IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
|COMMODITY FUTURES TRADING COMMISSION,||)||Civil Action No. 99-S-1874|
|CLAIRMONT CAPITAL CORP.,||)|
|a Colorado corporation,||)|
|GEOFFREY L. MANN, and||)|
|CHARLES W. TRENCH,||)|
COMPLAINT FOR A PERMANENT INJUNCTION,
CIVIL MONETARY PENALTIES, AND OTHER EQUITABLE RELIEF
1. From at least June 1998 to the present, defendants Clairmont Capital Corporation ("Clairmont"), Geoffrey L. Mann ("Mann"), and Charles W. Trench ("Trench") (hereinafter referred to collectively as "Defendants") have operated a business where customers buy and sell foreign currency options which are written by Clairmont. Clairmont has misrepresented to its customers, among other things, the potential profits associated with the purchase of Clairmont's foreign currency options investments while downplaying the risks involved, the competitiveness of its pricing of such options, and Clairmont's involvement in the purported "foreign exchange" market. Clairmont has also failed to give its customers material information concerning its fees, failed to tell its customers that it was the grantor of the options that it recommended to its customers, and failed to disclose to customers the consequences of exercising the Clairmont options.
2. Defendants' misrepresentations and omissions of material facts violate Section 4c(b) of the Commodity Exchange Act, as amended (the "Act"), 7 U.S.C. § 6c(b), and Commission Regulation 32.9, 17 C.F.R. § 32.9. Moreover, Defendants have not given their customers the proper disclosures concerning Clairmont's fees, in violation of Section 4c(b) of the Act, 7 U.S.C. § 6c(b), and Commission Regulation 32.5, 17 C.F.R. § 32.5. Additionally, the sale of commodity options by Clairmont, which is not a designated contract market, violates Section 4c(b) of the Act, 7 U.S.C. § 6c(b), and Commission Regulations 32.11 and 33.3(a), 17 C.F.R. §§ 32.11 & 33.3(a).
3. Accordingly, pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1, Plaintiff Commodity Futures Trading Commission (the "Commission") brings this action to enjoin Defendants' unlawful acts and practices and to compel their compliance with the Act. In addition, the Commission seeks disgorgement of Defendants' ill-gotten gains, restitution to customers, civil monetary penalties, and such other relief as this Court may deem necessary or appropriate.
4. Unless enjoined by this Court, Defendants are likely to continue to engage in the acts and practices alleged in this Complaint and similar acts and practices, as more fully described below.
JURISDICTION AND VENUE
5. The Act establishes a comprehensive system for regulating the purchase and sale of commodity futures contracts and options. This Court has jurisdiction over this action pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1, which provides that whenever it shall appear to the Commission that any person has engaged, is engaging, or is about to engage in any act or practice constituting a violation of any provision of the Act or any rule, regulation, or order promulgated thereunder, the Commission may bring an action against such person to enjoin such practice or to enforce compliance with the Act.
6. Venue properly lies with this Court pursuant to Section 6c(e) of the Act, 7 U.S.C. § 13a-1(e), because Defendants are found in, inhabit, or transact business in this District, and the acts and practices in violation of the Act have occurred, are occurring, or are about to occur within this District, among other places.
7. Plaintiff Commodity Futures Trading Commission is an independent federal regulatory agency which is charged with the administration and enforcement of the Act, 7 U.S.C. §§ 1, et seq., and the regulations promulgated thereunder.
8. Defendant Clairmont Capital Corporation, whose principal place of business is 518 Seventeenth Street, Suite 280, Denver, Colorado 80202, was incorporated in Colorado on June 16, 1998. Clairmont has never been registered with the Commission in any capacity nor has it been designated by the Commission as a contract market for the trading of options on foreign currency or options on foreign currency futures contracts.
9. Defendant Geoffrey L. Mann, who resides at 1880 Arapahoe Street, No. 2703, Denver, Colorado 80208, is Clairmont's president and owns 42% of its stock. Mann is not currently registered with the Commission. Between April 1996 and February 1998, Mann was registered as an associated person for four different Commission-registered introducing brokers.
