UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
|COMMODITY FUTURES TRADING COMMISSION,||)||Case No. SACV-00-940|
|)||COMPLAINT FOR INJUNCTIVE AND|
|)||OTHER EQUITABLE RELIEF AND FOR|
|RABB SABIN, an individual, and||)||CIVIL PENALTIES UNDER THE|
ART SMITH, an individual,
|)||COMMODITY EXCHANGE ACT, AS|
|)||AMENDED, 7 U.S.C. §§ 1, ET SEQ|
1. Defendants Rabb Sabin ("Sabin") and Art Smith ("Smith"), d/b/a Westar Financial Services ("Westar"), d/b/a The Cash Nursery ("TCN"), and d/b/a www.the-cash-nursery.com (the "Website"), have engaged and are engaging in various acts or practices in violation of Sections 4c(b) and 4o(1) of the Commodity Exchange Act (the "Act") and Sections 4.41 (a) and (b) and 33.10 of the Regulations promulgated thereunder (the "Regulations").
2. Specifically, Defendants, while operating as commodity trading advisors, have made and are making material misrepresentations concerning the following: (1) the profitability of their actual trading using TCN's trading methodology; (2) the presentation of hypothetical trades as actual trades; (3) their trading backgrounds; and (4) customers' ability to view TCN's actual trades before TCN actually places them (the "Website's Live Trade Section").
3. Accordingly, the Commodity Futures Trading Commission ("Commission") brings this action to enjoin such acts and practices and to compel compliance with the provisions of the Act and the Regulations. In addition, the Commission seeks a civil monetary penalty, an accounting, disgorgement of unlawfully obtained funds, restitution, and such other ancillary equitable relief as the Court may deem necessary or appropriate under the circumstances.
JURISDICTION AND VENUE
4. This Court has jurisdiction over this action pursuant to Section 6c(a) of the Act, 7 U.S.C. § 13a-1(a), which provides that whenever it shall appear to the Commission that any person has engaged, is engaging or is about to engage in any act or practice constituting a violation of the Act or any rule, regulation, or order thereunder, the Commission may bring an action against such person in the proper District Court of the United States to enjoin such practices, to enforce compliance with the Act, to remove any danger of violation of the Act, and for civil penalties.
5. Venue properly lies with this Court pursuant to Section 6c(e) of the Act, 7 U.S.C. § 13a-1(e), in that the Defendants are found in, inhabit, and transact business in this district, and the acts and practices in violation of the Act have occurred, are occurring, and are likely to continue to occur within this district, among other places.
6. The Commission, an independent federal regulatory agency of the United States of America, is empowered to enforce the provisions of the Act, 7 U.S.C. §§ 1, et seq., and the Regulations promulgated thereunder, 17 C.F.R. §§ 1.1, et seq.
7. Sabin, who resides in Silverado Canyon, California and has a mailing address of P.O. Box 732, Silverado Canyon, California 92676, has never been registered with the Commission in any capacity.
8. Smith, who resides at 880 N. Adele St., Apt. 1, Orange, California 92867, has never been registered with the Commission in any capacity.
9. Sabin and Smith conduct business under several names, including Westar, TCN and the Website.
STATUTORY AND REGULATORY BACKGROUND
10. A commodity trading advisor ("CTA") is defined in Section la (5)(A) of the Act, 7 U.S.C. §1a (5) (A), as any person who for compensation or profit, engages in the business of advising others as to the value of or the advisability of trading in: (i) any contract of sale of a commodity for future delivery made or to be made on or subject to the rules of a contract market; (ii) any commodity option authorized under Section 4c of the Act, 7 U.S.C. § 6c; or (iii) any leverage transaction authorized under Section 19 of the Act, 7 U.S.C. § 23, or a person who for compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the activities referred to above.
11. In 1996, Sabin purportedly developed a trading methodology ("Trading Methodology") to trade commodity options.
12. Sabin developed the Website in 1996.
13. Sabin began soliciting customers to purchase subscriptions to the Website in 1996 by utilizing the mails or other means or instrumentalities of interstate commerce.
14. Smith joined Sabin in 1997.
B. Material Misrepresentations Concerning Profitability
15. Since 1996, to induce customers to subscribe to the Website, Defendants have consistently misrepresented the profitability of trades they purportedly actually placed.
16. For example, Defendants informed customers that, using their Trading Methodology, they had made "successful trades" over 90% of the time on a yearly basis.
17. Defendants defined a "successful trade" for commodity options as achieving "a minimum investment return of 100% after fees and commissions."
18. Defendants falsely informed customers that TCN actually placed "successful" trades for commodity options through certain brokers, despite knowing that TCN never had any commodity trading account.
19. Defendants falsely informed customers that they had actually placed "successful" trades in their own personal trading accounts, despite knowing that their commodity trading accounts had never achieved the profits claimed on the Website.
20. Sabin informed customers that he "hit a big coffee trade in early 1994 with three options at $1530 total invested. Turned $1530 into $130,000 in 92 days, that 130K into $550,000 by end of 1994."
21. At the time Defendants made this representation concerning Sabin's coffee trade, Defendants knew that this was not an actual trade but was, at best, a hypothetical, paper trade.
22. Likewise, Smith informed customers that he "[t]urned $1,000 into $200,000 in one year using TCN methods."
23. At the time Defendants made this representation concerning Smith's trade, Defendants knew that this was not an actual trade but was, at best, a hypothetical, paper trade.
C. Material Misrepresentations Concerning Defendants' Backgrounds
24. Defendants misrepresented their backgrounds and trading histories to customers.
25. To induce customers to purchase subscriptions to the Website, Defendants made the following misrepresentations to customers: (1) that Sabin had earned a college degree; (2) that Sabin had earned a Masters degree in Business Administration from San Diego University; (3) that Sabin had served as a Special Forces Medic in Vietnam; and (4) that Smith had traded commodities since 1994.
