For Release: December 17, 2001
REPUBLIC NEW YORK SECURITIES CORPORATION PAYS $5 MILLION CIVIL MONETARY PENALTY FOR MISLEADING INVESTORS IN COMMODITY FRAUD
CFTC Files and Settles Action Against Republic for Its Role in a Ponzi Scheme That Defrauded Investors World-Wide and Resulted in Losses of Over $700 Million
WASHINGTON - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order finding that Republic New York Securities Corporation (Republic), a futures commission merchant, aided and abetted a commodity futures trading fraud perpetrated against investors around the world resulting in losses in excess of $700 million.
In the order, the Commission finds that from the fall of 1995 until August 1999, Republic assisted Martin Armstrong and his companies Princeton Economics International Ltd. and Princeton Global Management Ltd. in hiding significant trading losses in commodity futures and options, and in operating a Ponzi scheme. (See CFTC News Release #4312, September 14, 1999) reporting the filing of the Commission action CFTC v. Martin Armstrong, et al.)
Republic consented to the entry of the Order, which, among other things, requires Republic to pay a civil monetary penalty of $5 million, and to cease and desist from further violations of the Commodity Exchange Act, and revokes Republic’s registrations with the Commission. Republic does not admit or deny the allegations or findings contained in the Order.
CFTC Acting Chairman and Acting Enforcement Director Comments
CFTC Acting Chairman James Newsome commented,
The CFTC is committed to protecting futures investors around the world. We have already charged Martin Armstrong with running a fraudulent futures trading scheme. Now we are taking action against Republic for using its facilities to assist Armstrong in defrauding investors. Today’s action demonstrates the government’s resolve to prosecute global commodities futures fraud.
CFTC Acting Director of Enforcement Phyllis Cela said,
When a registrant handling customer business fails to act to stop conduct that has every appearance of being part of a fraudulent scheme, that registrant can be liable for the fraud as an aider and abettor. The Commission sanctioned Republic because the firm’s actions and inactions in this affair assisted a fraudulent scheme. However, notwithstanding such conduct, the Commission’s Order recognizes and gives Republic credit for its cooperation in the investigation and efforts to undo the damage it caused.
Republic Issued More Than 200 False Net Asset Value Letters to Investors
The Order states that Republic assisted Armstrong in a fraudulent scheme that he committed from the fall of 1995 through 1999. The Commission’s 1999 action charged Armstrong with creating the illusion that investor funds in more than 150 corporate accounts were maintained separately at Republic when in fact, according to the order, the investor funds were combined and commingled. As alleged in that action, Armstrong also represented to a number of his investors that the futures trading in their accounts was for the purpose of hedging currency exchange rates, when in fact, according to the Order, Armstrong used the funds for wide-ranging trading. Finally, Armstrong allegedly misrepresented to investors that their accounts were performing within promised expectations. However, the Order finds that the accounts were incurring substantial futures trading losses from speculative, not hedge, trading. In addition to the trading losses, the accounts were depleted further by “performance fees” charged in connection with false performance claims, and repayments to earlier investors in the manner of a Ponzi scheme, according to the complaint.
Republic’s primary assistance to the scheme, the Order finds, was its issuance of over 200 false Net Asset Value letters (NAV letters) to Armstrong. According to the Order, Republic knew that Armstrong then forwarded the NAV letters to the investors, Republic was aware that the majority of the NAV letters materially overstated balances allegedly available in the accounts, and Republic knew that the NAV letters failed to include payments for trading losses and the other withdrawals. Armstrong allegedly also created these overstatements by moving funds among a myriad of accounts, which temporarily boosted one account’s apparent value to the detriment of other accounts, with Republic’s knowledge.
Republic Committed Serious Supervisory and Regulatory Violations.
The Order also finds serious supervisory and regulatory failures by Republic. Republic failed to comply with, and implement, relevant policies and procedures for monitoring the investor accounts for, among other things, significant trading losses, correspondence between the futures traders and the firm's customers, and cash movements in a customer account not linked to trading activity, according to the Order. The Order further states that Republic improperly allocated winning trades from certain investor accounts to a third party account.
The Commission's action is filed in coordination with other related proceedings. Republic has agreed to the entry of another order in a related action being filed by the United States Attorney for the Southern District of New York, which directs Republic to make restitution payments in excess of approximately $606 million to defrauded investors located throughout the world. The Securities and Exchange Commission is filing a related administrative proceeding against Republic.
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The CFTC acknowledges the cooperation of the other federal and international agencies involved: the US Attorney for the Southern District of New York, the SEC, the Federal Reserve Bank of New York, Federal Bureau of Investigation and the Financial Services Agency (FSA) of Japan.
Daniel Nathan, Deputy Director , CFTC Enforcement Division: (202) 418-5314
Vincent McGonagle, Acting Associate Director: (202) 418-5387
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