UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the matter of:||)||CFTC DOCKETS NO. 00-04|
SOGEMIN METALS INC.,
|)||ORDER INSTITUTING PROCEEDINGS|
|)||PURSUANT TO SECTIONS 6(c) AND|
|)||6(d) OF THE COMMODITY EXCHANGE|
|)||ACT, MAKING FINDINGS AND|
|________________________________________________||)||IMPOSING REMEDIAL SANCTIONS.|
The Commodity Futures Trading Commission (the "Commission") has reason to believe that Sogemin Metals, Inc. ("SMI") has violated Sections 4b(a)(i) and 4b(a)(iii) of the Commodity Exchange Act, as amended (the "Act"), and Commission Regulations 30.9 and 166.3 promulgated thereunder (the "Regulations"). Therefore, the Commission deems it appropriate and in the public interest that a public administrative hearing be, and hereby is, instituted to determine whether SMI engaged in the violations as set forth herein, and to determine whether any order should be issued imposing remedial sanctions.
In anticipation of the institution of this administrative proceeding, SMI has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Without admitting or denying the findings herein, and prior to any adjudication on the merits, SMI acknowledges service of this Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Act, Making Findings and Imposing Remedial Sanctions (the "Order"). SMI consents to the use of the findings herein in this proceeding and in any other proceeding brought by the Commission or to which the Commission is a party.1
The Commission finds that:
Beginning in 1990 and continuing through 1994, SMI, a registered introducing broker, brokered futures and options transactions, among others, in base metals on the London Metal Exchange ("LME") and in precious metalsfor two Chilean metals firms, Corporacion Nacional del Cobre de Chile ("Codelco"), the world's largest producer of copper, and Empresa Nacional de Mineria ("Enami"), another large producer. These transactions were executed by Sogemin Metals Limited ("SML"), SMI's parent company in the United Kingdom and a member of the LME.2 During this period, SMI participated in a fraud upon Codelco and Enami through an unlawful commission arrangement involving SML's local agent in Chile. SMI failed to disclose to Codelco or Enami that SML paid return commissions to a Cayman Islands company controlled by its Chilean agent, whose principals included individuals with close family connections to the head futures traders at both of its Chilean clients. During the same period, certain SMI senior employees (the "SMI employees") arranged to receive kickbacks from these commissions.3 The illegal scheme also involved the payment of personal kickbacks to a senior employee of Codelco without the knowledge of Codelco's management. The scheme among the SMI employees and others continued through late 1994.
Sogemin Metals Inc. is a company incorporated under the laws of Connecticut with its principal office at 27 Signal Road, Stamford, Connecticut 06902. Since July 10, 1990, SMI has been continuously registered with the Commission as an introducing broker.
C. Other Relevant Individuals and Entities
Sogemin Metals Limited is a company organized under the laws of England and Wales with its principal office at 5th Floor, Mansion Court, 47-53 Cannon Street, London, EC4M 5SH, England, United Kingdom. SML is a Ring Dealing Member of the LME, an Associate Member of the London Bullion Market Association, and has been granted an exemption from registration with the Commission under Part 30 of the Commission's Regulations.
Corporacion Nacional del Cobre de Chile is a government-owned metals and mining company incorporated under the laws of the Republic of Chile with its principal office at Huerfanos 1270, Santiago, Chile. Codelco has never been registered with the Commission in any capacity.
Empresa Nacional de Mineria is a government-owned metals and mining company incorporated under the laws of the Republic of Chile with its principal office at Mac Iver No. 459, Santiago, Chile. Enami has never been registered with the Commission in any capacity.
Servicios de Negocios ("Serneg") is a corporation organized under the laws of the Republic of Chile. From 1990 through 1991, Serneg served as SML's local agent in Chile. Serneg has never been registered with the Commission in any capacity.
Servicios de Representacion y Asesorias Limitada d/b/a Brokerage Trading and Financial Services Limitada ("BTFSL") is a limited partnership organized under the laws of the Republic of Chile. From 1992 through 1994, BTFSL served as SML's local agent in Chile. BTFSL has never been registered with the Commission in any capacity.
Brokerage Trading and Financial Services ("BTFS") is a corporation organized under the laws of the Cayman Islands. From 1992 through 1994, BTFS received payments from SML related to BTFSL's representation of SML in Chile. BTFS has never been registered with the Commission in any capacity.
