COMMODITY FUTURES TRADING COMMISSION

In the Matter of: NEW YORK FOREX EX-CENTER CORPORATION 99 Wall Street New York, N.Y. 10005, PETER T. LAI 1883 Sheri Ann Circle San Jose, CA, 95131 and ANDREW SCUDIERO 300 East 62nd Street Apartment #1501 New York, N.Y 10021 Respondents

CFTC Docket No. 97-5

January 28, 1997


COMPLAINT AND NOTICE OF HEARING PURSUANT TO SECTIONS 6(c), 6(d), 8a(3) AND 8a(4) OF THE COMMODITY EXCHANGE ACT, AS AMENDED


By the Commission

OPINION:
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:

I.

RESPONDENTS

1. New York Forex Ex-Center Corp. a/k/a New York Forex Corporation ("N.Y. Forex") is a New York corporation which maintained its principal place of business at 80 Wall Street and later at 99 Wall Street, New York City, N.Y. 10005. N.Y. Forex was incorporated on April 2, 1993, and in or about June 1993, began offering and selling off-exchange contracts for the purchase and sale of foreign currencies for future delivery to members of the general public. The corporation used at least fifty account executives ("AEs") and a number of support staff individuals, including operators and various levels of managers. N.Y. Forex registered with the Commission as a Commodity Trading Advisor ("CTA") on May 20, 1994. On June 1, 1995, the National Futures Association ("NFA") issued a member responsibility action ("MRA") against N.Y. Forex suspending [*2] its NFA membership. The NFA stated that it had reason to believe that Peter T. Lai had been missing since May 16, 1995, and that because he was the sole principal and Associated Person ("AP") of N.Y. Forex, there were no disclosed principals or APs to operate the firm or protect customer interests. The company subsequently filed a voluntary petition for bankruptcy in the Southern District of New York on June 29, 1995, and its NFA registration was terminated on August 2, 1995.

2. Peter T. Lai ("Lai") is an individual whose last known address is 1883 Sheri Ann Circle, San Jose, California 95131. From May 20, 1994 until August 2, 1995, Lai was registered as an AP of N.Y. Forex. He is also the sole proprietor, President and Chief Executive Officer ("CEO") of N.Y. Forex.

3. Andrew Scudiero ("Scudiero") is an individual whose last known address is 300 East 62nd Street, Apartment #1501, New York, N.Y. 10021. Scudiero began working at N.Y. Forex some time between March and April of 1995 and solicited at least one customer who opened an account in May, 1995. Scudiero has never been registered with the Commission and appears to be unfit, based on securities fraud violations and a [*3] 1986 narcotics conviction, for registration.

II.

STATUTORY AND REGULATORY BACKGROUND

4. Section 4(a) of the Commodity Exchange Act as amended (the "Act"), 7 U.S.C. 6(a), makes it unlawful to offer and sell contracts to the public for the purchase and sale of commodities for future delivery without such transactions being conducted on or subject to a "contract market" so designated by the Commission. Pursuant to this section, it is also unlawful to conduct any office or business anywhere in the United States for the aforementioned purposes.

5. As defined in Section 1a(12) of the Act, 7 U.S.C. 1a(12), the term "futures commission merchant" ("FCM") means an individual, association, partnership, corporation, or trust that (A) is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market; and (B) in or in connection with such solicitation or acceptance of orders, accepts any money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom.

6. Pursuant to Section 4d(1) of the Act, 7 [*4] U.S.C. 6d(1), and Section 3.10 of the regulations promulgated thereunder ("Regulations"), 17 C.F.R. 3.10, it is unlawful for any person to engage as a FCM unless such person has registered with the Commission and such registration has not expired or been suspended.

