UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC Docket No. 00-10|
|RONALD J. SCHOEMMELL||)||ORDER INSTITUTING PROCEEDINGS|
14918 Waybridge Drive
|)||PURSUANT TO SECTIONS 6(c) AND 6(d)|
|Houston, Texas 77062,||)||OF THE COMMODITY EXCHANGE ACT|
|)||AND FINDINGS AND ORDER|
|)||IMPOSING REMEDIAL SANCTIONS|
|d/b/a R. S. of Houston Workshop||)|
|1419 Diamond Brook Drive||)|
|Houston, Texas 77062,||)|
The Commodity Futures Trading Commission ("Commission") has reason to believe that Ronald J. Schoemmell ("Schoemmell") and Valdimar Thorkelsson ("Thorkelsson"), doing business as R.S. of Houston Workshop, have 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 Section 4.41(a) of the regulations promulgated under the Act (hereafter the "Regulations"), 17 C.F.R. § 4.41(a) (1999). Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted to determine whether Schoemmell and Thorkelsson engaged in the violations set forth herein and to determine whether any order should be issued imposing remedial sanctions.
In anticipation of the institution of these administrative proceedings, Schoemmell and Thorkelsson have submitted Offers of Settlement ("Offers"), which the Commission has determined to accept. Without admitting or denying the findings herein, Schoemmell and Thorkelsson each acknowledge service of this Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Act and Findings and Order Imposing Remedial Sanctions ("Order"). Schoemmell and Thorkelsson each consent 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
The Commission finds the following:
From November 1998 until the present, Schoemmell and Thorkelsson, acting through an unincorporated entity known as the R.S. of Houston Workshop ("Workshop"), committed solicitation fraud while acting as commodity trading advisors. Schoemmell and Thorkelsson offered a trading course and methodology based on misrepresentations made on the internet and in a brochure that they traded Standard & Poors 500 equity index futures contracts ("S & P 500 futures") successfully for their own accounts using that methodology. However, neither Schoemmell nor Thorkelsson was a successful commodity trader. Schoemmell consistently suffered net trading losses in each of the six years he traded, and Thorkelsson made only an insignificant profit in one of several years he traded. As such, Schoemmell's and Thorkelsson's solicitations to actual and prospective customers were false, deceptive and misleading through their misstatement of facts material to the customers' decisions to purchase the trading workshop, in violation of Sections 4b(a)(i) and (iii) and 4o of the Act and Regulation 4.41(a).
Schoemmell and Thorkelsson also made statements on their web site and in a brochure sent to students and prospective students that gave purported hypothetical results of their trading methodology. In fact, however, Schoemmell and Thorkelsson's published futures trading results were based on after-the-fact selection of trades and entry and exit points. Therefore, they defrauded their clients and potential clients by failing to disclose the after-the-fact selection of trades and prices that rendered the trading results fictitious.2
Ronald J. Schoemmell resides at 14918 Waybridge Drive, Houston, Texas 77062. Schoemmell has never been registered with the Commission in any capacity.
Valdimar Thorkelsson resides at 1419 Diamond Brook Drive, Houston, Texas 77062. On February 15, 2000, Thorkelsson became designated as a principal of the R.S. of Houston Workshop, a registered commodity trading advisor ("CTA"). The R.S. of Houston Workshop is a d/b/a of Thorkelsson, who filed a Certificate of Operation Under Assumed Name on November 17, 1997 in Harris County, Texas.
Starting in 1996, Schoemmell and Thorkelsson offered a "short term and day traders" futures trading workshop to customers through advertisements in futures industry magazines, and since November 1998, they have marketed their workshop publicly through an Internet website. The web site, www.rsofhouston.com, provides general information about them, and also purports to give summary results of the trading methodology they teach in their workshop.
