UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC Docket No. 00-14|
|ERON DEMIAN READ, d/b/a||)||ORDER INSTITUTING PROCEEDINGS|
NEW AGE TRADING TECHNIQUES, and
|)||PURSUANT TO SECTIONS 6(c) AND 6(d)|
|GLOBAL FUTURES EXCHANGE||)||6(d) OF THE COMMODITY EXCHANGE|
& TRADING COMPANY,
|)||ACT, AS AMENDED, MAKING FINDINGS|
|)||AND IMPOSING SANCTIONS|
The Commodity Futures Trading Commission ("Commission") has reason to believe that Eron Demian Read, individually and d/b/a New Age Trading Techniques ("Read/NATT") has violated Sections 4ba(i) and (iii) and 4o(1) of the Commodity Exchange Act (the "Act"), 7 U.S.C. §§ 6b(a)(i) and (iii), 6o(1), and Section 4.41(a) of the Commission's Regulations, 17 C.F.R. § 4.41(a) (1999); and that Global Futures Exchange & Trading Company ("Global") violated Sections 4ba(i) and (iii) of the Act. Therefore, the Commission deems it appropriate and in the public interest that administrative proceedings be, and hereby are, instituted to determine whether Read/NATT and Global 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, Read/NATT and Global have each submitted an offer of settlement ("Offer"), which the Commission has determined to accept. Without admitting or denying the findings of this Order, and without to any adjudication on the merits, Read/NATT and Global each acknowledge service of this Order. Read/NATT and Global consent 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:
Eron Demian Read ("Read"), d/b/a New Age Trading Techniques ("NATT"), sells a commodity trading system and related services through an Internet website. Through NATT, Read offers a computer trading course, a training manual, "daily trade logs", an opportunity for customers to participate in and be tutored in chat rooms by e-mail, and trade "indicators." He offers to customize these indicators to fit a customer's personal trading style. Through his website and advertisements in trading publications, Read conveys a false impression that he is actually trading the market and providing live commentary as the market trades. In addition, Read/NATT agreed with Global, an introducing broker, to post Global's offer of a rebate on his website. The manner in which this rebate offer was presented to the public gave the false impression that the cost of any NATT products purchased could be recouped through an immediate credit to a Global brokerage account. 2
Eron Demian Read, individually and d/b/a New Age Trading Techniques, is a sole proprietorship located at 12358 Ventura Boulevard, Suite 273, Studio City, CA. 91604. Read became a registered CTA in February 2000. Prior to February 2000, he was not registered with the Commission in any capacity.
Global Futures Exchange & Trading Company Inc., ("Global") is a registered Introducing Broker located at 14542 Ventura Blvd., #214, Sherman Oaks, California 91403.
Products and Services Sold Through the NATT Website
Read, through NATT, sells various products and services to assist customers in "daytrading" the S & P 500 futures market. Read began doing business as NATT in January 1998. By early November 1999, Read was selling his products and services through an Internet website with the address www.natt.net.
Through his website, Read solicited customers to purchase a futures daytrading method through a "one-on-one" instructional course conducted via e-mail, a trading concepts manual and trade "indicators." The trade indicators are described as a mechanical system that provides trading signals. Read offers to customize the indicators to fit a customer's personal trading style. Additionally, Reed offers a trading course which includes daily trade logs that purport to be a record of actual daytrading. Read also offered "real-time" instruction via an Internet chat room.
Claims Concerning Actual Trading
The description of Read's service conveyed a false impression that Read was actually trading when in fact Read had not traded since early 1997, and then for only two months. For instance, on his website, Read claims:
· "This course reinforces its trading techniques through a live trading chat room. Eight trading sessions, twice per week, from market open to close, your instructor will trade the markets and explain each and every trade to you LIVE in real-time." (emphasis in original)
· "Trades illustrated in this log mostly refer to trades being considered for the commentator's own accounts(s). The commentator may occasionally trade for non-solicited accounts in addition to his/her own accounts(s)."
· "The Daily Trade Log documents minute by minute, bar by bar, the thought process of the instructor as it occurred in real-time. This incredible service allows you to participate in the logistics of a trade. *** Since the instructor is trading for real, it heightens the reality of the trade."
The website purports to provide a disclaimer about actual trading. However, the disclaimer only adds to the false impression that Read is actually trading because it states that only some trading is hypothetical and that the hypothetical trading is clearly marked. For instance, under the heading "Disclaimer", the website provides, among other things:
· "There are days or times when the trades shown in the Daily Trade Log are created in retrospect (these trades are clearly labeled)."
· "CFTC Disclaimer: There are days or times when the trades shown in the Daily Trade Logs are not actual, which are marked and then the following CFTC disclaimer may apply."
Despite these statements, in most instances, the website and Daily Trade Logs failed to specify which trades were the result of hypothetical or simulated trading.3 In fact, but for some trading in early 1997, all the trades are hypothetical.
In addition to the materials on his website, Read placed advertisements in various industry publications. The advertisements read, in relevant part:
· "Learn this new revolutionary methodology for day trading the S& P. Watch us trade live in real-time via the Internet!"
