UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|IN THE MATTER OF||)||CFTC Docket No. 99-4|
|STEVEN G. SOULE||)|
|900 Ashwood Parkway, No. 300||)||COMPLAINT AND NOTICE OF|
|Atlanta, Georgia 30338,||)||HEARING PURSUANT TO|
|)||SECTIONS 6(c) AND 6(d) OF THE|
|KYLER F. LUNMAN II||)||COMMODITY EXCHANGE ACT,|
|3 Pompano Road||)||AS AMENDED|
|Rumson, New Jersey 07760,||)|
|HOLD-TRADE, INC., a.k.a. HOLD TRADE, LTD.||)|
|27 West Street||)|
|Red Bank, NJ 07701||)|
The Commodity Futures Trading Commission (the "Commission") has received information from its staff which tends to show, and the Commission's Division of Enforcement ("Division") alleges:
1. From at least September 4, 1993 through approximately December 31, 1994 (the "relevant period"), Respondents Steven G. Soule ("Soule"), Kyler F. Lunman II ("Lunman"), and Hold-Trade, Inc., a.k.a. Hold Trade, Ltd. (together, "Hold Trade"), together with Thomas F. DeMarco ("DeMarco"), a telephone clerk on the New York Mercantile Exchange ("NYMEX") who is not a respondent in this action, engaged in scheme in which energy futures trades made on behalf of Coastal Corporation, or its subsidiaries or divisions, were misappropriated and wrongfully allocated to accounts controlled by Lunman. Soule, an employee of Coastal States Trading Corporation, a division of Coastal Corporation, a Houston, Texas-based $12 billion energy conglomerate (collectively, "Coastal"), was responsible for entering Coastal's large volume of energy futures orders to the floor of the NYMEX on a daily basis, and initiated the fraudulent allocations described below based on his knowledge of Coastal's trading on particular days.
2. DeMarco worked on the floor of the NYMEX as a telephone clerk for one or more entities known as Refined Energy Executions, Inc. and Refine Executions, Inc. (together, "Refined"). Soule entered most of Coastal's crude oil, heating oil and natural gas futures orders, which he gave directly to DeMarco at Refined by telephone. Soule and DeMarco together ensured the successful completion of the wrongful allocations by creating doctored floor order tickets and entering into additional transactions to replace those transactions that were misappropriated. Lunman and Hold Trade completed the scheme by providing the accounts into which the misappropriated Coastal trades were placed, monitoring the movement of Coastal's profitable trades into those accounts, and disbursing the ill-gotten gains among the scheme's participants. All respondents benefited financially from their roles in the scheme.
3. Steven G. Soule is an individual whose last known address was 900 Ashwood Parkway, No. 300, Atlanta, Georgia 30338. Between approximately September 4, 1990 and December 20, 1994, Soule was employed by Coastal, first as a Futures Trading Coordinator, and later as a Manager of Futures Trading. Prior to that employment, between January and September 1990, Soule worked as a telephone clerk for Refined the floor on the New York Mercantile Exchange ("NYMEX"). Soule has never been registered with the Commission in any capacity.
4. Kyler F. Lunman II is an individual whose last known address is 3 Pompano Road, Rumson, New Jersey 07760. Lunman is an officer and owner of Hold Trade, as well as its chief, if not only, manager and employee. Lunman was registered with the Commission as an associated person, principal or branch manager of at least seven firms since 1984. Since August 1997, however, Lunman has not been registered with the Commission in any capacity.
5. Hold-Trade, Inc. a/k/a Hold Trade, Ltd. is a Delaware corporation with its principal place of business in Red Bank, New Jersey. During the relevant period, Lunman was Hold Trade's President, and had signature authority over Hold Trade's brokerage and bank accounts. Hold Trade has never been registered with the Commission in any capacity.
The Fraudulent Allocation Scheme
6. Coastal's business, directly and through its various subsidiaries and divisions, includes petroleum refining, marketing and distribution, natural gas transmission and storage, and oil and gas exploration and production. Coastal trades in the futures markets primarily to hedge the value of its positions in raw materials and refined products.
7. During the relevant period, Soule worked in Coastal's Houston office and was one of two persons responsible for placing orders to the floor of the NYMEX for Coastal's trading activity. Soule contacted DeMarco virtually daily to place orders on behalf of Coastal in crude oil, heating oil and unleaded gasoline futures contracts.
8. During the relevant period, DeMarco recorded Soule's orders on floor order tickets, forwarded those orders to brokers for execution, and was responsible for allocating the executed trades to the appropriate accounts.
9. Soule and DeMarco, during the relevant period, misappropriated numerous Coastal futures transactions, including outright trades and intracommodity spreads, but also portions of intercommodity crack spreads, i.e, the coordinated purchase and sale of crude oil futures against the sale or purchase of heating oil and/or unleaded gasoline futures. Soule and DeMarco then wrongfully allocated the misappropriated trades to brokerage accounts controlled by Lunman and Hold Trade.