For a fee of $2,800, respondents promised to impart their profitable trading methodology to students through a four-day workshop that they conducted in Houston, Texas approximately once a month. For a fee of $1,800, Schoemmell and Thorkelsson also offered customers a home study course that included the same materials provided at the live workshop. Finally, for a fee of $2,495, respondents offered weekend seminars in cities around the country during the first three months of 2000.
Following classroom instruction, workshop customers receive 30 days of new trading charts via fax or e-mail. The charts, which track trading in S&P 500 futures, are sent out at the end of each day. The charts, made up after the close of trading, offer commentary by Schoemmell and show the trades that day which "qualified under the R.S. methodology."
Schoemmell and Thorkelsson, through their web site and/or in a direct mail promotional brochure, solicited students for their trading workshop using two kinds of materially false claims. First, they claimed that Schoemmell and Thorkelsson traded their own accounts profitably using the Workshop methodology. Specifically, as to Schoemmell, they claimed he used the Workshop's trading methodology to trade futures contracts profitably in his own trading accounts, and also stated that Schoemmell made his "day-to-day living" in that fashion. However, Schoemmell's account statements demonstrate that he suffered aggregate net trading losses in his trading accounts in each year that he traded (1992 through 1999). Student testimonials reprinted on respondents' web site noted that students thought Schoemmell's purported successful use of the methodology for his personal trading was important in deciding to take the course.
Further, although Schoemmell closed the last of his futures accounts in October 1999, the direct mail promotional brochure, sent in December 1999 or January 2000, continued to claim that Schoemmell was trading futures according to the Workshop methodology: "My name is Ron Schoemmell. I've been trading the futures markets for more than a dozen years. It's how I make my day-to-day living -- and by any measure you wish to apply, I do pretty darn well at it." That statement was false.
Schoemmell also claimed in the course materials provided to students who took the Workshop that he had made profitable trades on certain specified days when, in fact, his trading records demonstrated that he either failed to trade, or made no profit from trading, on those days.
As to Thorkelsson, the brochure sent by respondents to current and prospective students in December 1999 or January 2000 claimed that Thorkelsson was a successful trader, which was not true; his trading in seven futures accounts (three of which were traded on behalf of a family-owned entity) reflected net overall losses for each year between 1993 and 1999, except in 1996, where his single active account that year showed a net annual profit of $55.
The second type of misrepresentation involved the respondents' publication of a purported hypothetical trading record for the R.S. of Houston trading methodology on their web site in September 1999 and the use of a similar trading record in their direct mail promotional brochure sent to students and prospective students in late 1999 and early 2000. Schoemmell and Thorkelsson created the trading record retrospectively. Thus, the published trading record, rather than being hypothetical -- i.e., the mechanical output of historical price data fed through an algorithm containing pre-set pricing signals and responses that can be replicated by anyone using the same historical data -- was instead slanted by Schoemmell and Thorkelsson's after-the-fact application of subjective judgments about trade selection, pricing and market entry and exit timing. Thus, the so-called hypothetical trading record was actually a concocted and fictitious trading record that did not represent an objective record of the output of the Workshop methodology, and that could not readily have been replicated by any student.
D. VIOLATIONS OF THE ACT AND COMMISSION REGULATIONS
1. Respondents Schoemmell and Thorkelsson 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.3 Additionally, Sections 4b(a)(i) and (iii) require that the material misrepresentations and omissions of material facts be made "in connection" with futures transactions.4
Respondents knew that they had not successfully used their own trading methodology to make profits in their own trading accounts, but nevertheless misrepresented their trading as profitable to attract paying students for their trading courses. Further, respondent Schoemmell knew that he did not make trading profits on specific days, as represented in the course materials. As such, respondents' representations constitute fraud in violation of Sections 4b(a)(i) and (iii), 6 U.S.C. §§ 6b(a)(i) and (iii) (1994).
Respondents also represented that the methodology they taught generated substantial profits, knowing that such claims were not based on actual trading, but rather on their after-the-fact application of subjective judgment to trades that had already occurred. Misrepresentations of performance results are material "[b]ecause 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 Services, 2000 WL at *3.