7. Pursuant to Section 4d(2) of the Act,
7 U.S.C. 6d(2) an FCM must treat and deal with all money, securities, and property received by it to margin, guarantee, or secure the trades or contracts of any customer, as belonging to the customer and such money, securities, and property shall be separately accounted for and shall not be commingled with the funds of such FCM or be used to margin or guarantee the trades or contracts or to secure or extend the credit of any customer or person other than the one for whom the same is held.

8. Pursuant to Section 4k(1) of the Act, 7 U.S.C. 6k(1), and Section 3.12 of the Regulations, 17 C.F.R. 3.12, it is unlawful for any person to be associated with a FCM as a partner, officer, employee, or agent, in any capacity that involves (i) the solicitation or acceptance of customers' orders or (ii) the supervision of any person or persons so engaged, unless such person is registered [*5] with the Commission as an AP of such FCM and such registration shall not have expired, been suspended or been revoked. Such registration includes the filing of Form 8-R.

Similarly, pursuant to Section 4k(1) of the Act, it shall be unlawful for a FCM to permit such person to become or remain associated with the FCM if such FCM knew or should have known that such registration had expired, been suspended or been revoked. According to Section 3.12(c)(1) of the Regulations, no person will be registered as an AP in accordance with this paragraph (c) unless an officer, if the sponsor is a corporation, a general partner, if a partnership, or the sole proprietor, if a sole proprietorship, of such sponsor has signed and dated a certification in writing that it is the intention of the sponsor to hire or otherwise employ the applicant as an AP, the sponsor has verified the information on Form 8-R, and to the best of the sponsor's knowledge, information and belief, the information provided is accurate and complete. This certification must be submitted concurrently with the Form 8-R.

9. Pursuant to Section 4b(a)(i) of the Act, 7 U.S.C. 6b(a)(i), it is unlawful for any person, in or in connection [*6] with any order to make, or the making of, any contract of sale of any commodity for future delivery, made, or to be made, for or on behalf of any other person, if such contract for future delivery is or may be used for (A) hedging any transaction in interstate commerce in such commodity or the products or byproducts thereof, or (B) determining the price basis of any transaction in interstate commerce in such commodity, or (C) delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof, to cheat or defraud or attempt to cheat or defraud such other person.

10. Pursuant to Section 4o(1) of the Act, 7 U.S.C. 6o(1), it is unlawful for a CTA or an AP of a CTA, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, (A) to employ any device, scheme, or artifice to defraud any client or participant or prospective client or participant, or (B) to engage 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.

11. Pursuant to Section 9(a)(1) of the Act, 7 U.S.C. 13(a)(i), it shall be a felony for: [*7] (1) any person registered or required to be registered under the Act, or any employee or agent thereof, to embezzle, steal, purloin, or with criminal intent convert to such person's use or the use of another, any money, securities or property having a value in excess of $ 100, which was received by such person or any employee or agent thereof to margin, guarantee, or secure the trades or contracts of any customer or accruing to such customer as a result of such trades or contracts or which otherwise was received from any customer, client, or pool participant in connection with the business of such person.

12. Pursuant to Section 4b(a)(iv), 7 U.S.C. 6b(a)(iv) it is unlawful to bucket customer orders.

III.

GENERAL ALLEGATIONS

13. Unless stated otherwise, the period relevant to the allegations in this Complaint is from at least June 1993 to at least May 16, 1995.

14. On June 9, 1993, Lai filed a commodity-broker-dealer statement with the State of New York Department of Law, Bureau of Investor Protection and Securities, to register N.Y. Forex. The corporation was located at 80 Wall Street with no other offices or facilities and was to trade foreign currencies in the spot [*8] market. Lai was listed as the President of N.Y. Forex.

15. Lai, in his capacity as President and CEO of N.Y Forex, among other things, established office policy and hired managers. He supervised N.Y. Forex managers and AEs, organized one-week training courses for AEs, conducted weekly marketing meetings with managers and oversaw the handling of customer accounts. He also opened and closed accounts at foreign currency dealers as N.Y. Forex's representative, approved promotional advertisements and ran the N.Y. Forex office.

