UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC Docket No. 00-27|
|Systems of Success - Window to Profit||)|
|d/b/a Systems of Success||)|
|9947 NW 45th Street||)|
|Coral Springs, Florida 33065||)|
|Bernadette Flavell a/k/a Bernadette Viele||)||COMPLAINT AND NOTICE OF HEARING|
|9947 NW 45th Street||)||PURSUANT TO SECTIONS 6(c), 6(d) AND|
|Coral Springs, Florida 33065||)||8a(4) OF THE COMMODITY EXCHANGE|
|)||ACT, AS AMENDED|
|9947 NW 45th Street||)|
|Coral Springs, Florida 33065||)|
|- and -||)|
|324 SE 10th Court||)|
|Deerfield Beach, Florida 33441,||)|
The Commodity Futures Trading Commission ("Commission" or "CFTC") has received information from its staff which tends to show, and the Commission's Division of Enforcement ("Division") alleges that:
1. As more fully set forth below, the Respondents, Richard Viele ("Viele"), Bernadette Flavell a/k/a Bernadette Viele ("Flavell"), Systems of Success-Window to Profit d/b/a Systems of Success ("Systems of Success"), and Kevin Kates ("Kates") (collectively, the "Respondents") have engaged in acts and practices which constitute violations of Sections 4b(a)(i) and (iii) and 4o(1)(A) and (B) of the Commodity Exchange Act, as amended ("Act"), 7 U.S.C. §§ 6b(a)(i) and (iii) and 6o(1)(A) and (B) (1994), and Sections 4.41(a) and (b) of the CFTC's Regulations ("Regulations"), 17 C.F.R. §§ 4.41(a) and (b) (1999).
2. Specifically, the Respondents violated the applicable antifraud provisions of the Act by fraudulently inducing prospective clients to purchase signals generated by Systems of Success and to attend Systems of Success seminars in order to trade exchange-traded commodity futures contracts. In one mass circulation newspaper across the country, in written promotional materials, and in conversations and correspondence with clients and prospective clients, the Respondents consistently misrepresented the performance record and the profitability of the Systems of Success trading system.
3. Respondent Systems of Success is a Nevada corporation, which has a principal place of business located at 9947 NW 45th Street, Coral Springs, Florida 33065. At all times material to this Complaint, Systems of Success transacted business nationally. Systems of Success has never been registered with the Commission in any capacity.
4. Respondent Viele, who resides at 9947 NW 45th Street, Coral Springs, Florida 33065, has represented that he is the owner of "Profit Educational Services" and "Systems of Success-Window to Profits" on applications to register those names with the State of Florida on October 21, 1997. In separate incorporation articles filed with the Nevada Secretary of State on December 30, 1997, Viele is listed as the sole member of the board of directors of both entities. Viele has never been registered with the CFTC.
5. Respondent Flavell, who also resides at 9947 NW 45th Street, Coral Springs, Florida, 33065, is the self-proclaimed sole employee of Systems of Success. Flavell has been registered as a commodity trading advisor ("CTA") with the CFTC since June 4, 1998. Flavell withdrew an application to become an associated person ("AP") on July 30, 1997.
6. Respondent Kates, who resides at 324 SE 10th Court, Deerfield Beach, Florida 33441, was registered as an AP and listed as a principal of First Financial Trading, Ltd. ("First Financial") from September 14, 1995 to July 30, 1997. He became President of First Financial in July 1996. Kates was registered with the CFTC as a CTA, d/b/a Trader Services Co., from May 22, 1996 to December 30, 1998. First Financial, located at 324 SE 10th Court, Deerfield Beach, Florida, 33441, was registered as an introducing broker ("IB") from September 4, 1995 until July 30, 1997, when it withdrew its registration.
A. The Business of Systems of Success
7. The acts and practices of respondents Viele, Flavell and Systems of Success, as detailed below, occurred from September 1996 through January 1999. The acts and practices of respondent Kates, as detailed below, occurred from September 1996 through approximately April 1997.
8. In September 1996, Viele, with the aid of Kates, designed a system to generate a trading recommendation or "signal" to buy or sell S&P 500 futures contracts at the market opening. Kates provided Viele with the overnight data needed to generate the buy or sell signal.
9. In October 1996, Viele and Flavell, under the business name Systems of Success, began providing futures trading advice regarding the S&P 500. Viele also developed variations of the formula he devised, all of which, with the exception of one system, dealt with S&P 500 futures. These were marketed under different names and through various hotlines.
10. For a fee, Systems of Success would advise its clients to buy or sell S&P 500 futures contracts at the market opening. Kates also collected a fee from First Financial clients whose accounts were traded according to Viele's system.
