UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC Docket No. 00-15|
|Trendy Systems, LLC,||)||ORDER INSTITUTING PROCEEDINGS|
Allan P. Harris, and
|)||PURSUANT TO SECTIONS 6(c) AND 6(d)|
|Joseph Prewitt,||)||OF THE COMMODITY EXCHANGE ACT,|
|)||AS AMENDED, MAKING FINDINGS AND|
The Commodity Futures Trading Commission ("Commission") has reason to believe that Trendy Systems, LLC ("Trendy"), Allan P. Harris ("Harris") and Joseph Prewitt ("Prewitt") have violated Sections 4b(a)(i) and (iii) and 4o(1) of the Commodity Exchange Act (the "Act"), 7 U.S.C. §§ 6b(a)(i) and (iii) and 6o(1) (1994), and Section 4.41(a) and (b) of the Commission's Regulations, 17 C.F.R. § 4.41(a) and (b) (1999). Therefore, the Commission deems it appropriate and in the public interest that administrative proceedings be, and hereby are, instituted to determine whether Trendy, Harris, and Prewitt engaged in the violations set forth in this Order and to determine whether any Order should be issued imposing remedial sanctions.
In anticipation of the institution of this administrative proceeding, Trendy, Harris, and Prewitt have submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Without admitting or denying the findings in this Order, and without to any adjudication on the merits, Trendy, Harris, and Prewitt acknowledge service of this Order. Trendy, Harris, and Prewitt consent to the use of the findings in this Order in this or any other proceedings brought by the Commission or to which the Commission is a party.1
The Commission finds the following:
Respondents sold various commodity trading systems through their Internet website, claiming that the trading systems generated significant profits, such as annualized returns of 300% and 600%, from hypothetical trading. The website failed to disclose, however, that actual trading by Respondents using their trading systems during the same periods resulted in a net loss. Furthermore, while the Respondents' website purported to provide a statement concerning the inherent limitations of hypothetical performance claims, the statement did not conform with the Commission's Regulations, and falsely implied that some of the performance claims were based on actual trading. Respondents' activities in fraudulently advertising their trading systems violated Sections 4b(a)(i) and (iii) and 4o(1) of the Act, and Section 4.41(a) of the Commission's Regulations, and their failure to provide the required statement concerning performance results based on hypothetical trading violated Section 4.41(b) of the Commission's Regulations.2
Trendy Systems, LLC is a limited liability corporation incorporated in Delaware and is located at 6344-612 Westgate Drive, Orlando, Florida 32835. Neither Trendy nor its principals are registered with the Commission in any capacity.
Allan P. Harris is a principal of Trendy and resides at 305 Palm Warbler Road, Johns Island, Georgia 29455.
Joseph Prewitt is a principal of Trendy and resides at 6344-612 Westgate Drive, Orlando, Florida 32835.
From at least 1996 to March 2000, Respondents marketed and sold through their website (www.trendysystems.com) access to five, computer-run systems for use in trading commodity futures -- the "Naples," "Marco Island," "Key West," "NeuralTrend," and "Trendy Millennium." Subscribers to all five systems received nightly one-page faxes or e-mails containing the "most recent status and signals." In addition, subscribers could receive software that generated daily trading signals for the "Naples, "Marco Island," and "KeyWest" trading systems. Respondents' website also referred customers to a registered introducing broker who, the website claimed, received nightly faxes from Trendy and would trade the systems in an "automatic fashion" for subscribers. Respondents sold all systems in a package arrangement costing $450 per quarter, $750 per six months, or $1250 per year.