16. While serving in the above capacity, Lai failed to act in good faith and/or knowingly induced, directly or indirectly, the violations described more fully herein.

17. N.Y. Forex and Lai, directly and acting through their officers, directors, managers, employees, AEs and agents, engaged in the business of offering and selling to the public, futures contracts for the purchase or sale of commodities, without conducting those transactions on or subject to the rules of a board of trade which had been designated by the Commission as a "contract market" for such commodity. More particularly, N.Y. Forex and Lai offered to the general public the opportunity to speculate [*9] in fluctuations in the price of foreign currencies through the sale of contracts for the purchase or sale of various foreign currencies.
Recruitment of AEs and Solicitation of Customer Accounts from the General Public

18. N.Y. Forex distributed its advertisements and promotional literature to customers interstate through the mails including the U.S. Postal Service.

19. N.Y. Forex recruited its AEs through advertisements placed in English and foreign-language newspapers seeking bilingual trainees and entry-level AEs. Many of the AEs had little or no previous experience trading futures contracts or foreign currencies.

20. N.Y. Forex advertisements for AEs claimed that no prior trading experience was necessary, no license was needed and that an intensive training program was provided by N.Y. Forex for newly hired AEs. Such representations notwithstanding, the training program offered consisted primarily of teaching techniques to be used by AEs in soliciting prospective customers for the firm.

21. In training sessions organized by Lai and N.Y. Forex, AEs were told that their primary responsibility was to bring in investors and they were encouraged to solicit wealthy people or [*10] people likely to know other people with money. As compensation for their services, AEs received a share of the commissions that were generated by trading in these accounts. AEs were told to use cold call scripts and were pressured into opening accounts as soon as possible by soliciting friends, relatives and acquaintances, or by trading their own funds.

22. As a consequence, most N.Y. Forex AEs became customers themselves and solicited friends and relatives to open customer accounts.

23. Scudiero, who was not registered with the Commission in any capacity and headed up the cold-calling operations at N.Y. Forex some time between March and April of 1995, solicited at least one customer to open an account with N.Y. Forex.
Futures Contracts Offered by N.Y. Forex

24. NY Forex promotional materials and opening account documents claimed that customers' funds would be used for trading in the "spot foreign currency market," trading "forward contracts" or "spot currencies." In actuality, N.Y. Forex offered and sold to their customers contracts for the future delivery of foreign currency ("Contracts"), including British Pounds, Swiss Francs, Japanese Yen and German Marks, that were not [*11] traded on or pursuant to the rules of any contract market designated by the Commission.

25. It was N.Y. Forex's practice to allow customers to "offset" or "liquidate" their open contract positions through opposite and offsetting trades. The contract did not require delivery and explicitly provided for rollover.

26. N.Y. Forex customers did not have the capacity to make or take delivery of the physical commodities underlying their contracts, and accordingly, they never intended to make or take delivery. Delivery of the physical commodity never occurred.

27. N.Y. Forex and Lai offered the Contracts to customers as a means of speculating on the price of the underlying foreign currency.

28. Under the terms of N.Y. Forex's Contracts, contract positions could be held open for weeks and even months before offset. Several traders and customers did not offset their positions for several days.

29. Each Contract was standardized as to size to facilitate offset and provided for the same quantity of the underlying foreign currency as the contracts sold on the Chicago Mercantile Exchange, a Commission registered contract market for British Pounds, Japanese Yen, Swiss Francs and German Marks. [*12] For example, each Contract for British Pounds consisted of 62,500 British Pounds, each Contract for Japanese Yen consisted of 12,500,000 Yen, each Contract for Swiss Francs consisted of 125,000 Swiss Francs and each Contract for German Marks consisted of 125,000 German Marks.