26. To induce customers to purchase subscriptions, Defendants falsely informed customers that they had "thousands" of satisfied customers since 1996.
D. Material Misrepresentations Concerning the Website's Live Trade Section
27. Defendants falsely informed customers that "TCN shares specific option trades with [subscribers] that TCN executes for its own trading accounts."
28. Defendants falsely informed customers that customers could view TCN's trades before TCN "actually played" them with TCN's brokers.
29. Defendants falsely informed customers that "TCN selects 8 - 15 trades per week" on average and that "TCN criteria must be met to post trades."
30. TCN never had its own trading account.
31. Defendants never provided customers with access to the Website's Live Trade Section.
32. The Website includes a section entitled Testimonials, which lists several endorsements by individuals purporting to be satisfied customers of TCN.
33. Upon information and belief, Defendants cannot substantiate the claims contained in the Testimonials section.
VIOLATIONS OF THE COMMODITY EXCHANGE
THE REGULATIONS PROMULGATED THEREUNDER
VIOLATIONS OF SECTION 4c(b) OF THE
ACT AND REGULATION 33.10:
FRAUD IN CONNECTION WITH OPTIONS CONTRACTS
34. Paragraphs 1 through 33 are realleged and incorporated herein by reference.
35. Through their actions and material misrepresentations, Defendants have cheated, defrauded or attempted to cheat or defraud, and have willfully deceived, or attempted to deceive, their customers and prospective customers in or in connection with an offer to enter into, the entry into, the confirmation of the execution of, or the maintenance of, any commodity option transaction.
36. Each material misrepresentation or omission, and each willful deception made during the relevant time period, including but not limited to those specifically alleged herein, is alleged as a separate and distinct violation of Section 4c(b) of the Act and/or Regulation 33.10.
VIOLATIONS OF SECTION 4o (1)
OF THE ACT AND REGULATION 4.41(a) and (b):
FRAUD BY A COMMODITY TRADING ADVISOR
37. Paragraphs 1 through 36 are realleged and incorporated herein by reference.
38. Defendants, while operating as CTAs, and by use of the mails, means and instrumentalities of interstate commerce, have directly or indirectly employed or are employing a device, scheme or artifice to defraud clients or prospective clients or have engaged or are engaging in transactions, practices or a course of business which operate as a fraud or deceit upon such clients or prospective clients, in violation of Section 4o(1) of the Act.
39. Defendants, while operating as CTAs, have advertised and are advertising in a manner which employs devices, schemes or artifice to defraud clients or prospective clients, or have engaged or are engaging in transactions, practices or a course of business which operate as a fraud or deceit upon such clients or prospective clients, in violation of Regulation 4.41(a).
40. Defendants presented hypothetical performance statistics without the required warnings in advertisements or other solicitation materials, in violation of Regulation 4.41(b).
41. Each material misrepresentation or omission, and each willful deception made during the relevant time period, including but not limited to those specifically alleged herein, is alleged as a separate and distinct violation of Section 4o(1) of the Act, 7 U.S.C. § 6o(1), and/or Regulation 4.41(a) and (b), 17 C.F.R. § 4.41(a) and (b).
Wherefore, the Commission respectfully requests that this Court enter:
A. An Order of permanent injunction, enjoining Defendants, and all persons insofar as they are acting in the capacity of agents, servants, employees, successors, assigns, or attorneys of Defendants, and all persons insofar as they are acting in active concert or participation with Defendants, who receive actual notice of such orders by personal service or otherwise, including by facsimile transmission, from directly or indirectly:
(1) Cheating, defrauding or deceiving or attempting to cheat, defraud or deceive other persons, in or in connection with an offer to enter into, the entry into, the confirmation of the execution of, or the maintenance of, any commodity option transaction, in violation of Section 4c(b) of the Act and Regulation 33.10, 17 C.F.R. § 33.10; and
(2) While operating as a CTA, employing any device, scheme, or artifice to defraud, or engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon, any client or prospective client by use of the mails or any means or instrumentality of interstate commerce, in violation of Section 4o(1) of the Act, 7 U.S.C. § 6o(1), and Commission regulation 4.41(a) and (b), 17 C.F.R. 4.41(a) and (b);
B. An order directing that an accounting be made to both the court and the commission of all assets and liabilities of defendants, together with all funds received from and paid out by them to subscribers to TCN and other persons in connection with commodity options transactions or purported commodity options transactions, and all disbursements for any purpose whatsoever of funds received from subscribers of TCN, including salaries, commissions, fees, loans, and other disbursements or money and property of any kind;
C. An order directing Defendants to disgorge all benefits received including, but not limited to, salaries, commissions, fees, revenues, and trading profits derived, directly or indirectly, from acts or practices which constitute violations of the Act or Regulations, as described herein, plus prejudgment interest on such amounts;
D. An order of restitution directing Defendants to make whole each and every subscriber of their web site whose funds they received or utilized in violation of the provisions of the Act or Regulations, plus prejudgment interest on such amounts;
E. An order imposing a civil monetary penalty on Defendants in an amount not more than the higher of: (1) $110,000 (or $100,000 for violations prior to November 27, 1996) or (2) triple the monetary gain to Defendants for each violation of the Act or Regulations;
F. An award of prejudgment interest;
G. An order requiring Defendants to pay costs and fees as permitted by 28 U.S.C. §§ 1920 and 2412(a)(2); and
H. Such other equitable relief as the Court may deem necessary or appropriate under the circumstances.
Dated: September 27, 2000
Los Angeles, California
LOUIS V. TRAEGER
Stephen J. Obie
Louis V. Traeger, State Bar No. 38714
Attorneys for Plaintiff