UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC Docket No. 00-16|
|ELLERY COLEMAN d/b/a||)||ORDER INSTITUTING PROCEEDINGS|
|)||PURSUANT TO SECTIONS 6(c) AND 6(d)|
|)||OF THE COMMODITY EXCHANGE ACT,|
|)||AS AMENDED, MAKING FINDINGS|
|)||AND IMPOSING SANCTIONS|
The Commodity Futures Trading Commission ("Commission") has reason to believe that Ellery Coleman, individually and d/b/a Granite Investments ("Coleman"), has violated Sections 4b(a)(i) and (iii) and 4o(1) of the Commodity Exchange Act (the "Act"), 7 U.S.C. §§ 6b(a)(i) and (iii) and 6o(1) (1994), and Section 4.41(a) of the Commission's Regulations, 17 C.F.R. § 4.41(a) (1999). Therefore, the Commission deems it appropriate and in the public interest that administrative proceedings be, and hereby are, instituted to determine whether Coleman engaged in the violations set forth in this Order and to determine whether any Order should be issued imposing remedial sanctions.
In anticipation of the institution of this administrative proceeding, Coleman 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, Coleman acknowledges service of this Order. Coleman consents to the use of the findings in this Order in this or any other proceedings brought by the Commission or to which the Commission is a party.1
The Commission finds the following:
Ellery Coleman, d/b/a Granite Investments, sells through an Internet website various products and services, including two computer-run commodity trading systems and an advisory service that furnishes subscribers with trading recommendations by e-mail. Through his website, Coleman falsely claims that his trading systems and advisory service have generated huge profits with little risk, and that Coleman has personally made substantial profits through futures trading. Coleman's activities in fraudulently advertising his trading course and trading systems violated Sections 4b(a)(i) and (iii) and 4o(1) of the Act, and Section 4.41(a) of the Commission's Regulations.2
Ellery Coleman, individually and d/b/a Granite Investments, is a sole proprietorship located at 133 Bunkers Trail, Warner Robins, Georgia 31088. Neither Coleman nor Granite Investments is registered with the Commission as a Commodity Trading Advisor ("CTA").
Products And Services Sold Through The "Choicedaytrades" Website
Granite Investments, through its principal, Ellery Coleman, sells various products and services to assist customers in "daytrading" S&P 500 futures, including computer-run commodity trading systems, on-line training, a book on commodities trading authored by a third party, and subscriptions to an advisory service that provides specific trading recommendations. Coleman began selling his products and services in 1997 through mail solicitations, and then in approximately July 1998 began conducting sales and marketing through an Internet website (www.choicedaytrades.com).
Among the products and services available through the Internet site are two commodity trading systems that generate trading recommendations in S&P 500 futures -- the S&P Savvy and the Reliable Pattern Match ("RPM"). Purchasers of the trading systems receive computer software, a manual for trading S&P 500 futures, and access to online training. Customers purportedly use these trading systems by entering each day's opening, high, low, and closing prices, after which the systems generate three to four "scenarios" for the next day's trading, including specific entry and exit prices. Coleman also sells Choice Daytrades, a subscriber service through which customers receive trading recommendations via e-mail. On the website, Coleman claims that he relies on a trading system to inform the recommendations he makes to Choice Daytrades subscribers, but that he also exercises "some discretion" in selecting the recommended trades. These services can be purchased on a quarterly or annual basis, with annual prices ranging from $2450 to $3995.