Juan Pablo Davila Silva ("Davila") is a citizen of the Republic of Chile. From 1988 until January 1994, Davila was chief of Codelco's Futures Market Department. Davila is presently serving a three-year prison term in Chile for tax evasion. Davila has never been registered with the Commission in any capacity.
1. Codelco's Relationship with SMI
Between 1990 and 1994, Codelco and Enami directed trading orders through SMI for the execution of foreign futures and options contracts, among others, in copper as well as precious metals.4 From the outset of the trading relationship between Codelco and SML in 1990 and continuing through January 1994, Codelco's trading activities were directed by Davila, the manager of its futures department. When directing trading business to SML during this period, Davila dealt primarily with the SMI employees, who arranged execution of the orders by SML. The SMI employees were also the principal liaisons between SML and local agents in Chile that SML was required to have to transact business in Chile under Chilean law.5
2. The Unlawful Commissions and Kickback Scheme
SML's original agent in Chile was Serneg. Under the terms of the agency contract between SML and Serneg, SML paid Serneg a fixed monthly fee and a return commission based on the trading volume of its Chilean clients. Serneg had no experience in the metals industry, but its principals included family relatives of both Davila and the head futures trader of Enami. Although Codelco and Enami were aware that SML was compensating Serneg, Codelco and Enami were never informed of the family connections that existed between the heads of their futures departments and the principals of Serneg.
SML wire-transferred return commission payments from its New York bank account to Serneg at an account Serneg maintained at a bank in Florida (the "Serneg-Florida account"). From these funds, Serneg made payments from the Serneg-Florida account to Davila, the SMI employees and others. Apart from Davila's knowledge resulting from his involvement in the scheme, there is no evidence that Codelco was aware of the kickback payments by Serneg to any of the recipients at the time these payments were made.
In late 1991, the SMI employees and the principals of Serneg embarked on a plan to expand the commission and kickback arrangements by forming two new companies, one of which would replace Serneg as SML's Chilean agent. The Serneg principals established BTFSL in Chile and, commencing in January 1992, BTFSL formally replaced Serneg as SML's local agent. Under the terms of the agency agreement, SML paid BTFSL a monthly retainer fee in exchange for its services. At approximately the same time, the SMI employees established a second company, BTFS, in the Cayman Islands to receive return commission payments based on the trading volume of the Chilean clients. Although BTFS was owned by the principals of BTFSL, the SMI employees handled all details necessary to establish BTFS "offshore" in the Cayman Islands to more effectively conceal the kickback scheme. Specifically, the SMI employees set up the corporate identity of BTFS and established a bank account for BTFS (the "BTFS-Cayman account") to receive the return commission payments. SMI was aware of the existence and purpose of BTFS but never informed Codelco or Enami.
From May 1992 through September 1994, SML wire-transferred return commission payments to the BTFS-Cayman account as a result of trading by Codelco and Enami directed through SMI to SML. The BTFS-Cayman account functioned as a "clearinghouse" distributing kickbacks to the SMI employees as well as Davila and others. In July 1992, the SMI employees established personal offshore bank accounts in Bermuda to receive kickback payments from BTFS. Subsequently, the SMI employees established other bank accounts in the United States which received transfers from their Bermuda accounts as well as other direct kickback payments from the BTFS-Cayman account. Through 1992 and 1993, Davila progressively directed greater amounts of Codelco's trading business to SML through SMI. By January 1994, SML had become Codelco's leading broker. Codelco subsequently uncovered evidence that SML had paid return commissions to BTFS and that Davila and the SMI employees had accepted kickbacks related to Codelco's trading.6
E. Legal Discussion
1. Fraud by Material Omission
Section 4b(a)(i) of the Act provides that it shall be unlawful, in or in connection with a futures contract, for or on behalf of any other person, to willfully cheat or defraud, or attempt to cheat or defraud, such other person. Section 4b(a)(iii) of the Act provides that it shall be unlawful, in or in connection with an order or futures contract, for or on behalf of any other person, to willfully deceive or attempt to deceive, such other person in regard to any act of agency with respect to such order or contract. Section 30.9 of the Regulations is the Commission's antifraud rule for foreign futures and options. As noted above, Codelco's trading through SMI involved both LME futures and options contracts, among others.