30. N.Y. Forex customers purchased Contracts through payment of a predetermined portion of the total contract price. This portion -- which was designated by N.Y. Forex as a "deposit" or as "performance margin"-- was necessary for a customer or trader to establish an open long (buy) or short (sell) position in the customer's account. N.Y. Forex required customers to pay additional "margin" whenever purportedly adverse market conditions caused a customer's account equity to fall below certain levels. The customer agreements used by N.Y. Forex stated that the customers were required to pay additional deposit or margin whenever the funds in their respective accounts failed to cover open contract positions.
Misrepresentations and Other Fraudulent Conduct

31. N.Y. Forex maintained bank accounts at Chemical Bank and at Citibank where customer checks made payable to N.Y. Forex were deposited. The account at Chemical [*13] Bank was structured with a primary account in the name of N.Y. Forex and three subsidiary accounts in customer names. The accounts at Citibank were solely in the name of N.Y. Forex. In at least one account at Citibank, customer monies were commingled and used for variety of purposes other than for trading.

32. N.Y. Forex and Lai, acting directly and through their officers, director, managers, employees, AEs and agents, misrepresented the training and experience of its staff to potential customers and made false or misleading statements about the nature of its business. Among the misrepresentations and misleading statements made to customers were:

(a) Statements made by Lai that N.Y. Forex would transmit customer orders to one of several foreign exchange dealers, or some third party for execution, when at the time such statements were made, N.Y. Forex was not transmitting all customer orders to dealers, and was instead bucketing these orders;

(b) Statements in N.Y. Forex promotional materials that N.Y. Forex offered its investors the ability to participate and profit in the foreign exchange market, when, in fact, many customer orders were not placed into the market and were [*14] instead, bucketed;

(c) Statements in N.Y. Forex promotional materials that N.Y. Forex traders were skilled and experienced professionals "specializing in the trading of the four major world currencies" and that they used "astute risk management" to limit drawdowns and "manage the market to suit the individual investors," when, in fact, many of its traders were new and had never participated in the market before in any capacity;

(d) Statements in N.Y. Forex promotional materials that "downside risk" would be limited and that N.Y. Forex offered the comfort of "managed risk" and the use of stop loss orders, or words to that effect, when in fact, stop loss orders were not always used and no risk managing strategies were programmatically utilized; and

(e) Statements in N.Y. Forex promotional materials and by Lai that monies invested could be withdrawn at any time without penalty, when, in fact, many customers at N.Y. Forex did not have access to their funds and have yet to receive account balances or monies owed to them after repeated demands.

33. In making the statements referred to in paragraph 32 above, N.Y. Forex and Lai knew the statements were false, or had no basis [*15] to believe the statements were true.

34. Many customers lost a significant portion of their investment and few, if any, customers made any profits by entrusting their money to N.Y. Forex.

35. N.Y. Forex held accounts at Daiwa Securities America, Inc.'s ("Daiwa") Foreign Exchange Department, Smith Barney Shearson ("Smith Barney") and Refco F/X Associates, LTD ("Refco F/X") used to sporadically purchase and sell "spot" or forward currencies.

36. Account statements indicate that when N.Y. Forex did make currency trades at Smith Barney, Daiwa or Refco F/X, the actual trading activity was less than the trading activity that N.Y. Forex reported to its AEs and customers.

37. When AEs brought orders to the trading room, they expected that those order would be executed through third party dealers.

38. From at least May 20, 1994, until approximately May 16, 1995, there were 110 days on which AEs at N.Y. Forex "traded" through N.Y. Forex, but N.Y. Forex did not trade through any of its dealers.

39. Since at least on or about May 1994, N.Y. Forex and Lai, directly and/or acting through officers, directors, managers, employees, AEs and agents, in or in connection with orders to make, or the [*16] making of, contracts of sale of a commodity for future delivery, made, or to be made, for or on behalf of other persons, bucketed such customer orders.