Claims Concerning Profits
Coleman's website claims that his advisory service and trading systems have generated extraordinary profits.3 For instance, Coleman claims:
· "Day Trading the S&P 500" through Choice Daytrades -- "$144,650 per contract in 1999"
· "S&P Savvy up $44,050 for March99 contract"
· S&P Savvy had a "net profit of $62,425" per December98 contract . . . Return on account 2041%"
· S&P Savvy "made at least $25,000 for each contract period in the last three years"
· RPM "Results: Up $151,500 per 2 contracts on 1997"
· If customers had traded through RPM on October 15, 1998, they would have seen a "profit of a whopping $28,250" (emphasis in original)
Coleman has also represented that he trades S&P futures for his own account, and that he has made huge profits by using his trading systems. For example, Coleman states that:
· On October 15, 1998 when the S&P long position shot up over 20 before noon, "[i]t is my custom to take profits of 20 points when up that much by noon, so we made $10,000 per 2 contracts very quickly." Coleman added that "[t]his was not a hypothetical trade but was actually traded." (emphasis in original); and
· He achieved a profit of $13,361.57 in seven days and "tripled the account."
Coleman's own trading demonstrates that his claims about profits associated with the advisory service and trading systems are false. Of Coleman's three commodity trading accounts, two reflect trades of March99 contracts. Those trades resulted in a net loss of $431.22. Additionally, none of the three accounts reflect any trades involving December98 contracts. In fact, Coleman's first account, which was opened in January 1995 and closed one month later, sustained a net loss of $2,289.74. In another account opened in September 1996 and closed in April 1998, Coleman lost $4,782.54. In a third account, which was opened in February 1997, he achieved a short-term profit of over $13,000, as he claims on his website, but rather than tripling in value, as he claims, further trading resulted in losses of $4,961.56. Finally, on the day Coleman claims to have made a quick $10,000 profit on a S&P long position, there is no record that any trades were executed on his behalf.
Claims Concerning Risk of Loss
Through his website, Coleman claims that his trading systems minimize the risk of trading losses. For instance, Coleman promises to:
· "keep your risk low" because the contract is not held overnight
· minimize risks because "nothing stacks the odds in your favor like [it]"
· provide a system "with low risk stops."
These claims are also false. As exemplified by Coleman's own trading of S&P 500 futures, his trading systems do not minimize the risks of trading.
D. Legal Discussion
Coleman Violated Sections 4b(a)(i) and (iii) of the Act
Sections 4b(a)(i) and (iii) of the Act provide that is 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 attempted 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.4 Additionally, Sections 4b(a)(i) and (iii) require that the material misrepresentations and omissions of material facts be made "in connection" with futures transactions.5
Coleman has violated Sections 4b(a)(i) and (iii) through fraudulent acts by: misrepresenting that recommendations generated by his advisory service and trading systems have generated huge profits, including in his own trading; and minimizing the risks of trading S&P 500 futures through the system. Coleman also represented that his systems had generated tremendous profits, knowing that such claims were not based on actual trading, but rather on 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., 2000 WL at *3. See also CFTC v. Skorupska, 605 F. Supp. 923, 933 (E.D. Mich. 1985) (misrepresenting performance tables as being actual trading results violated Section 4b of the Act).
Coleman Violated Section 4o(1) of the Act and Section 4.41 of the Regulations
Section 4o(1) 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. 6
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.7 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."8 Coleman gave commodity futures trading advice for compensation or profit and, therefore, is a CTA. 9
Coleman's claims concerning the profits and risk associated with his advisory service and trading systems violate Section 4o(1) of the Act and Section 4.41 of the Regulations for the same reasons as they violate Sections 4b(a)(i) and (iii) of the Act.