Establishing a violation of Section 4b requires a showing that a person willfully made misleading representations "in connection" with futures transactions that were material.7 Similarly, Section 30.9 of the Regulation requires proof that a person willfully made misleading representations in connection with any account, agreement or transaction involving any foreign futures or foreign options transaction.8 An omission of a material fact qualifies as a misleading misrepresentation if the circumstances mandated disclosure to ensure that the representations were not misleading.9 "The question of materiality is an objective one and turns on whether a reasonable investor would regard the fact as significantly changing the total data available to him or her."10
The facts demonstrate that SMI defrauded the Chilean clients within the meaning of Section 4b of the Act and Section 30.9 of the Regulations. SMI failed to disclose to Codelco and Enami material facts concerning the commission arrangements associated with their trading, in particular the family relationships between the principals of Serneg, BTFS and BTFSL and the head traders at Codelco and Enami. SMI also failed to disclose the existence of the kickback payments by Serneg and BTFS to the SMI employees. SMI's failure to disclose these facts to Codelco and Enami was a material omission in violation of Section 4b of the Act and Section 30.9 of the Regulations.11 In fact, once Codelco and Enami learned of the kickback payments to Davila and the SMI employees, Codelco and Enami promptly moved to terminate their trading relationships with SMI and SML. SMI's intentional omission of this material information amounts to fraud under Section 4b of the Act and Section 30.9 of the Regulations.
Additionally, under the respondeat superior liability provisions of Section 2(a)(1)(A)(iii) of the Act and Section 1.2 of the Regulations, the act, omission, or failure of any official, agent, or other person acting for any individual, association, or corporation within the scope of his employment or office shall be deemed the act, omission, or failure of such individual, association, or corporation. "[I]t does not matter if the principal participated in or even knew about the agent's acts; he is strictly liable for them."12 Therefore, SMI is liable for the violations of Section 4b of the Act and Section 30.9 of the Regulations that were committed by its employees within the scope of their employment at SMI.
2. SMI's Failure to Supervise
Section 166.3 of the Regulations requires that each Commission registrant, except an associated person who has no supervisory duties, diligently supervise the handling by its partners, officers, employees and agents of all activities related to its business as a Commission registrant. The objective of Section 166.3 is to protect customers from fraudulent or manipulative activities by Commission registrants.13 A supervisory system accomplishes the goal of both detection and deterrence of fraudulent activity by ensuring that employees of Commission registrants handle customer accounts and transactions in accordance with the Act and the Commission's regulations.14
Two of the SMI employees were both principals and directors of SMI at the same time they were actively involved in the kickback scheme. Collectively, the SMI employees received and placed trading orders for Codelco and Enami while concealing from them facts material to the commission arrangements which affected their trading relationships. Additionally, the SMI employees personally benefited from the scheme by receiving kickbacks from BTFS generated by the volume of trading done by Codelco and Enami. SMI did not have adequate controls in place to detect or deter such a kickback scheme. SMI had no affirmative compliance program in place, no compliance manual of its own, and all compliance responsibilities were handled by SML compliance officers in London. Accordingly, SMI failed to adequately supervise the activities of the SMI employees and is liable under Section 166.3 of the Regulations.15
FINDINGS OF VIOLATIONS
Based on the foregoing, the Commission finds that SMI violated Sections 4b(a)(i) and 4b(a)(iii) of the Act, 7 U.S.C. §§ 6b(a)(i), (iii), and Commission Regulations 30.9 and 166.3, 17 C.F.R. §§ 30.9, 166.3 (1998).
OFFER OF SETTLEMENT
SMI has submitted an Offer of Settlement in which, without admitting or denying any findings in this Order, it:
A. Admits jurisdiction of the Commission with respect to all matters set forth in 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 the Offer;
6. 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
7. all claims which SMI may possess under the Equal Access to Justice Act, 5 U.S.C. § 504 and 28 U.S.C. § 2412 as amended by Pub. L. No. 104-121, §§ 231-32, 110 Stat. 862-863 (1996) and Part 148 of the Commission's Regulations, 17 C.F.R. § 148.1 et seq., relating to or arising from the Order.