10. Defendant Charles W. Trench, who resides at 2217 Glenarm, Denver, Colorado, 80205, is Clairmont's vice-president and owns 42% of its stock. Trench has never been registered in any capacity with the Commission.
A. Clairmont's Operations
11. From at least June 1998 to the present, Defendants Clairmont, Mann, and Trench have operated a business dealing in foreign currency options in Denver, Colorado. Clairmont's salesmen solicit potential investors from throughout the United States to buy and sell foreign currency options.
12. Clairmont's salesmen are trained by Mann and Clairmont's sales director in the fundamentals of trading foreign currency options and futures contracts on the foreign exchange markets, and in sales techniques. Using lead lists that the company purchases from independent parties and false and misleading sales scripts written by Mann and approved by Trench, the salesmen cold call members of the public and attempt to convince them to open foreign currency option trading accounts with Clairmont.
13. Once a trading account has been opened at Clairmont, Clairmont's director of accounts keeps the customers apprised of the purported value of their current positions and passes along Clairmont's latest trading recommendations. The customers, generally being unsophisticated investors, usually follow Clairmont's trading recommendations. Mann formulates Clairmont's recommendations, while Trench manages Clairmont's back office.
14. Clairmont is the grantor of the options sold to its customers. Rather than buying the options on any foreign exchange market, Clairmont creates the options, taking the exact opposite position from its customers. Clairmont keeps the entire option premium when the Clairmont options expire worthless.
15. Clairmont charges the customer approximately $1000 for each option it sells. When recommending an option to customers, Mann finds an option trading for about $500 on the Chicago Mercantile Exchange ("CME") and fixes the strike price and expiration date of the Clairmont option based upon the CME option. Clairmont then charges the customer an additional $250 in commissions and a "markup" averaging about $250, for a total cost of about $1000 to the customer.
16. Prior to February 1999, Clairmont used a Client Account Agreement which was written by Trench and approved by Mann. During February 1999, after inquiries about Clairmont were made by government regulators, Clairmont modified its Client Account Agreement.
B. Clairmont Operates as a Board of Trade for Trading Options on Foreign Currencies
17. Clairmont operates an organized board of trade for trading options on foreign currency that provides for the pricing and execution of Clairmont's options on foreign currency.
18. Clairmont provides a centralized and public trading facility for buying and selling standardized foreign currency options. Clairmont mass-markets these options to the general public and holds itself out to the public as a place to price, trade, and settle options on foreign currencies. Clairmont sets the purchase and sale prices of the Clairmont options.
19. Clairmont determines which options on foreign currencies are traded at its facility. Clairmont offers options on six major foreign currencies denominated against the U.S. dollar: Japanese Yen, German Marks, Swiss Francs, British Pounds, Canadian Dollars, and Australian Dollars.
20. The terms and conditions of Clairmont's foreign currency options are standardized. Clairmont models its options on those traded on the CME. Clairmont offers options on futures contracts in standardized currency amounts-for example, each option supposedly controls around 12,500,000 Japanese Yen, which is the size of a futures contract on the Japanese Yen traded on the CME. Unlike the CME options, the Clairmont options are not options on any actual underlying futures contracts. Clairmont never discloses to customers the consequences of exercising the Clairmont options.
C. Clairmont's Misrepresentations and Omissions in its Client Account Agreements
21. In its pre-February 1999 Client Account Agreement, Clairmont did not disclose that it was the grantor (or seller) of the options. The previous Client Account Agreement stated the following:
Conflicts of Interest. The firm with which the Client's account will be held on an omnibus basis may act as the counter party to certain transactions for the Client's account and may sell foreign currencies and/or options to the Client from its own account or may buy foreign currencies and/or options from the Client for its own account. In such case, the firm may have a conflict of interest in attempting to secure the highest price it can from any such sale and the lowest possible price for any such purchase. All sales and purchases for the Client's account, however, will be subject to competitive pricing by the firm carrying the Client's account.
22. By referring to a "firm" where accounts are held and that may act as a counter party, this paragraph misled customers into believing that a separate firm, and not Clairmont, sold the options to the customers.