40. On May 15, 1995, a sign was posted on the door of the office at 99 Wall Street that stated that N.Y. Forex was changing house brokers. The note read that all existing positions with its former broker were being liquidated and that all other trading activities were suspended until May 19, 1995. N.Y. Forex never resumed its trading operations.

41. During the month of May, many customers demanded monies owed to them from N.Y. Forex, either for commissions or for their account balances.

42. These customers were given checks drawn on N.Y. Forex's bank accounts that were denied due to insufficient funds or were told to wait until Lai acquired additional funds.

43. N.Y. Forex and Lai have failed to return customer monies entrusted to them.

VIOLATIONS OF THE COMMODITY EXCHANGE ACT

COUNT ONE

VIOLATIONS OF SECTION 4(a) OF THE ACT: OFFER AND SALE OF OFF-EXCHANGE COMMODITY FUTURES CONTRACTS


44. The allegations set forth in paragraphs 1 through 43 are realleged and incorporated herein by reference.

45. N.Y. Forex and Lai [*17] are each directly liable for violating Section 4(a) of the Act, 7 U.S.C. 6(a).

46. Pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. 4, and Section 1.2 of the Regulations, 17 C.F.R. 1.2, N.Y. Forex is liable for any violations of Section 4(a) of the Act by its officers, directors, managers, employees, AEs and agents in that all such violations were within the scope of each such individual's office or employment with N.Y. Forex.

47. Pursuant to Section 13(b) of the Act, 7 U.S.C. 13c(b) Lai is liable, as a controlling person for violations of Section 4(a) of the Act, 7 U.S.C. 6(a) (1988 and Supp. IV 1992), inasmuch as Lai directly or indirectly controlled N.Y. Forex in its activities and operations and failed to act in good faith and/or knowingly induced, directly or indirectly, the acts, omissions or failures constituting such violations.

48. For all the foregoing reasons, N.Y. Forex and Lai are liable for violations of Section 4(a) of the Act, 7 U.S.C. 6(a).

COUNT TWO

VIOLATIONS OF SECTION 4b(a)(i) OF THE ACT: FRAUD IN THE OFFER AND SALE OF COMMODITY FUTURES CONTRACTS


49. The allegations set forth in paragraphs 1 through 48 are realleged and incorporated [*18] herein by reference.

50. N.Y. Forex and Lai, acting directly and through their officers, directors, managers, employees, AEs and agents, sold contracts for the sale of a commodity for future delivery to persons that are or could be used for (a) hedging any transaction in interstate commerce in such commodity or the products or by-products thereof, or (b) determining the price basis of any transaction in interstate commerce in such commodity, or (c) delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof.

51. N.Y. Forex and Lai are each directly liable for violations of Section 4b(a)(i) of the Act, 7 U.S.C. 6b(a)(i) as they cheated or defrauded, or attempted to cheat or defraud, other persons, in or in connection with orders to make, or the making of, contracts of sale of commodities for future delivery, made or to be made, for or on behalf of other persons by making false, deceptive and/or misleading misrepresentations of fact or omitting, or failing to disclose, material facts.

52. Pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. 4, and Section 1.2 of the Regulations, 17 C.F.R 1.2, N.Y. Forex is liable for any violations [*19] of Section 4b(a)(i) of the Act, 7 U.S.C. 6b(a)(i), by its officers, directors, managers, employees, AEs and agents, inasmuch as all such violations were within the scope of each such individual's office or employment with N.Y. Forex.

53. Pursuant to Section 13(b) of the Act, 7 U.S.C. 13c(b), Lai is liable, as a controlling person, for violations of Section 4b(a)(1) of the Act, 7 U.S.C. 6b(a)(i), inasmuch as Lai directly or indirectly controlled N.Y. Forex and its activities and operations, and failed to act in good faith and/or knowingly induced, directly or indirectly, the acts, omissions or failures constituting such violations.