2. Respondents Schoemmell and Thorkelsson 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(a) 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.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, 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."6 Schoemmell and Thorkelsson gave commodity futures trading advice for compensation or profit and, therefore, are CTAs.7
Schoemmell and Thorkelsson made their misrepresentations in the course of soliciting students to study their trading methodology, whose object was to advise persons when to buy or sell S&P 500 futures, and students paid to receive this advice and learn the methodology. Moreover, Schoemmell and Thorkelsson's furnishing of futures trading advice, through their trading courses and course materials, was not "incidental to the conduct" of their business. Rather, providing futures trading advice was their business. Thus, Schoemmell and Thorkelsson fit squarely within the definition of a CTA under Section 1a(5) of the Act. Indeed, Thorkelsson explicitly recognized this fact by registering his d/b/a, Workshop, as a CTA.
Conduct that violates Section 4b(a) also constitutes a violation of Section 4o(1) of the Act when committed by a person who was acting as a commodity trading advisor. In re R&W Technical Services, Comm. Fut. L. Rep. (CCH) ¶27,582 (CFTC March 16, 1999) ("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 R&W and Reagan also violated Section 4o(1) of the Act"). Schoemmell and Thorkelsson's misrepresentations therefore violated Section 4o of the Act. Also, because Schoemmell and Thorkelsson, while acting as CTAs, advertised in a fraudulent or misleading manner, their conduct violated Regulation 4.41(a).
OFFERS OF SETTLEMENT
Schoemmell and Thorkelsson have submitted Offers in which each, 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 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 Schoemmell or Thorkelsson 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 each to cease and desist from violating the provisions of the Act and Regulations that he has been found to have violated; (b) imposes on each a $10,000 civil monetary penalty; and (c) orders each to comply with their undertakings, as set forth in the Order.
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 Schoemmell and Thorkelsson 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 Regulation 4.41(a).
Accordingly, it is hereby ordered that Schoemmell and Thorkelsson:
1. Shall each 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), 6o(1)(A) and (B) and Regulation 4.41(a);
2. Shall each pay a civil monetary penalty in the amount of Ten Thousand Dollars ($10,000.00); Schoemmell and Thorkelsson shall each 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 letters that identify Schoemmell's and Thorkelsson's names and the docket number of the proceeding; Schoemmell and Thorkelsson shall each simultaneously transmit copies of their cover letter(s) and the forms 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
3. Schoemmell and Thorkelsson shall comply with the following undertakings:
A. Neither Schoemmell nor Thorkelsson shall 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. Neither Schoemmell nor Thorkelsson shall 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, Schoemmell and Thorkelsson shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results.
C. Neither Schoemmell nor Thorkelsson shall 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. Neither Schoemmell nor Thorkelsson shall 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) Schoemmell or Thorkelsson 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, Schoemmell or Thorkelsson 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. By neither admitting nor denying the findings of fact or conclusions of law, Schoemmell and Thorkelsson both agree that neither they nor any of their agents or employees under their 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 Schoemmell or Thorkelsson's (i) testimonial obligations, or (ii) right to take factual and legal positions in other proceedings to which the Commission is not a party. Schoemmell and Thorkelsson 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.
|Dated: May 1, 2000||BY THE COMMISSION|
|Secretary to the Commission|
|Commodity Futures Trading Commission|
1 Neither Schoemmell nor Thorkelsson consents to this use of his respective Offer, or the findings in this Order consented to in their 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. Schoemmell and Thorkelsson also do not consent to the use of either one's Offer or the findings in this Order by any other person or entity in this or in any other proceeding. The findings made in this Order are not binding on any other person or entity named as a defendant or respondent in this or 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 and other proceedings, the Commission is addressing fraud committed on the Internet in order to promote the integrity of promotions made concerning commodity futures and options trading opportunities on the web.
3 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).
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., 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).
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) 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 Services., 2000 WL at *7.
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).