23. Clairmont's pre-February 1999 Client Account Agreement also claimed that Clairmont's option contracts were "fully liquid and redeemable through market makers or institutions in major financial orders throughout the world." This was false since Clairmont's options have no market outside of Clairmont and could not be considered liquid and redeemable through other parties.
24. Although Clairmont states in both its current and past Client Account Agreements that a "markup" or a "bid/ask spread" may be charged, at no time does Clairmont tell the customer that a markup which averages approximately $250 on each option is routinely charged by Clairmont.
25. In both its current and past Client Account Agreements, Clairmont represents that "[a]ll sales and purchases for the Client's account will be subject to competitive pricing...." These representations are materially false and misleading, in that the pricing does not correspond to the comparable prices of exchange-traded foreign currency options or any other relevant market prices. While Clairmont makes mention of a "markup," it does not disclose the actual amount of this fee, which averages approximately $250, to its customers. Further, this markup has the immediate effect of placing Clairmont's customers at a 50% disadvantage in comparison to competitive pricing of comparable options sold on the CME.
D. Clairmont's Misrepresentations and Omissions in its Solicitations
26. Clairmont's salesmen use sales scripts, written by Mann and approved by Trench, to solicit customers to open accounts. In February 1999, Clairmont modified its sales scripts in several ways.
27. In sales scripts used prior to February 1999, Clairmont's salesmen touted large moves in the Japanese Yen and linked changes in the exchange rate with moves in the option premium. Clairmont's sales script proclaimed a coming ten Yen move in the next 30 to 60 days, stating:
NOW BECAUSE OF THIS WE ARE CONVINCED THAT WE WILL SEE AT LEAST A TEN YEN MOVEMENT. THAT 10 YEN MOVEMENT COULD RETURN AS MUCH AS $150,000 FROM A $30,000 INVESTMENT.
The former sales scripts indicated potential returns on the options of 200% to 500%.
28. A current Clairmont sales script that its salesmen use to solicit potential customers includes the following misrepresentation: "...WE ARE CONVINCED THAT WE WILL SEE AT LEAST A 5 YEN MOVEMENT OVER THE NEXT 30 TO 60 DAYS. IF WE CAN CATCH THAT 5 YEN MOVEMENT IN OUR OPTIONS PREMIUM THAT WOULD RETURN AS MUCH AS 100% TO 200% ON YOUR INVESTMENT." (emphasis in original).
29. Virtually all of Clairmont's customers lose a substantial portion of their money investing with Clairmont. Clairmont's sales scripts' claims concerning potential profits also fail to reveal to customers the effect of the commissions ($250 per contract) and other fees (which average approximately $250 per option) charged by Clairmont on each option sold. Clairmont does not disclose the fact that Clairmont sells only out-of-the-money options-often deeply out-of-the-money-and that the Japanese Yen would therefore likely have to move substantially to recover costs, before making the large returns claimed by Clairmont.
30. Clairmont also minimizes the risks involved in trading foreign currency options in its sales solicitations. When potential customers express their opinion that trading foreign currency options is too risky for them, Clairmont salesmen are directed by Clairmont's sales scripts to state the following:
Although legally and technically all of your investment dollars are at risk, two things would have to happen in order for you to loose [sic] all of your money. First, the market would have to go against us and secondly you would have to refuse to allow me to cut your lose [sic] and take you out of the market.
This statement is misleading because, among other things, it does not take into account the possibility that the market price of the underlying foreign currencies may not change. Under that scenario, a customer's out-of-the-money options would expire worthless when the market price does not change. Additionally, it does not mention the possibility that customers could still lose a substantial portion of their money if the market does not move enough to overcome the steep commissions and fees charged by Clairmont. Thus, in connection with its claims of big profits, Clairmont materially understates the risks involved in trading the Clairmont options.
31. Clairmont also mischaracterizes itself as dealing in the foreign exchange market, much as a broker/dealer or bank would. On its website, www.clairmontcapital.com, Clairmont explains the rudiments of the foreign currency markets and how Clairmont can help the prospective customer to capitalize on investing in these markets. However, the discussion is misleading because Clairmont does not buy or sell foreign currency options on the interbank market for its customers. Instead, by writing options, Clairmont takes the opposite positions of its customers. Clairmont effects these transactions, not by trading in any market, but by making bookkeeping entries representing its customers' purchases and sales of Clairmont's foreign currency options.