Respondents claimed that their trading systems had generated extraordinary profits through hypothetical trading. For instance, through their website, Respondents claimed that:
· The "Naples" system traded S&P and 10 year T-Notes and averaged $6,500/month or $78,000/year profit with a 300% annualized return based on an initial investment of $25,000;
· The "Marco Island" model traded Emini S&P and averaged $7,000/month or $90,000/year profit with a 600% annualized return based on an initial investment of $15,000;
· The "KeyWest" system traded 10 year T-Notes and averaged $1,000/month or $12,000/year profit with a 240% annualized return based on an initial investment of $5,000;
· The "Millennium" system traded T-Notes, Crude Oil, Wheat, and Dow Jones Contracts. A chart on the website entitled "Featured Models' Quarterly Gain/(Loss)" shows that with an initial investment of $10,000, the system made $19,779 in one year;
Respondents claimed through their website that these performance results were the product of "simulated" trading; however, over the same periods, Respondents actually traded commodity futures using their trading systems, and their accounts experienced a combined net loss. In advertising extraordinary profits purportedly based on simulated or hypothetical trading, while at the same time failing to disclose that Trendy's actual trading during the same periods resulted in losses, Respondents fraudulently induced members of the public to purchase Trendy's trading systems.
Additionally, Respondents provided a "disclaimer" on their website that purported to address the inherent limitations of performance results based on simulated or hypothetical trading, but their statement misrepresented the nature of the performance claims they actually made, and departed materially from the statement required by Commission Regulation 4.41(b). One portion of Respondents' statement that was both misleading and noncomforming was as follows: "Past real or hypothetical performance of any trading model offered by Trendy systems, LLC is not a guarantee of future results, real or hypothetical." (emphasis added). The cautionary statement prescribed by Regulation 4.41(b) makes no mention of performance results based on "real" or actual trading. Respondents' statement, on the other hand, implies that at the very least, some of the performance claims appearing on Trendy's website were the product of actual, and not simply hypothetical, trading. In fact, none of the performance claims on the website resulted from actual trading.3
D. Legal Discussion
Respondents Violated Sections 4b(a)(i) and (iii) of the Act
Sections 4b(a)(i) and (iii) of the Act provide that is 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 attempted 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 contract, or in regard to any act of agency performed with respect to such order or contract for such person. Misrepresentations and omissions of material facts made with scienter regarding futures transactions constitute fraud under Section 4b(a) of the Act.4 Additionally, Sections 4b(a)(i) and (iii) require that the material misrepresentations and omissions of material facts be made "in connection" with futures transactions.5
Respondents violated Sections 4b(a)(i) and (iii) by representing that their trading systems generated significant hypothetical profits trading commodity futures while failing to disclose the dramatically less successful results achieved over the same period through Respondents' actual trading. When actual trading results known to the advertiser fall far short of hypothetical trading results, it is fraudulent for the advertiser to tout the hypothetical results, while failing to mention the results of the actual trading. Cf. Jaroslawicz v. Engelhard Corp., 704 F.Supp. 1296 (D.N.J. 1989) (company's affirmative statements concerning its financial health would give rise to liability for securities fraud if the company failed to disclose such material information as would prevent the statements from misleading investors).
Respondents also violated 4b(a)(i) and (iii) by misrepresenting that some of their advertised trading results may have been based on actual trading. Respondents did so knowing that such claims were not based on actual trading, but rather on hypothetical trading. "Because simulated results inherently overstate the reliability and validity of an investment system, and because extravagant claims understate the inherent risks in commodities trading, a reasonable investor would find [such] fraudulent misrepresentations to be material." R&W Technical Svcs., 2000 WL at *3. See also CFTC v. Skorupska, 605 F. Supp. 923, 933 (E.D. Mich. 1985) (misrepresenting performance tables as being actual trading results violated Section 4b of the Act).
Respondents 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. Section 4.41(b) prohibits persons from presenting claims of hypothetical or simulated performance results, unless such claims are accompanied by a prescribed cautionary statement.
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 a party 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.6 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."7 Trendy gave commodity futures trading advice for compensation or profit and, therefore, was a CTA. 8
By falsely representing the profits achieved through their trading systems, Respondents violated Section 4o(1) of the Act and Section 4.41(a) of the Regulations for the same reasons they violated Sections 4b(a)(i) and (iii) of the Act. Respondents also violated Section 4.41(b) of the Regulations by presenting hypothetical or simulated performance results without accompanying those results with the prescribed cautionary statement.
