UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC Docket No. 00-12|
|MOHAMED NAJIB TAYBI,||)||ORDER INSTITUTING PROCEEDINGS|
|)||PURSUANT TO SECTIONS 6(c) AND 6(d)|
|)||OF THE COMMODITY EXCHANGE ACT,|
|)||AS AMENDED, MAKING FINDINGS AND|
|)||IMPOSING REMEDIAL SANCTIONS|
The Commodity Futures Trading Commission (the "Commission") has reason to believe that Mohamed Najib Taybi ("Taybi") has violated Sections 4b(a)(i) and (iii) and 4o(1) of the Commodity Exchange Act, as amended (the "Act"), 7 U.S.C §§ 6b(a)(i) & (iii) & 6o(1) (1994), and Commission Regulation 4.41(a), 17 C.F.R. § 4.41(a) (1999). Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted to determine whether Taybi engaged in 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, Taybi has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Without admitting or denying the findings of fact or conclusions of law in this Order, and prior to any adjudication on the merits, Taybi acknowledges service of this Order. Taybi consents to the use of the findings in this Order in this proceeding and in any other proceeding brought by the Commission, or to which the Commission is a party.1
The Commission finds the following:
From on or about November 9, 1998 to March 2000, Taybi, while acting as a commodity trading advisor ("CTA"), defrauded and deceived clients and prospective clients by making material misrepresentations and omissions on his website, in violation of Sections 4b(a)(i) and (iii) and 4o(1) of the Act and Commission Regulation 4.41(a). Taybi's website, www.yenman.com, advertised "The Plan," Taybi's system for trading Japanese yen futures contracts. Taybi explicitly represented on his website that he was trading an actual account using The Plan. Taybi also provided on the website his purported futures trading results, including total profits and rate of return, since Taybi purportedly began trading pursuant to The Plan in November 1998. In fact, all of Taybi's trading results were hypothetical, and the website failed to disclose that the trading results were hypothetical.2
Mohamed Najib Taybi resides at 1810½ Washington Way, Venice, California 90291, which is also his principal place of business. Taybi never has been registered with the Commission in any capacity.
From November 1998 to March 2000, Taybi's website, www.yenman.com, advertised "The Plan," Taybi's system for trading Japanese yen futures contracts. Each plan costs $150, covers one day of trading, and provides specific advice as to when to buy and sell yen futures contracts. Each day during that time period Taybi stated in bold print at the top of the home page of his website: "Here is the profit you would have made trading the Japanese yen according to The Plan starting November 9, 1998," followed by a figure which purported to represent the profits thus far earned by Taybi trading pursuant to The Plan. For example, on February 22, 2000, the website stated that the profit was US $489,147.51. Taybi also included a detailed trading history for each day, week and month of trading from November 1998 to March 2000, in which he reported his purported profits through that day and the purported rate of return through that day, which approximated 614 percent. Taybi also represented on his website that "the current size of the account I am trading is $80,000." Taybi's track record and profits were in fact based on hypothetical trading, which Taybi omitted to disclose on his website, and Taybi was not actually trading any accounts.
D. LEGAL DISCUSSION
1. Taybi Violated Section 4b(a)(i) and (iii) of the Act
Section 4b(a)(i) and (iii) of the Act provides that it shall be unlawful, in or in connection with any order to make or the making of a futures contract, for or on behalf of any other person, (i) to cheat or defraud, or attempt to cheat or defraud, such other person, or (iii) willfully to deceive or attempt to deceive such other person by any means whatsoever in regard to any such order or contract or the disposition or execution of any such order or contract, or in regard to any act of agency performed with respect to such order or contract for such person. Misrepresentations and omissions of material facts made with scienter regarding futures transactions constitute fraud under Section 4b(a) of the Act.3 Additionally, Section 4b(a)(i) and (iii) requires that the material misrepresentations and omissions of material facts be made "in connection" with futures transactions.4
Taybi's knowing misrepresentations on his website that hypothetical trading results were actual trading results, which resulted in profits in an actual account, constitute fraud. Similarly, Taybi's failure in his website to disclose to clients and prospective clients that the trading results were based on hypothetical trading constitutes fraud. Taybi represented that his system had generated tremendous profits and rates of return, 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. Skorupskas, 605 F. Supp. 923, 933 (E.D. Mich. 1985) (misrepresenting performance tables as being actual trading results violated Section 4b of the Act).
