UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
In the Matter of: :CFTC Docket No. 98-13
TODD ALAN THOMAS : COMPLAINT AND NOTICE
4713 Baidric Street : OF HEARING PURSUANT TO
Boca Raton, Florida 33428, : SECTIONS 6(c), 6(d),
:8a(3) AND 8a(4) OF THE
Respondent. :ACT, AS AMENDED
The Commodity Futures Trading Commission ("Commission") has received information from its staff which tends to show, and the Commission's Division of Enforcement ("Division") alleges that:
1. From December 1992 through the present, Todd Alan Thomas ("Thomas") was registered as an associated person ("AP") of three introducing brokers ("IBs") in Florida -- Lexus Financial Group, Inc. ("Lexus"), Cambridge Financial Corporation ("Cambridge"), and Wellington Financial Group, Inc. ("Wellington") -- that solicited the public to trade exchange-traded commodity options.
2. In both thirty-minute radio and/or television advertisements, or "infomercials" (at Lexus and Wellington), and in telephone sales solicitations (at Lexus, Cambridge and Wellington), Thomas fraudulently solicited customers and prospective customers ("prospects") to purchase exchange-traded options on futures contracts by knowingly misrepresenting, and omitting to disclose, material facts.
3. During this time period, Thomas used misleading and deceptive misrepresentations regarding his customers' ability to exploit seasonal and other existing and known supply and demand forces in the cash markets for various commodities to exaggerate the profit potential of options on futures contracts. At the same time, Thomas downplayed the risk inherent in such options and overstated his customers' performance record in trading them.
4. TODD ALAN THOMAS resides at 4713 Baidric Street, Boca Raton, Florida 33428. From December 1992 through March 1996 and again from August 1996 through January 1997, Thomas was registered as an AP of Lexus, an IB in Hollywood, Florida. Lexus is the subject of a pending Commission enforcement proceeding, In the Matter of Lexus Financial Group, Inc., David Alan Luger, and Mark Lee Singer, CFTC Docket No. 97-4 (ALJ Levine). From May through July 1996, during Thomas' break in registration from Lexus, Thomas was registered as an AP of Cambridge, another Florida IB. Since approximately March 12, 1997, Thomas has been a registered AP, principal and 100% owner of Wellington, an IB in Ft. Lauderdale, Florida.
5. From December 16, 1992 to the present, while associated with Lexus, Cambridge and Wellington, Thomas solicited members of the general public to open accounts with each of these firms to purchase and sell exchange-traded options on commodity futures contracts.
6. At Lexus and Wellington, Thomas participated in thirty-minute infomercials, which aired on radio or television stations across the country. Each infomercial spotlighted a particular commodity or commodities, and was used to attract prospects.
7. Thomas appeared in at least 56 infomercials at Lexus and at least eight infomercials at Wellington.
8. In telephone sales solicitations at Lexus, Cambridge and Wellington, Thomas pressured prospects and customers to purchase commodity options by conveying an urgency to invest. Among other things, in frequent telephone calls to prospects, Thomas heavily emphasized the profits obtainable through options trading. Thomas typically urged prospects to open commodity trading accounts immediately, and urged customers to invest additional money, because of what he portrayed as unusually favorable market conditions likely to produce large profits. Thomas routinely sent a prepaid express mail service to pick up account opening documents or checks, telling the prospect or customer that it was imperative to get into the market before the price moved.
Extent to Which Options Customers Will
Profit from Seasonal or Other Existing and
Known Demand and Supply Forces in the Cash Market
9. In the Lexus and Wellington infomercials, Thomas utilized a two-part solicitation representing that existing and known supply and demand forces (including seasonal trends) in the cash market for the advertised commodity would cause the price of that commodity to go up, and that customers would achieve large and certain profits by purchasing options on futures contracts for the commodity prior to this predictable price movement.
10. In the Lexus and Wellington infomercials, Thomas first represented that the price of the advertised commodity was about to go up because demand would exceed supply for some stated reason, such as seasonal patterns including increasing demand for heating oil every winter and unleaded gasoline every summer, or a reduced supply of soybeans due to an early cold snap. Thomas presented historical data purportedly demonstrating that such price increases had occurred regularly, and he emphasized the predictability of these price increases. Thomas claimed that customers who purchase options on futures contracts could exploit these seasonal and other existing and known supply and demand cash market forces.