Offer of Settlement
Coleman has submitted an Offer of Settlement ("Offer") in which he, without admitting or denying the findings of fact or conclusions of law in this Order, before the taking of testimony and without adjudication of any issues of fact or law by the Commission, Coleman:
A. Admits the jurisdiction of the Commission with respect to all matters set forth in the Order;
B. Acknowledges service of this 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 the Offer;
6. all claims with Coleman 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. 847 and Part 148 of the Commission's; and Regulations, 17 C.F.R. § 148.1 et seq., relating to or arising from the Order;
7. any claim of Double Jeopardy based upon the institution of this proceeding or the entry of any order imposing a civil penalty or any other relief;
D. Stipulates that the record basis on which the Order may be entered consists solely of the Order and the findings consented to in the Offer, which are incorporated in the Order; and
E. Consents, solely on the basis of this Offer, to entry of the Order in the form attached hereto which:
1. makes findings of fact and finds that Coleman violated Sections 4b(a)(i) and (iii) and 4o(1) of the Commodity Exchange Act, as amended (the "Act"), 7 U.S.C. §§ 6b(a)(i) and (iii) and 6o(1) (1994), and Section 4.41 of the Commission's Regulations, 17 C.F.R. § 4.41(a) (1999). Respondent Coleman consents to the use of these findings in this and any other proceeding brought by the Commission or to which the Commission is a party; provided, however, Coleman does not consent to the use of the Offer or the Order, or the findings consented to in the Offer, as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of the Order. Respondent Coleman does not consent to the use of the Offer or the Order, or the findings in the Order consented in the Offer, by any other person or entity in this or in any other proceeding; and
2. directs that:
(a) Coleman shall pay a civil monetary penalty of ($ 10,000) (ten thousand dollars);
(b) Coleman cease and desist form violating Sections 4b(a) and 4o(1) of the Act, 7 U.S.C. §§ 6b(a) and 6o(1) (1994); and
(c) Coleman shall comply with his undertakings, as set forth in the Order.
Findings of Violations
Solely on the basis of the consent evidenced by the Offer, and prior to any adjudication of the merits by the Commission, the Commission finds that Coleman violated Sections 4b(a)(i) and (iii) and 4o(1), and Commission Regulation 4.41(a).
Accordingly, IT IS HEREBY ORDERED THAT:
A. Coleman cease and desist from violating Sections 4b(a)(i) and (iii) and 4o(1) of the Commodity Exchange Act (the "Act"), as amended 7 U.S.C. §§ 6b(a)(i) and (iii) and 6o(1) (1994), and Sections 4.41(a) of the Commission's Regulations, 17 C.F.R. § 4.41(a) (1999);
B. Coleman pay a civil penalty of $ 10,000. Coleman shall pay the total amount within ten days of the date of the Order by electronic funds transfer, or by U.S. postal money order, certified check, bank cashier's check, or bank money order, made payable to the Commodity Futures Trading Commission, and sent to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, under cover of a letter that identifies Coleman and the name and docket number of the proceeding; Coleman shall simultaneously transmit a copy of the cover letter and the form of payment to Phyllis J. Cela, Acting Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581; and
C. Coleman shall comply with the following undertakings:
1. Coleman 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. Coleman 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, Coleman shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results.
3. Coleman 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. Coleman 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 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) Coleman 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, Coleman 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.
6. By neither admitting nor denying the findings of fact or conclusions of law, Coleman 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 Coleman's (i) testimonial obligations, or (ii) right to take factual or legal positions in other proceedings in which the Commission is not a party. Coleman 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.
|Dated: May 1, 2000||BY THE COMMISSION|
|Secretary of the Commission|
|Commodity Futures Trading Commission|
1 Coleman does not consent to the use of the Offer or this Order, or the findings herein, as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of this Order. He does not consent to the use of the Offer or the Order, or the findings herein, by any other party in any other proceeding. The findings consented to in the Offer or made in the Order are not binding on any other person or entity in any other proceeding before the Commission.
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 and other proceedings, the Commission is addressing fraud committed on the Internet to promote the integrity of promotions made concerning commodity futures and options trading systems on the web.
3 The website purports to provide a disclaimer with respect to the profits attributable to Choice Daytrades recommendations. Specifically, the website states that "some" but "not all" of the trades recommended to subscribers were "taken in real time with real money," and therefore "[t]he CFTC requires" a disclaimer. The disclaimer provided is the one set forth in Section 4.41(b) of the Commission's Regulations for hypothetical or simulated performance results. However, in most instances, the website fails to specify which claims or trades attributed to the Choice Daytrades advisory service are the result of hypothetical or simulated trading.
4 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).
5 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 *5-6 . 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).
6 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."
7 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).
8 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.
9 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).