10. The process of misappropriation involved various steps, not all of which occurred in any given wrongful allocation. In general, however, the scheme worked like this: Soule placed orders for Coastal to buy or sell futures contracts or spreads in crude oil, heating oil, and unleaded gasoline on the NYMEX by contacting DeMarco in the Refined crude oil booth. DeMarco then prepared the written order tickets and relayed the orders to the floor ring to be executed.
11. After the executed orders were returned to DeMarco, he contacted Soule to confirm the fills.
12. Soule then watched the market closely to identify opportunities to obtain a profitable offset of some or all of Coastal's open position. When such an opportunity arose, Soule instructed DeMarco to, and DeMarco would, offset all or a portion of Coastal's initial transaction, and designate the offsetting trade as belonging to Lunman or Hold Trade.
13. To further the allocation, DeMarco, acting under Soule's direction, changed Coastal's original order ticket by changing the account identification on that ticket from Coastal to Lunman, or by reducing the number of contracts on the original Coastal order ticket and creating a new order ticket for Lunman for the balance, or by creating two new order tickets, one for Coastal in an amount less than the original order and one for Lunman for the balance of the original order.
14. To complete the misappropriation, Soule directed DeMarco to place another order for Coastal to replace the contracts previously misallocated. Because the market had moved since the original Coastal trade, the price at which this later trade was filled was almost always worse than the original price for the trade, thus costing Coastal money.
15. Soule often altered entries on his in-house Coastal paperwork, known as "Merc scorecards," to reflect the trades as he ultimately misappropriated them. Coastal entered data from the Merc scorecards into its computerized system as part of its recordkeeping.
16. At the end of a day on which its trades were wrongfully allocated, Coastal had the same number of round turn trades it expected to achieve at the beginning of the day, but at worse prices, because of Soule and DeMarco's allocation.
17. Lunman telephoned DeMarco frequently to learn which transactions misappropriated by Soule would be allocated to accounts he (Lunman) controlled.
18. During the relevant period, Lunman owned or controlled several commodity futures trading accounts at futures commission merchants ("FCMs") REFCO, Inc. ("Refco") and The Chicago Corporation ("Chicago Corp."), either in his own name or in the name of Hold Trade. Further, Lunman owned or controlled several bank accounts in his own name and that of Hold Trade.
19. The misappropriated trades were placed in accounts controlled by Lunman and Hold Trade, including futures account no. L402 67636 at Refco and futures account no. 6000 60454, at Chicago Corp., both in the name of Hold Trade. They were also placed in futures account no. 6000 60431 in his name at Chicago Corp., in Lunman's own name.
20. All respondents benefited financially from the wrongful allocation of Coastal's trades. Lunman and Hold Trade caused the proceeds of the allocated trades to be transferred from their futures accounts to bank or other financial institution accounts in the names of Lunman or Hold Trade. From those accounts, payments were then made, by Federal Express delivery and otherwise, to various financial institution accounts controlled by Soule, Soule's father, DeMarco, and others. On several occasions, DeMarco paid Soule's American Express bill in cash, and on other occasions, a Hold Trade bank check was submitted to American Express as payment for Soule's bills.
21. The respondents wrongfully allocated Coastal's trades on many days during the relevant period, including, but not limited to: 12/22/93 (2 trades); 12/27/93; 12/29/93 (2 trades); 1/3/94; 1/6/94; 1/11/94; 1/13/94; 1/14/94; 1/17/94; 1/19/94 (2 trades); 1/2194; 1/24/94; 1/28/94 (2 trades); 2/1/94 (2 trades); 2/2/94; 2/3/94; 2/4/94; 2/9/94; 2/10/94; 2/14/94; 2/15/94; 2/16/94; 2/17/94; 2/24/94; 3/1/94; 5/26/94; 5/31/94; 10/5/94; 10/28/94; and 11/4/94.
Violations of Section 4b(a)(i), (ii) and (iii) of the Act:
Fraud in Connection with Futures Trading
22. Paragraphs 1 through 21 are realleged and incorporated herein by reference.
23. All orders to make and the making of contracts of sale of commodities for future delivery described herein were or may have been used for 1) hedging any transaction in interstate commerce in such commodity or the by-products thereof, or 2) determining the price basis of any transaction in interstate commerce in such commodity, or 3) delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment of such future contracts.