The facts that Read had not traded since 1997 and that the trades were not live but were hypothetical make the advertisements and claims fraudulent and deceitful.
The Agreement Between Read and Global
On December 10, 1998, Global, entered into a written promotion agreement with Read in which Global agreed to issue "credit directly or through rebate of commissions spent to the trading account" to any NATT customer who opened a trading account with Global. This agreement explicitly set out the specific language of a "Special Offer" that Read presented to his customers on the website. The "Special Offer" stated in part:
"[I]f [the customer purchases] either the NATT basic course or the NATT complete package, [Global] agrees to apply the same amount of monies [the customer has] paid to NATT into [the customer's] trading account with this firm",
"[Global] will credit [the customer's] brokerage account for the amount of [his/her] NATT purchase, either directly or indirectly through rebate of commissions spent."
These representations gave the false impression that Global would provide an immediate credit of the amount a customer had spent on NATT trading systems in the customer's trading account, reimbursing the customer for his or her outlay for the course and providing a risk-free amount of money with which to begin trading. Read added to this false impression by also posting a website promotion that read, in part: "[H]ave a broker pay [in full] for the NATT course."
In reality, Global's "rebate" was $5 off each $25 commission paid by the customer for a round-turn trade. In order to recoup the $1600 average price for the NATT complete package, a customer would have to have engaged in 64 round-turn trades at a cost of thousands of dollars. Therefore, the impression created by Read and NATT and Global that Global would provide an immediate and full credit was false and misleading.
D. Legal Discussion
VIOLATIONS OF THE ACT AND COMMISSION REGULATIONS
1. Read 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.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
Read represented that he was actually trading and that customers could observe him trading knowing that he was not actually trading and that his daily trade logs were not based on actual trading, but rather on hypothetical trading. A statement is material if a reasonable investor would have considered the information important in making a decision to invest. Sudol v. Shearson Loeb Rhoades Inc., [1984-1986 Transfer Binder] Comm. Fut. L. Rep.(CCH) ¶ 22,748, at 31,119 (CFTC September 30, 1985). "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. Skorupskas, 605 F. Supp. 923, 933 (E.D. Mich. 1985) (misrepresenting performance tables as being actual trading results violated Section 4b of the Act).
Read's misrepresentations were "in connection" with futures transactions because he was marketing a trading system that was designed as a tool specifically for use in the futures markets, he offered to customize those systems to his customers' personal trading styles, and his advertisements for his trading system were fraudulent and deceptive. R & W Technical Svcs., 2000 WL at *22 (finding that the marketing of computerized trading systems not merely as computer software, but as a tool specifically for use in the futures markets satisfied the "in connection with" requirement); Skorupskas 605 F. Supp at 933 (fraudulent advertisements for a computerized trading system can satisfy the "in connection with" requirement under Section 4b of the Act).
The "Special Offer" for a rebate that Read set out in the website by agreement with Global gave the false impression that Global would provide an immediate credit of the amount a customer spent on NATT trading systems into the customer's trading account when, in reality, Global only provided $5 off a $25 commission per trade. Misrepresentations concerning fees, commissions and likelihood of profit violate Section 4b of the Act. CFTC v. Crown Colony Options, Ltd., 434 F.Supp 911, 917-918 (S.D.N.Y. 1977).
Read's misrepresentations were also "in connection with" futures transactions because the promotion for a "rebate" was a marketing tool used to attract customers to purchase Read's trading system and to open a commodities trading account and trade through Global. Skorupskas 605 F. Supp at 933. Read's representations were material because a reasonable investor certainly would consider an offer providing for a credit or rebate to a brokerage account in deciding where to open a commodity trading account.
Read made the misrepresentations with the requisite scienter. Misleading statements are made with scienter when they are committed intentionally or with reckless disregard. R & W Technical Svcs., 2000 WL at *20. Read prepared the written agreement, including the wording of the "Special Offer" contained in the agreement that created the false impression that NATT customers could recover all of the money spent on NATT materials immediately if they opened trading accounts. As a professional, Read knew or recklessly disregarded the fact that no independent broker would rebate $1600 immediately to a new customer without linking it to actual business and continuing business. Therefore, Read acted with scienter in putting the offer on his website. Id.
2. Read 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.
In order to establish a violation of Section 4o of the Act and Section 4.41 of the Regulations, the Division must prove that respondent was (i) a CTA or, with respect to Section 4.41(a) 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.6
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."7
Read gave commodity futures trading advice for compensation or profit and, therefore, he is a CTA, and was a CTA even before he registered as such.8 Read's advertisements, promotional materials and website that all make claims about actual trading that were false, and Read's agreement to place Global's deceptive offer to customers on his website violate Section 4o(1) of the Act and Section 4.41(a) of the Commission's Regulations for the same reasons they violate Sections 4b(a)(i) and (iii) of the Act.
