IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH -- CENTRAL DIVISION
|COMMODITY FUTURES TRADING COMMISSION,||)||No. 2: 98 CV 00216J|
|Plaintiff,||)||Hon. Bruce Jenkins|
|)||ORDER OF PERMANENT INJUNCTION|
|)||AND OTHER EQUITABLE RELIEF|
|JOHN LARRY SCHENK, et al.,||)||AGAINST JOHN LARRY SCHENK,|
|)||FIDELITY TRADERS GROUP, INC.|
|______________________________________________________||)||AND SAM GRAY|
Plaintiff, Commodity Futures Trading Commission ("Commission"), on March 27, 1998, filed a complaint against John Larry Schenk individually and d/b/a Linz Gruppe Inc. and Systrac Inc. ("Schenk"), Fidelity Traders Group Inc. ("Fidelity Traders") and Sam Gray among others, seeking injunctive and other equitable relief for violations of the Commodity Exchange Act, as amended, 7 U.S.C. §§ 1 et seq. (1994) ("Act"), and the Regulations promulgated thereunder, 17 C.F.R. §§ 1 et seq. (1999). On September 25, 1998, this Court entered a Consent Order of Preliminary Injunction against defendants Schenk, Fidelity Traders and Gray in which they acknowledged service of the Summons and Complaint, admitted jurisdiction of this Court over them and the subject matter of this action and admitted that venue lies properly with this Court.
The Court has considered the complaint, declarations, exhibits, brief in support of the motion for preliminary injunction, the Pretrial Order and the testimony presented at the hearing for the preliminary injunction as well as the testimony and exhibits in support of Plaintiff's Motion for Repatriation of Funds and Motion for Rule to Show Cause. It further appearing to this Court that there is no just reason for delay, and the Court being fully advised in the premises,
THE COURT FINDS THAT:
1. This Court has jurisdiction over this action and all parties hereto pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1, which authorizes the Commission to seek injunctive relief against any person whenever it shall appear that such person has engaged, is engaging, or is about to engage in any act or practice constituting a violation of any provision of the Act or any rule, regulation or order thereunder.
2. Venue properly lies with this Court pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1, in that the defendants are found in, inhabit, or transact business in this district, and the acts and practices in violation of the Act have occurred within this district, among other places.
3. The allegations of the complaint are well-pleaded and hereby taken as true. This Order is supported by the following facts.
4. Plaintiff Commission is an independent federal regulatory agency charged with the responsibility for administering and enforcing the provisions of the Act, 7 U.S.C. §§ 1 et seq. (1994), and the Regulations promulgated thereunder, 17 C.F.R. §§ 1 et seq. (1999).
5. Defendant John Larry Schenk currently resides at 7520 Silver Fork Dr., Salt Lake City, Utah 84121. Acting as a sole proprietorship d/b/a/ Linz Gruppe Inc. ("Linz Gruppe") and Systrac Inc. ("Systrac"), Schenk was registered with the Commission as a commodity pool operator ("CPO") and as a commodity trading advisor from October 10, 1990 to January 2, 1998 and as an introducing broker from September 23, 1992 to August 11, 1996. Schenk, in his individual capacity, was also registered as an Associated Person of Linz Gruppe throughout most of the time period between September 23, 1992 and January 2, 1998. Schenk was a principal of Fidelity Traders, the CPO of the Wasatch Fund, and was one of the CPOs of the Capital Advantage Group II ("CAG II") pools. Schenk made the trading decisions for the Wasatch Fund and the CAG II pool.
6. Defendant Sam Gray ("Gray") currently resides at 4109 W. Continental Dr., West Valley City, Utah 84120. Gray has never been registered with the Commission in any capacity. Gray was one of the principals of Fidelity Traders, the CPO of the Wasatch Fund.
7. Defendant Fidelity Traders Group, Inc. is a Utah corporation. Its last known address was 2231 South 1560 West, Woods Cross, Utah. Fidelity Traders has never been registered with the Commission in any capacity. Fidelity Traders was the CPO of the Wasatch Fund.
8. From August 1993 and continuing through January 1998, Schenk and Gray solicited members of the public to invest in the Wasatch Fund, a pool to trade commodity futures contracts in precious metals and foreign currencies. Schenk and Gray accepted and pooled approximately $402,000 from sixteen participants in the Wasatch Fund.
