UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC Docket No. 00-31|
|STANLEY EDWARD MOORE,||)||ORDER INSTITUTING PROCEEDINGS|
|)||PURSUANT TO SECTIONS 6(c) AND 6(d)|
|)||OF THE COMMODITY EXCHANGE ACT,|
|)||AS AMENDED, MAKING FINDINGS, AND|
|___________________________________________||)||IMPOSING REMEDIAL SANCTIONS|
The Commodity Futures Trading Commission (the "Commission") has reason to believe that Stanley Edward Moore ("Moore") has 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 Commission Regulation ("Regulation") 4.41(a), 17 C.F.R. § 4.41(a) (2000). Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted to determine whether Moore engaged in 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, Moore has submitted an Offer of Settlement (the "Offer") that the Commission has determined to accept. Without admitting or denying the findings of fact of this Order, and prior to any adjudication on the merits, Moore acknowledges service of this Order. Moore consents to the use of the findings in this Order in this proceeding and in any other proceeding brought by the Commission, or to which the Commission is a party.1
The Commission finds the following:
From in or about March 1999 to June 2000, Moore, while acting as a registered commodity trading advisor ("CTA"), defrauded and deceived clients and prospective clients by making material misrepresentations and omissions on his Web site, in violation of Sections 4b(a)(i) and (iii) and 4o(1) of the Act and Regulation 4.41(a). Moore's Web site advertised "Rhythm of the Markets," Moore's system for trading S&P 500 futures contracts and other instruments, such as options on the S&P 100 index, which trade on the Chicago Board Options Exchange ("OEX options"). Moore represented on his Web site that he had personally profitably traded S&P 500 futures contracts ("S&P 500 futures") using Rhythm of the Markets. In fact, Moore had not personally traded profitably. Moore also provided on his Web site his purported actual profits and actual rate of return trading OEX options pursuant to Rhythm of the Markets, which he presented in part as an indicator of the efficacy of the system for trading S&P 500 futures contracts. In fact, Moore had not actually traded OEX options between March 1999 and June 2000, and these results were hypothetical trading results, which Moore failed to disclose.2
Stanley Edward Moore, who resides and works at 900 South Meadows Parkway, Apt. 722, Reno, NV 89511, has been registered with the Commission as a CTA since April 1996.
From March 1999 to June 2000, Moore's Web site, www.rhythmofthemarkets.com, advertised "Rhythm of the Markets," Moore's system for trading S&P 500 futures and other instruments, such as OEX options. Moore's system consisted of a 200-page "trading manual" explaining Moore's trading methodology, "proprietary software" for trading, video and audiotaped presentations of how Moore purportedly trades, access to Moore's charts, and telephone consultation with Moore.
Moore's Web site touted his past experience profitably trading S&P 500 futures using Rhythm of the Markets. For example, a letter from the co-author of "Rhythm of the Markets," Joe Conway ("Conway"), was posted on the Web site which referred to Moore as a "super trader" and stated:
(1) Having watched hundreds of his trades with our methodology, I am amazed at his high percentage of wins. When he's wrong, which isn't very often, he can tell you why. I've seen him do dozens of consecutive trades without a loss in the S&P. On the average, I've seen him make $1,000-$2,000 a day trading one S&P contract. When he trades more contracts, he makes more money;
(2) The methodology is called, "Rhythm of the Markets" and Ed has made a substantial amount of money trading it. He is a trader who makes his living trading everyday.
In addition, Moore's Web site quoted Moore as saying that: "Ten (S&P contracts) is enough for me to trade because my palms start to sweat when I trade more than 10." In fact, Moore did not actually trade S&P 500 futures for his own account.
Conway was quoted on the Web site as saying that: "For his own trading, Moore tends to focus on the S&P futures and stock index options (OEX). He generally trades three to four times a day, once in the morning and two or three times in the afternoon."
Moore's Web site represented that Rhythm of the Markets was equally effective in trading S&P 500 futures and OEX options. Moore provided on his Web site his purported history of trading OEX options for virtually each day from March 1999 to April 2000, including his purported actual profits and purported actual rate of return as of the end of each day. Moore did not actually trade OEX options in his own account at any time between March 1999 and June 2000 and his purported track record and profits trading OEX options were based on hypothetical trading, which Moore failed to disclose.