C. Stipulates that the record basis on which the Order may be entered consists solely of the Order and the findings consented to in the Offer, which are incorporated in the Order; and
D. Consents to the Commission's issuance of this Order which:
1. makes findings by the Commission that SMI violated Section 4b(a)(i) and 4b(a)(iii) of the Act, 7 U.S.C. §§ 6b(a)(i), (iii)(1994), and Sections 30.9 and 166.3 of the Commission's Regulations, 17 C.F.R. §§ 30.9 and 166.3 (1998). SMI agrees that the findings in this Offer may be used in this and any other proceeding brought by the Commission or to which the Commission is a party; provided, however, SMI does not consent to the use of this Offer or the Order as the sole basis for any other proceeding brought by the Commission. SMI does not consent to the use of the Offer, the findings consented to in the Offer, or the Order by any other party in any other proceeding;
2. orders SMI to cease and desist from violating Sections 4b(a)(i) and 4b(a)(iii) of the Act, 7 U.S.C. § 6b(a)(i) and (iii)(1994), and Sections 30.9 and 166.3 of the Regulations, 17 C.F.R. §§ 30.9 and 166.3 (1998);
3. orders SMI to pay a civil monetary penalty of Five Hundred Thousand Dollars ($500,000). Payment of that sum shall be made within five (5) days of the date of the Order 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 addressed to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, 1155 21st Street, NW, Washington D.C. 20581, with a cover letter that identifies the name and docket number assigned to this matter by the Order. A copy of the cover letter and form of payment shall simultaneously be transmitted to Phyllis Cela, Acting Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, NW, Washington D.C. 20581;
4. orders SMI to comply with its undertakings set forth below and in the Offer.
Accordingly, IT IS HEREBY ORDERED that:
A. SMI shall cease and desist from violating Sections 4b(a)(i) and 4b(a)(iii) of the Act, 7 U.S.C. § 6b(a)(i) and (iii)(1994), and Sections 30.9 and 166.3 of the Regulations, 17 C.F.R. §§ 30.9 and 166.3 (1998);
B. SMI shall pay a civil monetary penalty of Five Hundred Thousand Dollars ($500,000). Payment of that sum shall be made within five (5) days of the date of the Order 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 addressed to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, 1155 21st Street, NW, Washington D.C. 20581, with a cover letter that identifies the name and docket number assigned to this matter by the Order. A copy of the cover letter and form of payment shall simultaneously be transmitted to Phyllis Cela, Acting Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, NW, Washington D.C. 20581; and if payment is not made in accordance with the requirements of this paragraph, the Order shall be vacated and the proceeding reinstated as to SMI; and
C. SMI shall comply with the following undertakings:
1. SMI undertakes to continue to cooperate fully with the Commission's Division of Enforcement ("Division") in the ongoing investigation that led to the filing of the Order, and in all other proceedings arising from such investigation by, among other things: (a) responding promptly, completely, and truthfully to any inquiries or requests for information; (b) providing authentication of documents; (c) testifying completely, truthfully, and consistently with any prior sworn statements provided to the Division; and (d) not asserting privileges under the Fifth Amendment of the United States Constitution in connection with any testimony SMI is asked to provide. The provisions of this paragraph shall apply equally to SMI's officers, directors, employees, and agents acting in their official capacities;
2. SMI represents that the Parent Corporation and/or SML have undertaken the following remedial measures:
(a) the adoption of strict monitoring and control by SML's Compliance and Accounting Departments of all commission rebates paid by SMI and/or SML, the details of which are to be provided to SML's Management Committee;
(b) the restructuring of SML's Management Committee and SML's Credit Committee so that they are regularly informed of management and credit issues respectively;
(c) the appointment of two senior managers of the Parent Corporation to SML's board of directors;
(d) the increased participation of Sogem's internal audit department in reviewing the operations of SML;
(e) the establishment of a Risk Management Committee at SML which shall meet regularly and submit copies of the minutes of its meetings to the Parent Corporation;
(f) the complete revision of the internal procedures manual governing SML;
(g) the complete revision of the compliance manual governing SML;
(h) a formal change in policy substantially reducing SML's reliance on outside agents to assist in the business of SML, requiring that all such agents be subject to written introducing broker agreements, and requiring that customers be notified of the existence of compensated outside agents; and
(i) the replacement of SML's Managing Director, Finance Director, Trading Director and Compliance Officer with individuals who did not hold those positions during the period between January 1990 and December 1994.
3. SMI shall also undertake the following:
(a) to continue to cooperate with the Parent Corporation and/or SML in the adoption and implementation of all measures set forth above in paragraph VI(C)(2) of this Order;
(b) the adoption of strict monitoring and control of all commission rebates paid on transactions effected through SMI;
(c) the complete revision of the internal procedures manual governing SMI, which shall include procedures to ensure the implementation of subparagraph (b) immediately above; and
(d) the creation of a compliance manual governing SMI.