2. Taybi Violated Section 4o(1) of the Act and Section 4.41(a) of the Regulations
Section 4o(1) of the Act prohibits CTAs from (a) employing any device, scheme or artifice to defraud any client or participant or prospective client or participant, or (b) engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant. Section 4.41(a) of the Regulations prohibits a CTA or principal thereof from advertising in a fraudulent or misleading manner.
In order to establish a violation of Section 4o(1) of the Act and Section 4.41(a) of the Regulations, the Division must prove that the respondent was (i) a CTA or, with respect to Section 4.41(a) of the Regulations, a principal thereof, and (ii) either (a) employed any device, scheme, or artifice to defraud any client or prospective client, or (b) engaged in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. Section 4o(1) of the Act, which also requires the use of the mails or any means or instrumentality of interstate commerce, prohibits both registered and unregistered CTAs from defrauding their clients.5 Section 4.41(a) of the Regulations also applies to all CTAs, regardless of whether those CTAs are required to be registered.
Under Section 1a(5) of the Act, in order to establish that someone is a CTA, it must be shown that the person (i) advised another about the value or advisability of trading in futures contracts, (ii) "either directly or through publications, writings or electronic media," (iii) for compensation or profit, unless that person is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" if such publisher's or producer's provision of commodity futures trading advice is "solely incidental to the conduct of [its] business or profession."6
Taybi gave commodity futures trading advice for compensation or profit and, therefore, is a CTA. 7
The same conduct by Taybi that violated Section 4b(a)(i) and (iii) of the Act also violated Section 4o(1) of the Act and Regulation 4.41(a) because Taybi engaged in that conduct in his capacity as a CTA. Skorupskas, 605 F.Supp. at 932-33 (the same conduct that violates Section 4b can violate Section 4o(1)); Hirk, 561 F.2d at 103-04 (7th Cir. 1977).
FINDINGS OF VIOLATIONS
Based on the foregoing, the Commission finds that Taybi violated Sections 4b(a)(i) and (iii) and 4o(1) of the Act and Commission Regulation 4.41(a).
OFFER OF SETTLEMENT
Taybi has submitted an Offer of Settlement in which, without admitting or denying the findings of fact or conclusions of law herein, he:
A. Admits the jurisdiction of the Commission with respect to all matters set forth in the Order;
B. Acknowledges service of 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 its Offer;
6. all claims which he 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 the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104-121, §§ 231-232, 110 Stat. 862-863, and Part 148 of the Regulations, 17 C.F.R. §§ 148.1, et seq. (1998), relating to, or arising from, this action, and he shall not assert any right under the Equal Access to Justice Act to seek costs, fees, or other expenses relating to, or arising from, this proceeding; and
7. any claim of double jeopardy based upon the institution of this proceeding or the entry in this proceeding of any order imposing a civil monetary penalty or any other relief;
D. Stipulates that the record basis on which this Order is entered consists solely of this Order and its findings to which he has consented in the Offer, which are incorporated in this Order; and
E. Consents, solely on the basis of the Offer, to the Commission's issuance of this Order, which makes findings and:
1. orders Taybi to cease and desist from violating Sections 4b(a)(i) and (iii) and 4o(1) of the Act and Commission Regulation 4.41(a); and
2. orders Taybi to comply with his undertakings as set forth below.