54. For all the foregoing reasons, N.Y. Forex and Lai are liable for violations of Section 4b(a)(i) of the Act, 7 U.S.C. 6b(a)(i).

COUNT THREE

VIOLATIONS OF SECTION 4b(a)(iv) OF THE ACT: BUCKETING ORDERS


55. The allegations set forth in paragraph 1 through 54 are realleged and incorporated herein by reference.

56. N.Y. Forex is directly liable for violating Section 4b(a)(iv) of the Act, 7 U.S.C. 6b(a)(iv).

57. Pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. 4, and Section 1.2 of the Regulations, 17 C.F.R. 1.2, N.Y. Forex [*20] is liable for any violations of Section 4b(a)(iv) of the Act, 7 U.S.C. 6b(a)(iv), by its officers, directors, managers, employees, AEs and agents, inasmuch as all such violations were within the scope of each such individual's office or employment with N.Y. Forex.

58. Pursuant to Section 13(b) of the Act, 7 U.S.C. 13c(b), Lai is liable, as a controlling person, for violations of Section 4b(a)(iv) of the Act, 7 U.S.C. 6b(a)(iv) inasmuch as Lai directly or indirectly controlled N.Y. Forex in its activities and operations, and failed to act in good faith and/or knowingly induced, directly or indirectly, the acts, omissions or failures constituting such violations.

59. For all the foregoing reasons, N.Y. Forex and Lai are liable for violations of Section 4b(a)(iv) of the Act, 7 U.S.C. 6b(a)(iv).

COUNT FOUR

VIOLATIONS OF SECTION 9(a)(1) OF THE ACT: CONVERSION AND/OR EMBEZZLEMENT OF CUSTOMER FUNDS


60. The allegations set forth in paragraphs 1 through 59 are realleged and incorporated herein by reference.

61. Through the course of conduct described above, N.Y. Forex and Lai embezzled, stole, purloined, or with criminal intent converted to their own use, money, securities, [*21] or property having value in excess of $ 100 which was received by them to margin, guarantee, or secure the trades or contracts of customers, or which accrued from any customer in connection with the business of N.Y. Forex, all of which was in violation of Section 9(a)(1) of the Act.

62. N.Y. Forex and Lai each are directly liable for violating Sections 9(a)(1) of the Act, 7 U.S.C. 13(a)(1).

63. Pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. 4, and Section 1.2 of the Regulations, 17 C.F.R. 1.2, N.Y. Forex is liable for any violations of Section 9(a)(1) of the Act, 7 U.S.C. 13(a)(1), by its officers, directors, managers, employees, AEs and agents inasmuch as all such violations were within the scope of each such individual's office or employment with N.Y. Forex.

64. Pursuant to Section 13(b) of the Act, 7 U.S.C. 13c(b), Lai is liable, as a controlling person, for violations of Section 9(a)(1) of the Act, 7 U.S.C. 13(a)(1) inasmuch as Lai directly or indirectly controlled N.Y. Forex in its activities and operations, and failed to act in good faith and/or knowingly induced, directly or indirectly, the acts, omissions or failures constituting such violations. [*22]

65. For all the foregoing reasons, N.Y. Forex and Lai are liable for violations of Section 9(a)(1) of the Act, 7 U.S.C. 13(a)(1).

COUNT FIVE

VIOLATIONS OF SECTION 4d(1) and (2) OF THE ACT AND SECTION 3.10 OF THE REGULATIONS: OPERATING AS AN UNREGISTERED FUTURES COMMISSION MERCHANT AND COMMINGLING AND FAILING TO SEPARATELY ACCOUNT FOR CUSTOMER MONIES


66. The allegations set forth in paragraphs 1 through 65 are realleged and incorporated herein by reference.

67. From at least on or about June 1993, N.Y. Forex engaged as a FCM in soliciting or accepting orders for the purchase and sale of a commodity for future delivery, or involving any contracts of sale of any commodity for future delivery, on or subject to the rules of any contract market, without registering under the Act with the Commission as a FCM, in violation of Section 4d(1) of the Act, 7 U.S.C. 6d(1).