11. In June 1997, December 1997, and January 1998, Systems of Success held workshops, during which Viele disclosed the mathematical formulas used to generate the daily signal. Flavell assisted Viele during the seminars. Seven clients attended and all, save one, paid $30,000 or $40,000 to attend. These seminars were conducted at Flavell and Viele's home.
B. Respondents' Solicitations were Fraudulent
Advertising in Investor's Business Daily
12. From December 1996 until January 1999, respondents Viele, Flavell and Systems of Success, and from December 1996 until approximately April 1997, respondent Kates, solicited members of the general public to pay to obtain via a "hotline" the daily signal generated by Systems of Success. The Respondents' solicitation occurred in advertisements in Investor's Business Daily ("IBD"). The Systems of Success newspaper advertisements made claims about the success rate of trades made using a Systems of Success signal, claiming that Systems of Success percentage of winning trades ranged from 96% accuracy to 100% accuracy. These claims included: "New Breakthrough System has a Current 1998 Record of 98% Winners;" "Traders, this new pinpoint system reads the market like a road map producing Winner after Winner!;" "100% Winners-last 55 days;" "100% Accurate;" "World's Most Accurate System;" and "Our amazing new system has never been stopped out!"
13. The newspaper ads also claimed high profits from trading using Systems of Success' signal including claims of making "$1.2 Million in 1 year," "900% Actualized Profits," and "$25,390.00 IN JUST 32 DAYS."
14. At first, the newspaper advertisements directed readers to call a toll-free telephone number which belonged to Kates. Beginning in February 1997, the advertisements reflected a toll-free number belonging to Flavell.
15. Flavell and Viele also placed advertisements for Viele's seminars and workshops in IBD. The advertisements for the workshops included claims of profits similar to those made in the advertisements for the hotlines, such as "[m]ake $1.8 Million in 9 months!" These advertisements also had varying warnings and disclaimers. One ad had no warnings or disclaimers at all, while another ad stated that one could learn "how it's possible to make winning trade after winning trade...". That ad also stated that "futures trading involves a high degree of risk."
16. All forms of advertisements for Systems of Success' hotlines and workshops failed to state that claimed profit percentages and dollar figures are not based on actual trading, but rather upon hypothetical results. Through at least March 24, 1997, the advertisements failed to include the disclaimer regarding hypothetical results required by Section 4.41(b)(1) of the Regulations. Even in those few Systems of Success' advertisements that included this disclaimer, such as an ad that appeared in IBD on January 15, 1999, it was in such exceptionally small print that it was almost impossible to read.
17. From October 1996 to at least April 1997, Systems of Success provided promotional material to prospective customers. This material made misrepresentations as to profits and losses similar to those in the IBD advertisements. For example, promotional material touting a trading system called "Dr. Viele's `Window to Profits'" claimed that this system generated $77,675.25 in profits in only seventeen trading days in March 1997 with an average profit per trading day of $4,569.13. Promotional material for a "Mega" trades system boasted $302,000 in gross profits. The promotional material falsely suggested that the results were based on actual trading and did not disclose that the results were based on hypothetical trading.
18. Written materials supplied to workshop participants in June 1997, December 1997 and January 1998, similarly exaggerated the profit potential of the trading systems. A summary provided to workshop participants of futures trading "results" for three different money management systems showed percentage gains ranging from 164.5% to 346% over five and a half months.
19. In promotional materials provided to workshop participants, Viele and Flavell falsely stated that Systems of Success' performance record was based on actual trading. For example, in a Systems of Success document subtitled "Trading Results," Viele and Flavell declare that "System[s] of [S]uccess has developed a system that is unbelievably accurate. The following is our performance record. All trades were made in the market and are not hypothetical."
20. Flavell and Kates distributed spreadsheets denoting the various systems' track records to potential clients. Some of these track records were labeled "Actual Trading Results for S&P SYS 1" and included a summary page that falsely stated "[r]esults are based on actual trades."
21. The track records reflected that virtually all of the trades were profitable. For example, one track record, given to at least one client, reflected monthly profits ranging from $3,650 to $16,650. This particular track record reflected only one losing trade in seven months
22. While Systems of Success advertised and distributed promotional materials portraying consistent profits, individuals whose accounts were traded by Kates and other IBs according to one of Viele's systems, including Viele's own account, lost money in as early as October 1996.
23. On October 11, 1996, Viele lost $2,350 trading in his own account at First Financial. However, the track records provided to clients and prospective clients for this time period omits any trade for October 11, 1996.
24. On October 31, 1996, the track record showed no entry, although one of Kates' customers, trading according to Viele's hotline signals, lost $6,600.
25. A comparison between the trading results of several other accounts that Kates traded according to Viele's system and the track record provided to customers reveals that Kates' clients' actual results varied substantially from the claimed results reflected in the track record.
26. On approximately five dates, clients traded according to Viele's system and lost money. However, none of those dates appear on the track records.