9. In their solicitations of prospective pool participants for the Wasatch Fund, Schenk and Gray falsely represented, verbally and/or in writing, that:
a. Schenk and Fidelity Traders had a history of trading managed accounts profitably;
b. the Wasatch Fund had made profits in all but one month between September 1993 and December 1994;
c. Schenk and Fidelity Traders were able to minimize the risk of trading commodity futures by watching the markets and using stop orders;
d. the Wasatch Fund would generate monthly profits of 2-1/2 to 6 percent per month; and
e. Schenk's sole compensation would be an incentive fee of 20 percent of the monthly net profits he generated from trading commodity futures.
Schenk and Gray knew that these statements were false when they made them. Wastach Fund participants relied upon these false representations in deciding to invest in the Wasatch Fund.
10. Schenk and Gray failed to disclose to prospective and actual pool participants that:
a. commissions, fees and expenses paid from Wasatch pool participant funds could exceed 18 percent monthly;
b. the pool would have to achieve annualized trading profits of at least 39 percent just to break even;
c. Schenk would receive payments, in the form of commissions, even when the Wasatch Fund was losing money; and
d. Schenk's firm, Linz Gruppe, would receive commissions on the Wasatch Fund's trades.
11. Schenk, Gray and Fidelity Traders failed to provide prospective and actual pool participants with a Disclosure Document setting forth the Wasatch Fund's actual performance for the life of the pool, the performance of any other pools they operated, and the performance of any other accounts they traded or, if they had no
12. Schenk and Gray received funds from investors in person and through the mail, that were made payable to Fidelity Traders and intended for investment in the Wasatch Fund. Schenk and Grey deposited these funds into accounts maintained in the names of Fidelity Traders or Systrac.
13. Schenk and Gray prepared and mailed Fidelity Traders' account statements to each pool participant on a monthly basis. Schenk and Gray also orally confirmed to several pool participants the profitability of the futures trading reflected in the written statements. The account statements falsely stated that the futures trading in the Wasatch Fund generated profits in the range of 1.8 to 18 percent per month and overstated the value of each pool participant's share of the pool. Schenk knew that these account statements were false when the statements were prepared and issued to Wasatch Fund participants. At the time the account statements were prepared and issued, Gray knew that these account statements were false or had no reasonable basis to make such a report.
14. The Wasatch Fund traded commodity futures from September 1993 to December 1997 and lost money trading almost every month. The Wasatch Fund ultimately lost a total of approximately $234,434 trading commodity futures and lost money trading almost every month. Even though the Wasatch Fund ceased trading in July 1996, Gray and Schenk continued until January 1998 or later to issue statements to customers which falsely stated that the Wasatch Fund was trading profitably.
15. Of the $402,000 received from Wasatch Fund pool participants, Schenk and Gray misappropriated approximately $68,000. Of this amount, Schenk directly received approximately $15,500, Gray received $29,465 and Schenk and Gray used approximately $39,000 to make unauthorized payments to family members and business associates.
16. In or about February 1995, Schenk, Brian Tobler, Robert Moncur and Douglas Foster ("CAG II defendants") agreed to form a pool to trade commodity futures pursuant to a trading program devised by Schenk. They divided the responsibilities for the pool operation among themselves. Schenk made the trading decisions and traded the pool accounts.
17. Commission Regulation 4.13(a)(2), 17 C.F.R. § 4.13(a)(2), exempts from registration CPOs whose pools' total gross capital contributions are less than $200,000 and have fewer than 15 participants. In order to appear to fit within this exemption, the CAG II defendants subdivided the pool into three component pools: Capital Advantage Group II, L.L.C. ("CAG II"); Brighton Fund, L.L.C. ("Brighton"); and Augusta Fund, L.L.C. ("Augusta") (collectively the "CAG II pools"). CAG II, Brighton and Augusta had separate bank and commodity trading accounts. The CAG II commodity accounts were each introduced by Linz Gruppe to a futures commission merchant ("FCM"). Each had a different nominal pool operator. However, the CAG II defendants treated the pools as one pool.
18. The CAG II defendants transferred pool participant funds among the pool accounts without the prior knowledge or consent of the pool participants.
19. On occasion, the CAG II defendants traded the CAG II pools using block orders, i.e., one order was placed and the executed trades were distributed among the component pools.
20. The CAG II defendants traded each of the CAG II pools differently, but reported identical performance results to the pool participants.
21. Schenk falsely represented to Foster and Moncur that:
a. he had realized profits of 20 to 30 percent per month trading commodity futures contracts using his trading program; and
b. by trading according to his trading program, he could minimize and control loss by using stop orders.