68. While acting as an unregistered FCM, N.Y. Forex failed to treat and deal with all money, securities and property received by it to margin, guarantee, or secure the trades or contracts of all such customers, as belonging to the customer. Such money, securities and property were not separately accounted for [*23] and/or were commingled with the funds of N.Y. Forex and/or were used to margin or guarantee the trades or contracts or to secure or extend the credit of any customer or person other than the one for whom the same was held in violation of Section 4d(2) of the Act, 7 U.S.C. 6d(2).

69. N.Y. Forex is directly liable for violating Sections 4d(1) and (2) of the Act, 7 U.S.C. 6d(1) and (2) and Section 3.10 of the Regulations.

70. Pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. 4, and Section 1.2 of the Regulations, 17 C.F.R. 1.2, N.Y. Forex is liable for any violations of Sections 4d(1) and (2) of the Act, 7 U.S.C. 6d(1) and (2), and Section 3.10 of the Regulations, 17 C.F.R. 3.10, by its officers, directors, managers, employees, AEs and agents inasmuch as all such violations were within the scope of each such individual's office or employment with N.Y. Forex.

71. Pursuant to Section 13(b) of the Act, 7 U.S.C. 13c(b), Lai is liable, as a controlling person, for violations of Sections 4d(1) and (2) of the Act, 7 U.S.C. 6d(1) and (2) and Section 3.10 of the Regulations, 17 C.F.R. 3.10, inasmuch as Lai directly or indirectly controlled N.Y. Forex in its activities [*24] and operations, and failed to act in good faith and/or knowingly induced, directly or indirectly, the acts, omissions or failures constituting such violations.

72. For all the foregoing reasons, N.Y. Forex and Lai are liable for violating Sections 4d(1) and (2) of the Act, 7 U.S.C. 6d(1) and (2) and Section 3.10 of the Regulations.

COUNT SIX

VIOLATION OF SECTION 4o(1) OF THE ACT: FRAUD AS A CTA


73. The allegations set forth in paragraphs 1 through 72 are realleged and incorporated herein by reference.

74. Because N.Y. Forex was registered as a CTA and Lai was an AP of N.Y. Forex, the conduct set forth above violated Section 4o(1) of the Act, 7 U.S.C. 6o(1), by use of the mails or other instrumentalities of interstate commerce, directly or indirectly set forth a scheme or device to defraud customers and/or resulted in transactions or courses of business which operated as a fraud or deceit upon customers.

75. N.Y. Forex is directly liable for violating Section 4o(1) of the Act, 7 U.S.C. 6o(1).

76. Pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. 4, and Section 1.2 of the Regulations, 17 C.F.R. 1.2, N.Y. Forex is liable for any violations of Section [*25] 4o(1) of the Act, 7 U.S.C. 6o(1), by its officers, directors, managers, employees, AEs and agents inasmuch as all such violations were within the scope of each such individual's office or employment with N.Y. Forex.

77. Pursuant to Section 13(b) of the Act, 7 U.S.C. 13c(b), Lai is also liable, as a controlling person, for violations of Section 4o(1) of the Act, 7 U.S.C. 6o(1), inasmuch as Lai directly or indirectly controlled N.Y. Forex in its activities and operations, and failed to act in good faith and/or knowingly induced, directly or indirectly, the acts, omissions or failures constituting such violations.

78. For all the foregoing reasons, N.Y. Forex and Lai are liable for violations of Section 4o(1) of the Act, 7 U.S.C. 6o(1).