Offer of Settlement
Respondents have submitted an Offer of Settlement ("Offer") in which they, without admitting or denying the findings in this Order:
A. Admit the jurisdiction of the Commission with respect to all matters sets forth in the Order;
B. Acknowledge service of this 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 Trendy, Harris, or Prewitt may possess under the Equal Access to Justice Act, 5 U.S.C. § 504 (1994) and 28 U.S.C. § 2412 (1994) as amended by Pub. L. No. 104-121, §§ 231-32, 110 Stat. 847 and Part 148 of the Commission's Regulations, 17 C.F.R. § 148.1 et seq., relating to or arising from the Order;
D. Stipulate that the record basis on which the Order may be entered consists solely of the Order and the findings consented to in the Offer, which are incorporated in the Order; and
E. Consent to the Commission's issuance of this Order, which makes findings and:
1. orders Respondents to cease and desist from violating Sections 4b(a)(i) and (iii) and 4o(1) of the Commodity Exchange Act (the "Act"), as amended 7 U.S.C. §§ 6b(a)(i) and (iii) and 6o(1) (1994), and Sections 4.41(a) and (b) of the Commission's Regulations, 17 C.F.R. § 4.41(a) and (b) (1999);
2. orders Respondents to pay, jointly and severally, Ten Thousand Dollars ($10,000), which represents a civil monetary penalty. Trendy, Harris, and Prewitt shall pay the total amount within ten days of the date of the Order by electronic funds transfer, or by U.S. postal money order, certified check, bank cashier's check, or bank money order, made payable to the Commodity Futures Trading Commission, and sent to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, under cover of a letter that identifies Trendy and the name and docket number of the proceeding; Respondents shall simultaneously transmit a copy of the cover letter and the form of payment to Phyllis J. Cela, Acting Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581; and
3. orders Respondents to comply with his undertakings as set forth in the Order.
Findings of Violations
Solely on the basis of the consent evidenced by the Offer, and prior to any adjudication of the merits by the Commission, the Commission finds that Respondents violated Sections 4b(a)(i) and (iii) and 4o(1), and Commission Regulation 4.41(a) and (b).
Accordingly, IT IS HEREBY ORDERED THAT:
A. Respondents cease and desist from violating Sections 4b(a)(i) and (iii) of the Commodity Exchange Act (the "Act"), as amended 7 U.S.C. §§ 6b(a)(i) and (iii) (1994), and Trendy cease and desist from violating Section 4o(1) of the Act, as amended, 7 U.S.C. § 6o(1) (1994) and Section 4.41(a) and (b) of the Commission's Regulations, 17 C.F.R. § 4.41(a) and (b) (1997);
B. Respondents pay, jointly and severally, a civil penalty of $10,000. They shall pay the total amount within ten days of the date of the Order by electronic funds transfer, or by U.S. postal money order, certified check, bank cashier's check, or bank money order, made payable to the Commodity Futures Trading Commission, and sent to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, under cover of a letter that identifies Trendy and the name and docket number of the proceeding; Respondents shall simultaneously transmit a copy of the cover letter and the form of payment to Phyllis J. Cela, Acting Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581; and
C. Respondents shall comply with the following undertakings:
1. Respondents shall not misrepresent, expressly or by implication:
a. the performance, profits or results achieved by, or the results that can be achieved by, users, including him/herself, of any commodity futures or options trading system or advisory service; and
b. the risks associated with trading pursuant to any commodity futures or options trading system or advisory service;
2. Respondents 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, Respondents shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results.
3. Respondents 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.
4. Respondents shall not represent, expressly or by implication:
a. 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;
b. the risks associated with trading using any commodity futures or options trading system or advisory service;
c. 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) Respondents possess and rely 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, Respondents maintain 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.