3. Global violated Section 4b(a)(i) and (iii) of the Act
Global and Read/NATT entered into an agreement that Read/NATT would promote the fraudulent rebate offer on Read's website. That agreement expressly set forth the language of the offer to be posted on Read/NATT's website. Global thus knew the terms of the posted offer did not comport with the actual terms of the rebate. Therefore, Global knowingly violated Section 4b(a)(i) and (iii) of the Act by falsely representing the rebate offer.
Offer of Settlement
Read and Global have submitted Offers of Settlement ("Offers") in which they, without admitting or denying the findings in this Order: (1) admit the jurisdiction of the Commission with respect to all matters set forth in the Order; (2) acknowledge service of this Order; (3) waive the filing and service of a Complaint and 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 Offers; 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; and, all claims which Read or Global 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 Regulations, 17 C.F.R. § 148.1 et seq., relating to or arising from the Order; (4) stipulate 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 (5) consent to the Commission's issuance of this Order, which makes findings set forth below and (a) orders Read and Global to cease and desist from violating the provisions of the Act and Regulations that they have been found to have violated; (b) orders Global to pay a civil monetary penalty as set forth below; (c) notes the appropriateness of a civil monetary penalty, but does not impose one based upon Read's demonstrated inability to pay; and (d) orders Read and Global to comply with the undertakings as set forth in the Order below.
Findings of Violations
Solely on the basis of the consent evidenced by the Offers, and prior to any adjudication of the merits by the Commission, the Commission finds that Read violated Sections 4b(a)(i) and (iii) and 4o(1) of the Act and Commission Regulation 4.41(a), and Global violated Section 4b(a)(i) and (iii) of the Act.
Accordingly, IT IS HEREBY ORDERED THAT:
1. (a) Read shall 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), 6o(1), and Section 4.41(a) of the Commission's Regulations, 17 C.F.R. § 4.41(a) (1999), and (b) Global shall cease and desist from violating Sections 4b(a)(i) and (iii) of the Act;
2. (a) Global shall pay Ten Thousand Dollars ($10,000), which represents a civil monetary penalty. Global 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 identifying Global and the name and docket number of the proceeding. Global shall simultaneously transmit a copy of its cover letter and of 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 (b) The Commission is not imposing a civil monetary penalty against Read but notes the appropriateness of a monetary penalty. Read has submitted a Sworn Financial Disclosure Statement and has provided other evidence to the Commission regarding his financial condition and asserts his financial inability to pay a civil monetary penalty. Read acknowledges that the Commission's acceptance of this offer is conditioned upon the accuracy and completeness of his representations in his Sworn Financial Disclosure Statement and other evidence he has provided regarding his financial condition. Read consents that if at any time following the entry of the Order, the Division obtains information indicating that his 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 the Commission's Order, petition the Commission to (1) reopen this matter to consider whether Read provided accurate and complete financial information at the time such representations were made; (2) determine the amount of civil monetary penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if the Offer had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Read was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil monetary penalty to be imposed, and whether any additional remedies should be imposed. Read may not, by way of defense to any such petition, contest the validity of, or the findings in, the Order, or assert that payment of a civil monetary penalty should not be ordered.
3. Read and Global shall comply with the undertakings as set forth below.
A. Read shall not misrepresent, expressly or by implication:
1. 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
2 the risks associated with trading pursuant to any commodity futures or options trading system or advisory service;
B. Read 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, Read shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results.
C. Read shall not enter into any promotional agreement with any brokerage firm or offer any rebate, credit or other promotion associated with any commodity futures options trading system or advisory service in connection with any brokerage account without setting forth the terms of the rebate, credit or other promotion explicitly and setting forth exactly how such credit, rebate or other promotion will be earned and applied, and providing examples of exactly how the dollar amount of any rebate, credit or other promotion would be determined and by whom it would be determined.
D. Read shall not represent, expressly or by implication:
1. 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;
2. the risks associated with trading using any commodity futures or options trading system or advisory service;
3. 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) Read 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, Read 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.
E. Global shall not enter into any promotional agreement with any Commodity Trading Advisor ("CTA"), whether registered or unregistered, or offer any rebate, credit or other promotion associated with any commodity futures options trading system or advisory service offered by a CTA, without setting forth the terms of the rebate, credit or other promotion explicitly and setting forth exactly how such credit, rebate or other promotion will be earned and applied, and providing examples of exactly how the dollar amount of any rebate, credit or other promotion would be determined and by whom it would be determined.
F. By neither admitting nor denying the findings of fact or conclusions of law, Read and Global agree that neither they nor any of their agents or employees under their authority or control shall take any action to 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 shall affect Read's or Global's (i) testimonial obligations, or (ii) right to take factual and legal positions in other proceedings to which the Commission is not a party. Read and Global will undertake all steps necessary to assure that all of their agents and employees under their 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 to the Commission|
|Commodity Futures Trading Commission|
1 Neither Read nor Global consents 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 the Order. They do 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 opportunities on the web.
3 Read does not currently provide Daily Trade Logs on his website.
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 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).
6 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).
7 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.
8 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).