4. Within three months of the date of this Order, SMI shall deliver a report to the Division that shall confirm that the undertakings set forth in paragraph VI(C)(3) above have been implemented. On the same date, SMI shall provide the Division with copies of its revised internal procedures manual and the compliance manual referred to in subparagraphs 3(c) and 3(d) above. The report and the manuals referred to in this paragraph shall be delivered to the Regional Counsel, Division of Enforcement, Commodity Futures Trading Commission, One World Trade Center, Suite 3747, New York, NY 10048;
D. Neither SMI nor any agents acting under its authority or control shall take any action or make any public statements denying, directly or indirectly, creating, or tending to create, the impression that the Order is without a factual basis; provided, however, that nothing in this provision affects: (i) SMI's testimonial obligations, or (ii) right to take legal positions, in other proceedings to which the Commission is not a party. SMI shall take all steps necessary to assure that all of its agents and employees understand and comply with this undertaking.
|By the Commission|
|Dated: February 7, 2000|
|Jean A. Webb|
|Secretary to the Commission|
|Commodity Futures Trading Commission|
1 SMI does not consent to the use of its Offer, the findings to which it has consented in its Offer, or this Order, as the sole basis for any other proceeding brought by the Commission other than a proceeding brought to enforce the terms of this Order. Nor does SMI consent to the use of its Offer and this Order by any other person or entity in this or any other proceeding. The findings to which SMI has consented in its Offer as contained in this Order are not binding on any other person or entity named as a defendant or respondent in any other proceeding.
2 At all relevant times, both SMI and SML were owned by SA Sogem NV ("Sogem"), a subsidiary of Union Miniere, a Belgian conglomerate (the "Parent Corporation"). From 1990 through 1993, SMI was directly owned by SML. Beginning in 1994, Sogem Afrimet Inc., an American corporation, replaced SML as the direct parent of SMI. Thereafter, Sogem Afrimet Inc. changed its name to Sogem U.S.A. Inc. At all times, SML had direct authority over SMI.
3 SMI promptly suspended and then terminated the SMI employees after their involvement in this scheme was disclosed by Codelco in March 1996.
4 Codelco initiated trading positions during the period 1990 through 1994. From 1995 through 1996, Codelco placed trading orders with SMI solely to close out pre-existing positions.
5 During this period of time Chilean law required foreign companies doing business in Chile to retain the services of a local agent. Among other functions, SML's local agent was identified in and required to countersign trading and foreign exchange reports which Codelco filed with the Banco Central de Chile.
6 SMI cooperated extensively with the Commission's investigation of this matter. Additionally, SML provided substantial assistance to the Commission's Division of Enforcement by providing documents and other materials on a voluntary basis. SMI has represented to the Commission that its parent companies have already undertaken substantial remedial measures designed to prevent the recurrence of the conduct described in this Order.
7 See Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977).
8 See In re ContiCommodity Services, Inc., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,038 at 37,880 (CFTC Apr. 17, 1991).
9 Modlin v Cane, 1998 WL 429622, *8 (C.F.T.C. July 30, 1998) (citing Swickard v. A.G. Edwards Sons, [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,522, at 30,275 (CFTC Mar. 7, 1985)).
10 In re Citadel Trading Co., 1986 WL 66170, *5 (CFTC May 12, 1986).
11 Id. Because two of the SMI employees were senior officers as well as directors of SMI and were active participants in the fraud, their direct knowledge of the underlying conduct that violated the Act and the Regulations is imputed to SMI. See, e.g., Baker v. Latham Sparrowbush Associates, 72 F.3d 246, 255 (2d Cir. 1995) ("The knowledge of a director, officer, sole shareholder or controlling person of a corporation is imputable to that corporation").
12 Stotler and Co. v. CFTC, 855 F.2d 1288, 1292 (7th Cir. 1988) (citing Cange v. Stotler, 826 F.2d 581, 589 (7th Cir. 1987) and Rosenthal & Co. v. CFTC, 802 F.2d 963, 966-67 (7th Cir. 1986)).
13 In re Paragon Futures Ass'n, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,266, at 38,850 (CFTC April 1, 1992) (citing 43 Fed. Reg. 31,886, at 31,889 (July 24, 1978)).
15 Although there is ample evidence here of substantive fraudulent conduct, Section 166.3 is an independent and primary violation for which no underlying violation is necessary. Thus, the rule can be violated when a registrant lacks an adequate supervisory system or where an otherwise adequate system is not diligently maintained. In re Collins, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,194 at 45,744 (CFTC Dec. 10, 1997).