27. The track records list approximately six dates on which Viele's system generated a winning trade with a specific profit, but clients that traded on those dates suffered losses.
28. On dates where some accounts lost money while other accounts made money, the track record only reflects that there was a winning trade for a specified amount.
29. Viele, Flavell and Kates knew that the track records were misleading and inaccurate.
30. In some materials sent to clients, Flavell and Kates either failed to include the required cautionary statement regarding the limitations of hypothetical performance results or did not include it on the same page as the track record.
Oral Misrepresentations by Respondent Flavell Concerning Systems of Success' Registration with the CFTC
31. Flavell further misled clients by representing that Systems of Success is registered with the Commission. In a letter on Systems of Success letterhead, addressed to subscribers and received sometime after April 1997 by at least one workshop participant, Flavell stated "[a]s you are aware, Systems of Success is currently registered with the Commodity Futures Trading Commission as a Commodity Trading Advisor." Yet Systems of Success has never been registered with the Commission in any capacity.
VIOLATIONS OF THE COMMODITY
AND REGULATIONS THEREUNDER
VIOLATIONS OF SECTION 4b(a)(i) and (iii) OF THE ACT:
COMMODITY FUTURES FRAUD
32. The allegations contained in paragraphs 1 through 31 above are realleged and incorporated by reference.
33. From September 1996 through January 1999, Viele, Flavell and Systems of Success, and, from September 1996 through April 1997, Kates violated Sections 4b(a)(i) and (iii) of the Act, 7 U.S.C. §§ 6b(a)(i) and (iii) (1994), in that they willfully cheated, defrauded or deceived, or attempted to cheat, defraud or deceive other persons by, among other things, making material misrepresentations and omissions of fact, including, but not limited to, the misrepresentations and omissions set forth in paragraphs 1 to 31, above.
34. Viele directly or indirectly controlled Systems of Success, and did not act in good faith or knowingly induced, directly or indirectly, the violations described above, and, pursuant to Section 13(b) of the Act, 7 U.S.C. 12c(b) (1994), is liable for Systems of Success' violations of Sections 4b(a)(i) and (iii) of the Act.
35. Flavell directly or indirectly controlled Systems of Success, and did not act in good faith or knowingly induced, directly or indirectly, the violations described above, and, pursuant to Section 13(b) of the Act, 7 U.S.C. 12c(b) (1994), is liable for Systems of Success' violations of Sections 4b(a)(i) and (iii) of the Act.
36. Pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. § 4 (1994), and Regulation Section 1.2, 17 C.F.R. §1.2 (1999), Systems of Success is liable for any violations of Sections 4b(a)(i) and (iii) of the Act by Viele and Flavell, in that all such violations were within the scope of their office or employment with Systems of Success.
VIOLATIONS OF SECTIONS 4o(1)(A) AND
(B) OF THE ACT
AND COMMISSION REGULATION SECTIONS 4.41(a) AND (b):
FRAUD BY A CTA AND FAILURE TO
CAUTIONARY STATEMENT REGARDING LIMITATIONS
OF HYPOTHETICAL TRADING RESULTS
37. The allegations contained in paragraphs 1 through 36 above are realleged and incorporated herein by reference.
38. From September 1996 through January 1999, Viele, Flavell and Systems of Success, and, from September 1996 through April 1997, Kates, while acting as CTAs, violated Sections 4o(1)(A) and (B) of the Act, 7 U.S.C. §§ 6o(1) (1994), and Sections 4.41(a) and (b) of the Commission's Regulations, 17 C.F.R. § 4.41(a) (1999), in that the Respondents directly or indirectly employed a device, scheme or artifice to defraud clients or prospective clients, or engaged in transactions, practices or a course of business which operated as a fraud or deceit upon clients or prospective clients, including, but not limited to, the activities set forth in paragraphs 1 to 36, above.
39. Pursuant to Section 4.41(a) of the Commission's Regulations, 17 C.F.R. § 4.41(a) (1999), a CTA is prohibited from advertising in a manner which (1) employs any "device, scheme or artifice to defraud any ... client or prospective ... client" or (2) involves any "transaction, practice or course of business which operates as a fraud or deceit upon any ... client or any prospective ... client." The Commission has held that Section 4.41(a) of the Regulations is violated when advertisements depict hypothetical trading results as actual trading results
40. Pursuant to Section 4.41(b) of the Commission's Regulations, 17 C.F.R. § 4.41(b) (1999), a CTA must not present the performance of any simulated or hypothetical commodity interest account, transaction in a commodity interest account, or series of transactions in a commodity interest of a CTA unless such performance is accompanied by the required cautionary warning concerning the limitations of hypothetical trading, as set forth in Section 4.41(b).