Accordingly, IT IS HEREBY ORDERED THAT:
1. Taybi shall cease and desist from violating Sections 4b(a)(i) and (iii) and 4o(1) of the Act and Commission Regulation 4.41(a);
2. The Commission notes the appropriateness of a civil monetary penalty based on Taybi's conduct, but waives the assessment of a civil monetary penalty based on sworn financial statements submitted by Taybi. Taybi has submitted a sworn Financial Disclosure Statement and has provided other evidence regarding his financial condition and has asserted a financial inability to pay a civil monetary penalty. If at any time following entry of this Order, the Division of Enforcement (the "Division") obtains information indicating that Taybi's representations concerning his financial condition were fraudulent, misleading, inaccurate or incomplete in any material respect at the time they were made, the Division may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Taybi provided accurate and complete financial information at the time such representations were made; (2) determine the amount of civil penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Taybi's Offer had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Taybi was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil penalty to be imposed, and whether any additional remedies should be imposed. Taybi may not, by way of defense to any such petition, contest the validity of, or the findings in, this Order or assert that payment of a civil penalty should not be ordered; and
3. Taybi shall comply with the following undertakings:
A. he shall not misrepresent, expressly or by implication:
1. the performance, profits or results achieved by, or the results that can be achieved by, users, including himself, of any commodity futures or options trading system or advisory service; and
2. the risks associated with trading pursuant to any commodity futures or options trading system or advisory service;
B. he 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, Taybi shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results;
C. he 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;
D. he shall not represent, expressly or by implication:
1. the performance, profits or results achieved by, or the results that can be achieved by, users, including himself, of any commodity futures or options trading system or advisory service;
2. the risks associated with trading using any commodity futures or options trading system or advisory service;
3. that the experience represented by any user, testimonial or endorsement of the commodity futures or options trading system or advisory service represents the typical or ordinary experience of members of the public who use the system or advisory service; unless: (a) he possesses and relies upon a reasonable basis substantiating the representation at the time it is made; and (b) for two (2) years after the last date of the dissemination of any such representation, he maintains all advertisements and promotional materials containing such representation and all materials that were relied upon or that otherwise substantiated such representation at the time it was made, and makes such materials immediately available to the Division for inspection and copying upon request; and
E. neither he nor any of his agents or employees under his authority or control shall take any action or make any public statement denying, directly or indirectly, any findings or conclusions in this Order or creating, or tending to create, the impression that this Order is without a factual basis; provided, however, that nothing in this provision affects Taybi's (1) testimonial obligations; or (2) right to take contrary factual or legal positions in other proceedings to which the Commission is not a party. Taybi will undertake all steps necessary to assure that all of his agents and employees under his authority and control understand and comply with this undertaking.
|Dated: May 1, 2000||BY THE COMMISSION|
|Secretary of the Commission|
|Commodity Futures Trading Commission|
1 Taybi does not consent to the use of this Order as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of this Order and does not consent to the use of the Offer or this Order, or the findings consented to in his Offer, by any other person or entity in this or any other proceeding. The findings made in this Order are not binding on any other person or entity in any other proceeding.
2 The Internet is a highly beneficial medium that facilitates the dissemination of information, but which also enables potential violators to reach millions of people worldwide quickly and at very low cost. By this and other proceedings, the Commission is addressing fraud committed on the Internet to promote the integrity of promotions made concerning commodity futures and options trading opportunities on the web.
3 In the Matter of R&W Technical Services, Inc., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶27,582 at 47,740-47,741 (CFTC Mar. 16, 1999), aff'd in relevant part, R&W Technical Svcs., Inc. v. CFTC, 2000 WL 217498 (5th Cir. Feb. 24, 2000). See, e.g., Saxe v. E.F. Hutton, 789 F.2d 105, 110 (2d Cir. 1986); Kelley v. Carr, 442 F. Supp. 346, 351-54 (W.D. Mich. 1977), aff'd in part, rev'd in part, 691 F.2d 800 (6th Cir. 1980); CFTC v. J.S. Love Associates Options, Ltd., 422 F. Supp. 652, 655 (S.D.N.Y. 1976).
4 Fraudulent statements that induce members of the public to purchase software that generates specific buy and sell signals for commodity futures trading satisfy the "in connection with" requirement of Section 4b(a). R&W Technical Svcs., 2000 WL at 217498. See also Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977) (noting that the "in or in connection with" requirement should be interpreted flexibly to include deceptive conduct that occurs prior to the opening of an actual commodity trading account).
5 CFTC v. Savage, 611 F.2d 270, 281 (9th Cir. 1979) (enforcement action charging defendant with making false reports to customers, engaging in "wash" trades and holding himself out to the public as a CTA without being registered with the Commission).
6 Section 1a(5) of the Act, 7 U.S.C. § 1a(5). Section 4o(1) of the Act and Section 4.41 of the Regulations thus do not apply to a CTA who is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" whose "furnishing of [advice] ... is solely incidental to the conduct of their business or profession." This exclusion is designed to protect incidental publishers of advice, such as general magazines and newspapers, not publishers who specifically concentrate on commodities advice. R&W Technical Svcs., 2000 WL at *7.
7 See CFTC v. British American Commodity Options Corp., 560 F.2d 135, 141 (2d Cir. 1977), cert. denied, 438 U.S. 905 (1978) (a firm that "offer[ed] opinions and advice, and issued analyses and reports concerning the value of commodities" to customers, was a CTA under the Act); Gaudette v. Panos, 644 F. Supp. 826, 839 (D. Mass. 1986) (defendants who represented their advisory skills to be exemplary, suggested that plaintiffs open a commodity account and then recommended certain futures contracts for investment were CTAs).