5. Respondents shall not take any action or make any public statement denying, directly or indirectly, any statement in the Order, or creating, or tending to create, the impression that the Order is without factual basis; provided, however, that nothing in this provision affects Respondents' testimonial obligations, or their right to take factual or legal positions relating to any proceeding in which the Commission is not a party. Respondents will undertake all steps necessary to assure that all of their agents and employees understand and comply with this agreement.
Unless otherwise specified, the provisions of this Order shall be effective on this date.
|Dated: May 1, 2000||BY THE COMMISSION|
|Secretary of the Commission|
|Commodity Futures Trading Commission|
1 Trendy, Harris, and Prewitt do not consent to the use of the Offer or this Order, or the findings herein, as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of this Order. They do not consent to the use of the Offer or the Order, or the findings herein, by any other party in any other proceeding. The findings consented to in the Offer or made in the Order are not binding on any other person or entity in any other proceeding before the Commission.
2 The Internet is a highly beneficial medium that facilitates the dissemination of information, but which also enables potential violators to reach millions of people worldwide quickly and at very low cost. By this and other proceedings, the Commission is addressing fraud committed on the Internet to promote the integrity of promotions made concerning commodity futures and options trading systems on the web.
3 There were other ways, as well, that Respondents' "disclaimer" deviated from the prescribed cautionary statement, thereby conveying a less straightforward, though not necessarily misleading, message to Trendy customers. For example, Respondents inserted language within the text of their statement on hypothetical trading disclaiming liability to subscribers for performance claims expressed in the website.
4 In the Matter of R&W Technical Services, Inc., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27,582 at 47,740-47,741 (CFTC Mar. 16, 1999), aff'd in relevant part, R&W Technical Svcs., Inc. v. CFTC, 2000 WL 217498 (5th Cir. Feb. 24, 2000). See, e.g. Saxe v. E.F. Hutton, 789 F.2d 105, 110 (2d Cir. 1986); Kelley v. Carr, 442 F. Supp. 346, 351-54 (W.D. Mich. 1977), aff'd in part, rev'd in part, 691 F.2d 800 (6th Cir. 1980); CFTC v. J.S. Love Associates Options, Ltd., 422 F. Supp. 652, 655 (S.D.N.Y. 1976).
5 Fraudulent statements that induce members of the public to purchase software that generates specific buy and sell signals for commodity futures trading satisfy the "in connection with" requirement of Section 4b(a). R&W Technical Svcs., 2000 WL at *5-6 . See also Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977) (noting that the "in or in connection with" requirement should be interpreted flexibly to include deceptive conduct that occurs prior to the opening of an actual commodity trading account).
6 CFTC v. Savage, 611 F.2d 270, 281 (9th Cir. 1979) (enforcement action charging defendant with making false reports to customers, engaging in "wash" trades and holding himself out to the public as a CTA without being registered with the Commission).
7 Section 1a(5) of the Act, 7 U.S.C. § 1a(5). Section 4o(1) of the Act and Section 4.41 of the Regulations thus do not apply to a CTA who is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" whose "furnishing of [advice] ... is solely incidental to the conduct of their business or profession." This exclusion is designed to protect incidental publishers of advice, such as general magazines and newspapers, not publishers who specifically concentrate on commodities advice. R&W Technical Svcs., 2000 WL at *7.
8 See CFTC v. British American Commodity Options Corp., 560 F.2d 135, 141 (2d Cir. 1977), cert. denied, 438 U.S. 905 (1978)(a firm that "offer[ed] opinions and advice, and issued analyses and reports concerning the value of commodities" to customers, was a CTA under the Act.); Gaudette v. Panos, 644 F. Supp. 826, 839 (D. Mass. 1986) (defendants who represented their advisory skills to be exemplary, suggested that plaintiffs open a commodity account and then recommended certain futures contracts for investment were CTAs).