COUNT SEVEN

VIOLATION OF SECTION 4k(1) OF THE ACT and 3.12 OF THE REGULATIONS: SOLICITATTON OF CUSTOMERS BY AN UNREGISTERED AP


79. The allegations set forth in paragraphs 1 through 78 are realleged and incorporated herein by reference.

80. From at least on or about June 1993, N.Y. Forex engaged as a FCM in soliciting and accepting customer orders for the purpose of trading in a commodity for future delivery on or subject to the [*26] rules of a contract market. As an agent of a FCM who solicited at least one customer's funds for N.Y. Forex, Scudiero had an obligation to register as an AP, and his failure to do so is a violation of Section 4k(1) of the Act and 3.12 of the Regulations.

81. N.Y. Forex is directly liable for violating Section 4k(1) of the Act.

82. Pursuant to Section 2(a)(1)(A)(iii) of the Act, 7 U.S.C. 4, and Section 1.2 of the Regulations, 17 C.F.R. 1.2, N.Y. Forex is also liable for Scudiero's violation of Section 4k(1) of the Act, 7 U.S.C. 6k(1), inasmuch as such violation was within the scope of Scudiero's office or employment with N.Y. Forex.

83. Pursuant to Section 13(b) of the Act, 7 U.S.C. 13c(b), Lai is liable, as a controlling person, for violations of Section 4k(1) of the Act, 7 U.S.C. 6k(1), inasmuch as Lai directly or indirectly controlled N.Y. Forex in its activities and operations, and failed to act in good faith and/or knowingly induced, directly or indirectly, the acts, omissions or failures constituting such violations.

84. For all of the foregoing reasons, N.Y. Forex, Lai and Scudiero are liable for violations of Section 4k(1) of the Act. Additionally, Scudiero is [*27] liable for his violation of 3.12 of the Regulations.

RELIEF REQUESTED

NOW THEREFORE, by reason of the foregoing allegations made by the Division, the Commission deems it necessary and appropriate, pursuant to its responsibilities under the Act, to institute an administrative proceeding to determine whether the allegations set forth are true, and if so, whether orders should be entered in accordance with Sections 6(c), 6(d), 8a(3) and 8a(4) of the Act, 7 U.S.C. 9, 13b, 12a(3) and 12a(4), imposing the following sanctions:


(a). Directing each of the Respondents to cease and desist from violating the provisions of the Act and the Regulations set forth herein;

(b). Prohibiting the Respondents from trading on or subject to the rules of any contract market, and requiring all contract markets to refuse them all trading privileges thereon;

(c). Revoking, suspending or conditioning all registrations held by the Respondents;

(d). Assessing against each Respondent a civil penalty of not more than the higher of $ 100,000 or triple the monetary gain for each violation of the Act or Regulations; and

(e). Requiring the Respondents to make restitution to customers of [*28] damages proximately caused by their violations of the Act or Regulations, including interest thereon from the date of the violations.

WHEREFORE, IT IS HEREBY ORDERED by the Commission that a public hearing for the purpose of taking evidence and hearing argument on the allegations and issues set forth above be held before an Administrative Law Judge in accordance with the Rules of Practice under the Act, sections 10.1 et seq., at a time and place to be fixed as provided by Section 10.61 of the Rules of Practice, and that all post-heating procedures shall be conducted pursuant to Sections 10.81 through 10.109 of the Rules of Practice.

IT IS FURTHER ORDERED that each of the Respondents shall file an answer to the allegations against them in this Complaint within 20 days after service pursuant to Section 10.23 of the Rules of Practice and, pursuant to Section 10.12(a) of the Rules of Practice, shall serve two copies of such Answer and of any documents filed in this proceeding upon the Regional Counsel (Eastern Regional Office), Commodity Futures Trading Commission, One World Trade Center, Suite 3747, New York, New York 10048. If any respondent fails to file the required Answer [*29] 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 and Notice of Hearing, the allegations of which shall be deemed true.

IT IS FURTHER ORDERED that this Complaint shall be served on the Respondents personally or by certified mail, to the addresses set forth for the Respondents in the Complaint.

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 factually 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.