41. From September 1996 through January 1999, Viele, Flavell and Systems of Success, and, from September 1996 through April 1997, Kates, while acting as CTAs, violated Section 4o(1) of the Act and Regulation Section 4.41(a) in that they misrepresented to customers in their advertisements and promotional materials that the track records supplied were actual trading results when, in fact, they were hypothetical results.
42. From September 1996 through January 1999, Viele, Flavell and Systems of Success, and, from September 1996 through April 1997, Kates, while acting as CTAs, violated Regulation Section 4.41(b) by including hypothetical trading results in promotional materials, but not including in the promotional material, or in its advertisements the required cautionary warning concerning the limitations of hypothetical trading results.
43. Viele directly or indirectly controlled Systems of Success, and did not act in good faith or knowingly induced, directly or indirectly, the violations described above, and, pursuant to Section 13(b) of the Act, 7 U.S.C. 12c(b) (1994), is liable for Systems of Success' violations of Sections 4o(1)(A) and (B) of the Act, 7 U.S.C. §§ 6o(1), and Regulations Sections 4.41(a) and (b), 17 C.F.R. §§ 4.41(a) and (b).
44. Flavell directly or indirectly controlled Systems of Success, and did not act in good faith or knowingly induced, directly or indirectly, the violations described above, and, pursuant to Section 13(b) of the Act, 7 U.S.C. 12c(b) (1994), is liable for Systems of Success' violations of Sections 4o(1)(A) and (B) of the Act, 7 U.S.C. §§ 6o(1), and Regulations Sections 4.41(a) and (b), 17 C.F.R. §§4.41(a) and (b).
By reason of the foregoing allegations, the Commission deems it necessary and appropriate, pursuant to its responsibilities under the Act, to institute public adminis-trative proceedings to determine whether the allegations set forth in Section III above are true and, if so, whether an appropriate order should be entered in accordance with Sections 6(c), 6(d) and 8a(4) of the Act, 7 U.S.C. §§ 9, 12a(4) and 13b (1994).
Section 6(c) allows the Commission to enter an order (1) prohibiting a Respondent from trading on or subject to the rules of any contract market and requiring all contract markets to refuse such person all trading privileges thereon for such period as may be specified in the Commission's Order, (2) if the Respondent is registered with the Commission in any capacity, suspending, for a period not to exceed six months, or revoking the registration of that Respondent, (3) assessing against the Respondent a civil penalty of not more than the higher of $100,000 for violations on or before November 27, 1996, $110,000 for violations thereafter, or triple the monetary gain to the Respondent for each violation of the Act or Regulations committed after November 27, 1996, and (4) requiring restitution to customers of damages proximately caused by the violations of the Respondent.
Section 6(d) allows the Commission to enter an Order directing that the Respondent cease and desist from violating the provisions of the Act and Regulations found to have been violated.
WHEREFORE, IT IS HEREBY ORDERED that a public hearing for the purpose of taking evidence and hearing arguments on the allegations set forth in Section III above be held before an Administrative Law Judge, in accordance with the Rules of Practice under the Act, 17 C.F.R. § 10.1 et seq. (1999), at a time and place to be fixed as provided in Section 10.61 of the Rules of Practice, 17 C.F.R. § 10.61 (1999), and that all post-hearing procedures shall be conducted pursuant to Sections 10.81 through 10.1-07 of the Rules of Practice, 17 C.F.R. §§ 10.81 through 10.107 (1999).
IT IS FURTHER ORDERED that each Respondent shall file an Answer to the allega-tions against said Respondent in the Complaint within twenty (20) days after service, pursu-ant to Section 10.23 of the Rules of Practice, 17 C.F.R. § 10.23 (1999), and pursuant to Section 10.12(a) of the Rules of Practice, 17 C.F.R. § 10.12(a) (1999), shall serve two copies of such Answer and of any document filed in this proceeding upon Elizabeth C. Brennan, Trial Attorney, Commodity Futures Trading Commission, Division of Enforcement, One World Trade Center, Suite 3747, New York, New York 10048, or upon such other counsel as designated by the Division. If any Respondent fails to file the required Answer or fails to appear at a hearing after being duly served, such Respondent shall be deemed in default, and the proceeding may be determined against such Respondent upon consideration of the Complaint, the allegations of which shall be deemed to be true.
IT IS FURTHER ORDERED that this Complaint and Notice of Hearing shall be served on each Respondent personally or by certified or registered mail forthwith pursuant to Section 10.22 of the Commission's Rules, 17 C.F.R. § 10.22 (1999).
In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of the investigative or prosecutorial functions in this or any factual-ly related proceeding will be permitted to participate or advise in the decision upon this matter except as witness or counsel in proceedings held pursuant to notice.
|By the Commission.|
|Dated: September 6, 2000||______________________|
|Jean A. Webb|
|Secretary to the Commission|
Commodity Futures Trading Commission