Schenk knew these statements were false at the time he made them.
22. Foster and Moncur did not verify the representations Schenk made to them, but they solicited prospective and actual pool participants to invest in CAG II by falsely representing that:
a. the pool's trader had a history of trading profitably; and
b. the pool's trader was able to control losses through the use of stop orders. In making the decision to invest in the CAG II pools, CAG II pool participants relied upon these false representations.
23. The CAG II Defendants accepted and received funds in person and through the mail from at least 29 CAG II pool participants.
24. Schenk failed to provide pool participants with a Disclosure Document that set forth the CAG II pool's actual performance for the life of the pool, the performance of any other pools he operated, and the performance of any other accounts he traded.
25. Some of the funds received were made payable to Western Funding and Capital Advantage Group, other entities owned by Schenk, and were deposited into bank accounts in the names of Western Funding and Capital Advantage Group.
26. From approximately March 1995 to at least June 1996, Schenk failed to disclose to prospective and actual pool participants:
a. the amount of compensation that Schenk would receive from the CAG II pools;
b. the commissions, fees and expenses that pool participants would be charged, and that these commissions, fees and expenses could exceed 18 percent; and
c. that the pool would have to achieve annualized profits of 165 percent just to break even.
27. The CAG II pools paid in excess of $153,000 in commissions to the FCM clearing the CAG II pools' trades. As the owner of Linz Gruppe, the introducing broker, Schenk received a portion of this amount.
28. At periodic meetings, the CAG II defendants jointly decided to report monthly profits of 1 to 2% to pool participants even though they all knew that did not accurately reflect the performance of the CAG II pools.
29. After the CAG II defendants agreed on the percentage return to be reported, Moncur prepared and mailed account statements to each CAG II pool participant reporting the agreed upon rate of return. These account statements reported that profits, in the range of at least 1% to 2.3% per month, had been generated from futures trading and overstated the value of each participant's share of the pool. Schenk knew these account statements were false.
30. In fact, between April 1995 and March 1996, Schenk lost money trading the CAG II pools almost every month. Schenk ultimately lost approximately $253,498 of the participants' funds trading commodities.
IT IS THEREFORE ORDERED THAT:
A. Defendants Schenk, Fidelity Traders and Gray are permanently restrained, enjoined and prohibited from directly or indirectly:
1. Cheating or defrauding or attempting to cheat or defraud other persons in or in connection with any order to make, or the making of, any contract or sale of any commodity for future delivery, made, or to be made, for or on behalf of any other person if such contract for future delivery is or may be used for (a) hedging any transaction in interstate commerce in such commodity or the products or byproducts thereof, or (b) determining the price basis of any transaction in interstate commerce in such commodity, or (c) delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof, in violation of Section 4b(a)(i), 7 U.S.C. §§ 6b(a)(i) (1994);
2. Willfully making or causing to be made to other persons any false report or statement thereof, or willfully entering or causing to be entered for such persons any false record thereof, in violation of Section 4b(a)(ii), 7 U.S.C. §§ 6b(a)(ii) (1994);
3. While acting as a commodity pool operator ("CPO") or as an associated person of a CPO, employing any device, scheme or artifice to defraud any client or prospective client and any pool participant or prospective participant, or engaging in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client or any participant or prospective participant, by use of the mails or any means or instrumentality of interstate commerce, in violation of Section 4o(1) of the Act, 7 U.S.C. §6o(1) (1994);
4. Accepting funds from actual and prospective commodity pool participants, for the purchase of an interest in a commodity pool that they operate or intend to operate, in the name of an entity other than the pool's name, in violation of Regulation 4.20(b), 17 C.F.R. § 4.20(b) (1999);
5. Commingling the property of a commodity pool that they operate or intend to operate with the property of any other person, in violation of Regulation 4.20(c), 17 C.F.R. § 4.20(c)(1999); and
6. While acting as a CPO registered or required to be registered under the Act, directly or indirectly soliciting, accepting or receiving funds, securities or other property from a prospective participant in a commodity pool that they operate or intend to operate, without delivering, on or before the date they engage in such activity, a Disclosure Document conforming to the requirements of Regulation 4.24(a), 17 C.F.R. § 4.24(a), in violation of Regulation 4.21(a), 17 C.F.R. § 4.21(a)(1999).