D. LEGAL DISCUSSION
1. Moore Violated Section 4b(a)(i) and (iii) of the Act
Section 4b(a)(i) and (iii) of the Act provides 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.3 Additionally, Section 4b(a)(i) and (iii) requires that the material misrepresentations and omissions of material facts be made "in connection" with futures transactions.4
Moore's knowing misrepresentations on his Web site that he made his living trading S&P 500 futures using Rhythm of the Markets and that he was a profitable "super trader," when he had not traded futures for his own account, constitute fraud within the meaning of Section 4b(a)(i) and (iii) of the Act. In the Matter of R&W Technical Services, Ltd., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27,582 at 47,742 (CFTC Mar. 16, 1999) (falsely claiming profitable trading through respondents' own use of the trading system constitutes fraud; "[t]he use of a trading system by its developers is important to reasonable consumers because it reflects a meaningful vote of self-confidence and a sign of authenticity") aff'd in relevant part, R&W Technical Services, Ltd. v. CFTC, 205 F.3d 165, 169-70 (5th Cir. 2000). Moore's representations on his Web site that his system was equally effective trading in commodity futures contracts and OEX options and that the OEX trading results were based on his actual trading using the system when he had not traded OEX options between March 1999 and June 2000 also constitute fraud, in violation of Section 4b(a)(i) and (iii) of the Act.
In addition, Moore's representation that his system had generated profits and positive rates of return, when he knew that such claims were not based on actual trading, but rather on hypothetical or simulated trading, constitutes fraud, in violation of Section 4b(a)(i) and (iii) of the Act. "Because simulated results inherently overstate the reliability and validity of an investment system, and because extravagant claims understate the inherent risks in commodities trading, a reasonable investor would find [such] fraudulent misrepresentations to be material." R&W Technical Svcs., 205 F.3d at 170. See also CFTC v. Skorupskas, 605 F. Supp. 923, 933 (E.D. Mich. 1985) (solicitations aided through use of false or deceitful performance tables violated Section 4b(a)).
2. Moore Violated Section 4o(1) of the Act and Section 4.41(a) 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(1) of the Act and Section 4.41(a) of the Regulations, the Division must prove that the 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.5 Section 4.41(a) of the Regulations also applies to all CTAs, regardless of whether those CTAs are required to be registered.
Under Section 1a(5) of the Act, in order to establish that someone is a CTA, it must be shown that the person (i) advised another about the value or advisability of trading in futures contracts, (ii) "either directly or through publications, writings or electronic media," (iii) for compensation or profit. Section 1a(5) of the Act, 7 U.S.C. § 1a(5).6 Moore, who is registered as a CTA, gave commodity futures trading advice for compensation or profit and, therefore, is a CTA. 7
The same conduct by Moore that violated Section 4b(a)(i) and (iii) of the Act also violated Section 4o(1) of the Act and Regulation 4.41(a) because Moore engaged in that conduct in his capacity as a CTA. R&W Technical Svcs., ¶27,582 at 47,745 ("Because we have found that [respondents] violated Section 4b(a) of the Act and that they acted as CTAs, further analysis is not needed to conclude that [respondents] also violated Section 4o(1) of the Act"), aff'd in relevant part, R& W Technical Services v. CFTC, 205 F.3d 165 (5th Cir. 2000); Skorupskas, 605 F.Supp. at 932-33.
FINDINGS OF VIOLATIONS
Based on the foregoing, the Commission finds that Moore violated Sections 4b(a)(i) and (iii) and 4o(1) of the Act and Regulation 4.41(a).
OFFER OF SETTLEMENT
Moore has submitted an Offer of Settlement ("Offer") in which, without admitting or denying the findings of fact in this Order, he:
A. Admits the jurisdiction of the Commission with respect to all matters set forth in the Order;
B. Acknowledges service of the Order;
1. the filing and service of a Complaint and Notice of Hearing;
2. a hearing;
3. all post-hearing procedures;
4. judicial review by any court;
5. any objection to the staff's participation in the Commission's consideration of its Offer;
6. all claims which he may possess under the Equal Access to Justice Act, 5 U.S.C. § 504 (1994) and 28 U.S.C. § 2412 (1994), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104-121, §§ 231-232, 110 Stat. 862-863, and Part 148 of the Regulations, 17 C.F.R. §§ 148.1, et seq. (2000), relating to, or arising from, this action, and he shall not assert any right under the Equal Access to Justice Act to seek costs, fees, or other expenses relating to, or arising from, this proceeding; and
7. any claim of double jeopardy based upon the institution of this proceeding or the entry in this proceeding of any order imposing a civil monetary penalty or any other relief;
D. Stipulates that the record basis on which this Order is entered consists solely of this Order and its findings to which he has consented in the Offer, which are incorporated in this Order; and
E. Consents, solely on the basis of the Offer, to the Commission's issuance of this Order, which makes findings and:
1. orders Moore to cease and desist from violating Sections 4b(a)(i) and (iii) and 4o(1) of the Act and Regulation 4.41(a);
2. orders Moore to pay a civil monetary penalty in the amount of Fifteen Thousand Dollars ($15,000);
3. orders that Moore's registration with the Commission as a Commodity Trading Advisor be suspended for a period of six (6) months from the date of this Order; and
4. orders Moore to comply with his undertakings as set forth below.
