of the Act).

8 Section 4.41(b) of the Regulations 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 the 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."

9 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 the public as a CTA without being registered with the Commission).

10 Section 1a(5) of the Act, 7 U.S.C. 1a(5). Section 4o(1) of the Act and Section 4.41 of the Regulations thus do not apply to a CTA who is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" whose "furnishing of [advice] ... is solely incidental to the conduct of their business or profession." 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., 2000 WL at *7.

11 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).

Section 4o(1) of the Act and Section 4.41 of the Regulations exempts CTAs who are "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" whose "furnishing of [advice] ... is solely incidental to the conduct of their business or profession." This exemption is designed to reach those who publish material of general interest in which there might be some incidental material, but which could not be construed as providing information about the advisability or value of futures trading. In re Armstrong, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,657 at 40,149 (CFTC Feb. 8, 1993) (Commission finds publisher exclusion inapplicable where the respondent's provision of trading advice "far from being 'solely incidental' to its publishing business, was the very point of that business").