E. Offer and Sale of Commodity Options Not Conducted On Or Subject to the Rules of a Designated Contract Market
32. At no time have the commodity options offered and sold by Clairmont been transacted on or subject to the rules of a board of trade that has been designated by the Commission as a "contract market" for trading commodity options.
33. Clairmont has operated as a board of trade without receiving Commission designation as a contract market.
VIOLATIONS OF THE COMMODITY EXCHANGE ACT
VIOLATIONS OF SECTION 4c(b) OF THE ACT, 7 U.S.C. § 6c(b),
AND COMMISSION REGULATION 32.9, 17 C.F.R. § 32.9:
FRAUD BY MISREPRESENTATION AND OMISSION OF MATERIAL FACTS
34. The allegations set forth in paragraphs 1 through 33 are realleged and incorporated herein by reference.
35. Beginning in June 1998 and continuing to the present, in or in connection with an offer to enter into, the entry into, or the confirmation of the execution of, commodity option transactions, Clairmont, Mann, and Trench cheated, defrauded, or deceived, or attempted to cheat, defraud, or deceive other persons by making false, deceptive, or misleading representations of material facts and by failing to disclose material facts, in soliciting customers or potential customers, including, but not limited to:
a) false representations of the likelihood for achieving profits from trading with Defendants, while minimizing the risks of trading;
b) false representations that Clairmont deals in the foreign exchange market, much as a broker/dealer or bank does;
c) failing to disclose that Clairmont routinely charges a "markup" which averages approximately $250 on each commodity option that it sold and misrepresenting that its options are competitively priced; and
d) failing to disclose to customers the consequences of exercising the Clairmont options; in violation of Section 4c(b) of the Act, 7 U.S.C. § 6c(b), and Commission Regulation 32.9, 17 C.F.R. § 32.9.
36. Beginning in June 1998 and continuing to at least February 1999, in or in connection with an offer to enter into, the entry into, or the confirmation of the execution of, commodity option transactions, Clairmont, Mann, and Trench cheated, defrauded, or deceived, or attempted to cheat, defraud, or deceive other persons by making false, deceptive, or misleading representations of material facts and by failing to disclose material facts, in soliciting customers or potential customers, including, but not limited to:
a) falsely representing that the commodity options that Clairmont sold were fully liquid and redeemable through market makers and other institutions; and
b) failing to disclose that Clairmont was the grantor of the foreign currency options that Clairmont sold to its customers; in violation of Section 4c(b) of the Act, 7 U.S.C. § 6c(b), and Commission Regulation 32.9, 17 C.F.R. § 32.9.
37. The foregoing acts, omissions, and failures of Clairmont's employees and agents occurred within the scope of each such person's employment or office with Clairmont, and Clairmont is therefore liable for them. See Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. § 4.
38. Clairmont, Mann, and Trench knew that their statements and representations set forth above were false, deceptive, or misleading, or had no reason to believe that they were true, and knew that they were failing to disclose material facts to customers and prospective customers.
39. Mann and Trench, as co-owners and officers of Clairmont, directly or indirectly controlled Clairmont, and did not act in good faith or knowingly induced, directly or indirectly, the acts constituting the violations described in this Count One. Therefore, pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b), defendants Mann and Trench are liable for Clairmont's violations of Section 4c(b) of the Act and Commission Regulation 32.9, as described in this Count One.
VIOLATIONS OF SECTION 4c(b) OF THE
ACT, 7 U.S.C. § 6c(b),
AND COMMISSION REGULATION 32.5, 17 C.F.R. § 32.5:
FAILURE TO MAKE PROPER DISCLOSURES
40. The allegations set forth in paragraphs 1 through 39 are realleged and incorporated herein by reference.
41. Commission Regulation 32.5 requires an options dealer to deliver a disclosure document which contains an explanation of the risks in trading options, and also furnish information concerning the actual amount of the purchase price, including a separate listing of the premium, mark-ups on the premium, costs, fees, and other charges.