24. From at least September 4, 1993 through December 20, 1994, by the conduct alleged in this Complaint, Respondent Soule, in or in connection with orders to make or the making of, contracts of sale of commodities for futures delivery, made or to be made for future delivery, made or to be made for or on behalf of other persons, where such contracts for future delivery were or could have been used for any of the purposes set forth above in paragraph 23, above:
(i) cheated or defrauded, or attempted to cheat or defraud such persons;
(ii) willfully made or caused to be made to such persons false reports or statements thereof, and willfully entered or caused to be entered for such persons false records thereof; and
(iii) willfully deceived or attempted to deceive such persons in regard to such orders or contracts, or the disposition or execution of such orders or contracts, or in regard to acts of agency performed with respect to such orders or contracts or for such persons, in violation of Section 4b(a)(i),(ii) and (iii) of the Act, 7 U.S.C. §§ 6b(a)(i),(ii) and (iii).
25. Respondent's violations of Section 4b of the Act are based on the conduct alleged in paragraphs one through 21 above and involve the fraudulent allocation of commodity futures trades, making false reports to customers regarding the prices at which their orders were executed, and deceiving customers regarding the handling of their orders, the executions thereof, and the operation of an allocation scheme throughout the relevant period, within the meaning of Section 4b.
26. A separate and distinct violation is alleged for each trade that Respondent Soule fraudulently allocated on the days identified in paragraph 21 above, and for such other days and trades as may be proven at hearing.
Violations of Section 13(a) and 2(a)(i)(A)(iii):
Aiding and Abetting Liability and Principal/Agent Liability
27. Paragraphs 1 through 26 are realleged and incorporated herein by reference.
28. Based on their conduct alleged in paragraphs one through 21, above, Respondents Lunman and Hold Trade knowingly and willfully aided, abetted, counseled, commanded, induced or procured the commission of violations of Section 4b(a)(i),(ii) and (iii) of the Act, 7 U.S.C. §§ 6b(a)(i),(ii) and (iii), by Respondent Soule.
29. By aiding and abetting Soule's violations of the Act, Respondents Lunman and Hold Trade violated Section 13(a) of the Act, 7 U.S.C. § 13c(a).
30. At all times during the relevant period, Lunman was the principal, if not sole, employee or agent for Hold Trade, and his actions as alleged in Paragraphs one through 21 above were undertaken within the scope of that employment or agency.
31. Hold Trade is therefore liable as a principal for the foregoing acts of its employee or agent, Lunman, by operation of Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. § 4.
Violation of Section 13(b)
Controlling Person Liability
32. Paragraphs 1 through 31 are realleged and incorporated herein by reference.
33. Respondent Lunman directly or indirectly controlled Respondent Hold Trade, and knowingly induced, directly or indirectly, the act or acts constituting Hold Trade's violations as alleged in Paragraphs one through 21, above.
34. As a controlling person of Hold Trade who knowingly induced Hold Trade's violations of the Act, Respondent Lunman violated Section 4b of the Act, 7 U.S.C. §6b pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b).
By reason of the foregoing allegations, the Commission deems it necessary and appropriate, pursuant to its responsibilities under the Act, to institute public administrative proceedings to determine whether the allegations set forth in Parts I, II, III and IV above are true and, if so, whether orders should be entered in accordance with Sections 6(c) and 6(d) of the Act, 7 U.S.C. §§ 9 and 13b (1994).
Section 6(c) of the Act allows the Commission to (1) prohibit a respondent from trading on or subject to the rules of any contract market and require 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, suspend, for a period not to exceed six months, or revoke, the registration of that respondent, (3) assess against a respondent a civil monetary penalty of not more than the higher of $100,000 or triple the monetary gain to the respondent for each violation, and (4) require restitution to customers of damages proximately caused by the violations of the respondent.
Section 6(d) of the Act 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 on the allegations set forth in Sections I, II, III, and IV above be held before an Administrative Law Judge in accordance with the Commission's Rules of Practice under the Act ("Rules"), 17 C.F.R. §§ 10.1 et seq., at a time and place to be set as provided by Section 10.61, 17 C.F.R. § 10.61, and that all post-hearing procedures shall be conducted pursuant to Sections 10.81 through 10.107, 17 C.F.R. §§ 10.81 through 10.107.
IT IS FURTHER ORDERED that each Respondent shall file an Answer to the allegations contained in this Complaint within twenty (20) days after service pursuant to Section 10.23 of the Commission's Rules, 17 C.F.R. § 10.23, and shall serve two copies of such Answer and of any documents filed in these proceedings upon Magdalena Wegner, Trial Attorney, Division of Enforcement, U.S. Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581. If any Respondent fails to file the required Answer, or fails to appear at a hearing after being duly notified, such Respondent shall be deemed in default and the proceedings may be determined against him 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 registered or certified mail, pursuant to Section 10.22 of the Commission's Rules, 17 C.F.R. § 10.22.
In the absence of an appropriate waiver, no officer or employee of the
Commission engaged in the performance of investigative or prosecutorial
functions in this or any factually
related proceedings will be permitted to participate or advise the decision in this matter except as a witness or counsel in a proceeding held pursuant to notice.
By the Commission.
Secretary to the Commission
U.S. Commodity Futures Trading Commission
Dated: December 22, 1998