Accordingly, IT IS HEREBY ORDERED THAT:
1. Moore shall cease and desist from violating Sections 4b(a)(i) and (iii) and 4o(1) of the Act and Regulation 4.41(a);
2. Moore's registration as a CTA shall be suspended for a period of six (6) months from the date of this Order;
3. Moore shall pay a civil penalty in an amount of Fifteen Thousand Dollars ($15,000) within ten (10) days of the date of the Order. Moore shall make such payment 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 Moore and the name and docket number of the proceeding; Moore shall simultaneously transmit a copy of the cover letter and of the form of payment to Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W. Washington, D.C. 20581. In accordance with Section 6(e)(2) of the Act, if Moore fails to make payment of his penalty within fifteen (15) days of the respective due date, he shall be automatically prohibited from trading on all contract markets until he shows to the satisfaction of the Commission that payment of the full amount of the penalty with interest thereon to the date of payment has been made; and
4. Moore shall comply with the following undertakings:
A. he 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. he 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, Moore shall clearly identify those hypothetical or simulated performance results that were based, in whole or in part, on hypothetical trading results;
C. he 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;
D. he 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: (a) he possesses and relies upon a reasonable basis substantiating the representation at the time it is made; and (b) for two (2) years after the last date of the dissemination of any such representation, he 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 for inspection and copying upon request; and
E. 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 this Order or creating, or tending to create, the impression that this Order is without a factual basis; provided, however, that nothing in this provision affects Moore's (1) testimonial obligations; or (2) right to take contrary factual or legal positions in other proceedings to which the Commission is not a party. Moore will undertake all steps necessary to assure that all of his agents and employees under his authority and control understand and comply with this undertaking.
|By the Commission.|
|Dated: September 6, 2000||______________________|
|Jean A. Webb|
|Secretary to the Commission|
Commodity Futures Trading Commission
1 Moore does not consent to the use of this Order as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of this Order and does not consent to the use of the Offer or this Order, or the findings consented to in his Offer, by any other person or entity in this or any other proceeding. The findings made in this Order are not binding on any other person or entity in any other proceeding.
2 The Internet is a highly beneficial medium that facilitates the dissemination of information, but which also enables potential violators to reach millions of people worldwide quickly and at very low cost. By this proceeding and the other proceedings being filed contemporaneously, as well as the ten proceedings filed on May 1, 2000, the Commission is addressing fraud committed on the Internet to promote the integrity of promotions made on the Web concerning commodity futures and options trading opportunities.
3 In the Matter of R&W Technical Services, Ltd., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27,582 at 47,740-47,741 (CFTC Mar. 16, 1999), aff'd in relevant part, R&W Technical Services., Ltd. v. CFTC, 205 F.3d 165 (5th Cir. 2000). See, e.g., Saxe v. E.F. Hutton, 789 F.2d 105, 110 (2d Cir. 1986); Kelley v. Carr, 442 F. Supp. 346, 351-54 (W.D. Mich. 1977), aff'd in relevant part, rev'd in part on other grounds, 691 F.2d 800 (6th Cir. 1980); CFTC v. J.S. Love Associates Options, Ltd., 422 F. Supp. 652, 655 (S.D.N.Y. 1976).
4 Fraudulent statements that induce members of the public to purchase software that generates specific buy and sell signals for commodity futures trading satisfy the "in connection with" requirement of Section 4b(a). R&W Technical Svcs., 205 F.3d at 165. See also Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977) (noting that the "in or in connection with" requirement should be interpreted flexibly to include deceptive conduct that occurs prior to the opening of an actual commodity trading account).
5 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).
6 Section 1a(5) specifically excludes from the definition of a CTA anyone who is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" if such publisher's or producer's provision of commodity futures trading advice is "solely incidental to the conduct of [its] business or profession," and thus Section 4o(1) of the Act and Section 4.41 of the Regulations do not apply to such persons. This exclusion is designed to protect incidental publishers of advice, such as general magazines and newspapers, not publishers who specifically concentrate on commodities advice. R&W Technical Svcs., 205 F.3d at 174.
7 See CFTC v. British American Commodity Options Corp., 560 F.2d 135, 141 (2d Cir. 1977), cert. denied, 438 U.S. 905 (1978) (a firm that "offer[ed] opinions and advice, and issued analyses and reports concerning the value of commodities" to customers, was a CTA under the Act); Gaudette v. Panos, 644 F. Supp. 826, 839 (D. Mass. 1986) (defendants who represented their advisory skills to be exemplary, suggested that plaintiffs open a commodity account and then recommended certain futures contracts for investment were CTAs).