B. Defendants Fidelity Traders and Gray are permanently restrained, enjoined and prohibited from directly or indirectly soliciting, accepting and receiving funds, securities or other property from investors for the purpose of trading in commodity interests without being registered with the Commission as a commodity pool operator, as required, and by making use of the mails or other means or instrumentalities of interstate commerce in connection with this business, in violation of Section 4m(1) of the Act, 7 U.S.C. § 6m(1) (1994).
C. Defendants Schenk, Fidelity Traders and Gray are permanently restrained, enjoined and prohibited from directly or indirectly:
1. Acting as a futures commission merchant, commodity pool operator, commodity trading advisor, introducing broker, floor broker, floor trader or as an associated person or other agent of any registrant as defined under the Act;
2. Soliciting, receiving or accepting any money, securities or property from others in connection with the purchase or sale of commodity interests;
3. Soliciting, accepting or placing orders from others for the purchase or sale of commodity interests, giving advice or other information in connection with the purchase or sale of commodity interest contracts, introducing customers to any other person engaged in the business of commodity interest trading, issuing statements or reports to others concerning commodity interest trading, or otherwise engaging in any business activities related to commodity interest trading; and
4. Controlling or directing the trading for any commodity interest account for or on behalf of any other person or entity, directly or indirectly, whether by power of attorney or otherwise.
D. The injunctive provisions of this Order shall be binding upon Schenk, Fidelity Traders and Gray, upon any person insofar as he or she is acting in the capacity of officer, servant, agent, employee or attorney of any of them, and upon any person who receives actual notice of this Order by personal service or otherwise, insofar as he or she is acting in active concert or participation with Schenk, Fidelity Traders and Gray.
E. Within thirty days of the date of this Order, Schenk and Gray shall make restitution in the total amount of $360,016.35 ("Restitution Amount") to make whole all persons whose funds were received or disposed of by Schenk and Gray in connection with their operation of the Wasatch Fund in violation of the statutory and other provisions identified in this Order. In addition, Schenk and Gray shall pay prejudgment interest upon the Restitution Amount in the a mount of $89,862.50; and Schenk and Gray shall pay postjudgment interest at the Treasury bill rate prevailing on the date the Order is entered, pursuant to 28 U.S.C. § 1961(a). The Wasatch Fund participants to whom restitution shall be paid are identified in Exhibit A, which is attached hereto and incorporated herein by reference.
F. Within thirty days of the date of this Order, Defendant Schenk shall pay $175,687 in disgorgement, representing Schenk's gross profits from the conduct alleged in the Commission's Complaint, and Defendant Gray shall pay $29,465 in disgorgement, representing Gray's gross profits from the conduct alleged in the Commission's Complaint. Disgorgement shall be directed to the Commodity Futures Trading Commission, Division of Trading and Markets, 1155 21st St., N.W., Washington, D.C. 20581 to the attention of Dennese Posey under a cover letter that identifies the defendant and the name and docket number of this proceeding. A copy of the cover letter and the form of payment shall be simultaneously transmitted to Phyllis Cela, Acting Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st St., N.W., Washington, D.C. 20581.
1. Within thirty days of the date of this Order, Schenk shall pay to Commission a civil monetary penalty of $175,687. This penalty represents Schenk's profits from the scheme.
2. Gray shall pay to the commission a civil monetary penalty of $ 29,465 within thirty days of the date of Order. This penalty represents profits from the scheme.
H. If any provision of this Order or the application of any provision or circumstance is held invalid, the remainder of this Order, and the application of the provision to any other person or circumstance, shall not be affected by the holding.
I. Schenk and Gray shall not transfer or cause others to transfer funds or other property to the custody, possession or control of any other person for the purpose of concealing such funds or property from the Court, the Commission, or any officer that may be appointed by the Court.
J. This Court shall retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
K. There being no just reason for delay, the Clerk of the Court is hereby directed to enter this Order of Permanent Injunction.
DONE AND ORDERED this 22nd day of May, 2000.
|HONORABLE BRUCE S. JENKINS|
|UNITED STATES DISTRICT COURT JUDGE|
|DISTRICT OF UTAH|
|Attorney for: Commodity Futures Trading Commission|
|300 S. Riverside Plaza|
|Chicago, IL 60606|
|R. Paul Allred|
|(Bar # 4785)|
|Assistant Attorney General|
|Attorney General's Office of Consumer Rights|
|160 East 300 South|
|Salt Lake City, Utah 84114-6760|