42. Clairmont failed to disclose properly the risks of options trading and the separate amounts of the premium, mark-ups on the premium, costs, fees, and other charges for the options, in violation of Commission Regulation 32.5.
43. Mann and Trench, as co-owners and officers of Clairmont, directly or indirectly controlled Clairmont, and did not act in good faith or knowingly induced, directly or indirectly, the acts constituting the violations described in this Count Two. Pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b), therefore, defendants Mann and Trench are liable for violations of Section 4c(b) of the Act and Commission Regulation 32.5, as described in this Count Two.
VIOLATIONS OF SECTION 4c(b) OF THE ACT, 7 U.S.C. §6c(b), AND COMMISSION
REGULATIONS 32.11, AND 33.3(a), 17 C.F.R. §§32.11, 33.3(a):
OFFER AND SALE OF COMMODITY OPTIONS NOT CONDUCTED ON OR SUBJECT
TO THE RULES OF A BOARD OF TRADE WHICH HAS BEEN DESIGNATED BY THE
COMMISSION AS A CONTRACT MARKET
44. The allegations set forth in paragraphs 1 through 43 are realleged and incorporated herein by reference.
45. The foreign currencies which are the subjects of the options offered by Defendants are commodities as defined by Section 1a(3) of the Act, 7 U.S.C. § 1a(3).
46. Beginning in June 1998 and continuing to present, Defendants have offered to enter into, entered into, executed, confirmed the execution of, or conducted business for the purpose of soliciting, accepting any order for, or otherwise dealing in any transaction in, or in connection with, a commodity option when: (a) such transactions have not been conducted on or subject to the rules of a board of trade which has been designated by the Commission as a "contract market" for such commodity, and (b) such contracts have not been executed or consummated by or through a member of such contract market, in violation of Section 4c(b) of the Act, 7 U.S.C. § 6c(b), and Commission Regulations 32.11 and 33.3(a), 17 C.F.R. §§ 32.11, 33.3(a).
47. Mann and Trench as co-owners and officers of Clairmont, directly or indirectly controlled Clairmont, and did not act in good faith or knowingly induced, directly or indirectly, the acts constituting the violations described in this Count Three. Therefore, pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b), defendants Mann and Trench are liable for violations of Section 4c(b) of the Act and Commission Regulations 32.11 and 33.3(a), as described in this Count Three.
WHEREFORE, the Commission respectfully requests that this Court, as authorized by Section 6c of the Act, 7 U.S.C. § 13a-1, and pursuant to the Court's own equitable powers, enter:
1. a permanent injunction prohibiting Defendants and any other person or entity associated with them, including any successor thereof, from engaging in conduct violative of Section 4c(b) of the Act, 7 U.S.C. § 6c(b), and Commission Regulations 32.5, 32.9, 32.11 and 33.3(a), 17 C.F.R. §§ 32.5, 32.9, 32.11, 33.3(a), and from engaging in any commodity-related activity, including soliciting new customers or customer funds;
2. an order directing Defendants and any successors thereof, to disgorge, pursuant to such procedure as the Court may order, all benefits received from the acts or practices which constituted violations of the Act, as described herein, and interest thereon from the date of such violations;
3. an order directing Defendants to make full restitution to every customer whose funds were received by them as a result of acts and practices which constituted violations of the Act, as described herein, and interest thereon from the date of such violations;
4. a civil penalty on each defendant in the amount of not more than the higher of $110,000 or triple the monetary gain to that defendant for each violation of the Act or Regulations;
5. an order requiring Defendants to pay costs and fees as permitted by 28 U.S.C. §§ 1920 and 2412(a)(2); and
6. such other and further remedial ancillary relief as the Court may deem appropriate.
|Louis V. Traeger|
|Jay M. Miller|
|Commodity Futures Trading Commission|
|Division of Enforcement|
|10900 Wilshire Blvd., Suite 400|
|Los Angeles, CA 90024|
|(310) 235-6783 (telephone)|
|Date: September 27, 1999||(310) 235-6782 (fax)|