11. Thomas represented in the Lexus and Wellington infomercials that there is a one-to-one correlation between a given increase in the cash price of a commodity and the resulting profit on an option on a futures contract for that commodity. Thomas presented the customer's strike price as the price of the commodity at the time of the investment, and claimed that if the price increased from there, the options customer would profit, penny for penny, on these cash price increases. Thomas further claimed that such returns would be achieved with only the limited option premium (i.e., the amount paid to purchase the option) at risk of loss.
12. A typical infomercial in which Thomas appeared was a Lexus radio infomercial on heating oil options, which aired in late summer or early autumn of 1994. Thomas represented first that an increase in the price of heating oil was imminent as demand increased with the impending onset of colder weather, and second, that just a ten-cent increase in the price of heating oil would return a profit of as much as $42,000 on a $10,000 options investment. Similarly, Thomas appeared in a Lexus infomercial on soybean options in April 1995 in which Thomas suggested first, that early cold snaps in Kansas, the Texas panhandle, and Oklahoma would cause a higher price for soybeans, and second, that a 50-cent move in the price of soybeans would yield a return of as much as $25,000 on a $10,000 options investment. All infomercials in which Thomas appeared at Lexus and Wellington followed the same pattern illustrated by the foregoing examples, regardless of the commodity being advertised.
13. In his telephone sales solicitations with prospects and customers at Lexus, Cambridge and Wellington, Thomas used the same two-part solicitation (set forth in paragraphs 9-12 above) that he utilized in the Lexus and Wellington infomercials, including, among others, the following representations:
(i) that because the winter was coming and the demand for heating oil always went up in the winter months, a heating oil investment was almost certain to make a profit, or words to that effect;
(ii) that falling temperatures would cause a significant shortage of harvestable oranges, resulting in huge profits to the holders of options on frozen orange juice, or words to that effect;
(iii) that demand for unleaded gasoline "always went up in the summertime," and the customer could make "huge profits" by purchasing options on unleaded gasoline which would come due in the summertime, or words to that effect;
(iv) that now was the perfect time to get into soybean options because of excessive rain in the Midwest, which had led to a shortage of soybeans, or words to that effect;
(v) that with a one cent move, the customer would make $2,100 if he purchased five unleaded gas options, and with a ten cent move, he would make $21,000, or words to that effect; and
(vi) that the customer's options would increase in value proportionately with each one cent increase in the price of unleaded gasoline as the summer driving season arrived, or words to that effect.
14. Both parts of Thomas' two-part solicitation, set forth in paragraphs 9-12 above with respect to his infomercials at Lexus and Wellington, and set forth in paragraph 13 above with respect to his telephone sales solicitations at Lexus, Cambridge and Wellington, are false, misleading and deceptive.
15. Thomas' first representation -- that the price of the commodity is about to increase due to seasonal or other existing and known supply and demand forces, and that an options customer can exploit knowledge of those cash market forces -- is false, deceptive and misleading because, among other things:
i) such a price increase is not assured;
ii) an advantage in trading options will not be obtained based on seasonal and other existing and known demand and supply forces cited by Thomas, because those forces already are reflected in the price paid for the option and in the price of the option's underlying futures contract; and
iii) the representations as to profit potential detailed by Thomas were based on historical movements of the underlying commodities prices rather than the options marketed by Thomas.
16. Thomas' second representation -- that there is a one-to-one correlation between a given increase in the cash price of a commodity and the resulting profit on an option on a futures contract for that commodity -- is false, deceptive and misleading because, among other things:
i) neither cash prices, futures prices, nor option values for a commodity move in the steady, straight-line fashion suggested by Thomas. Rather, they fluctuate with highs and lows over time;
ii) the strike price of the options purchased by Thomas' customers was not the commodity price at the time the option was purchased;
iii) option values generally do not move in direct proportion to the movement in the underlying commodity price; and
iv) Thomas failed to disclose that the profitability of an option will depend in part on the strike price and the amount of commissions.
17. These false representations and omissions in Thomas' infomercials at Lexus and Wellington, and his telephone sales solicitations at Lexus, Cambridge and Wellington, assured prospects and customers that they would achieve large and certain profits, with only minimal risk of loss, by purchasing the options he recommended prior to the commodity's predictable price increase.
b. Misrepresentations and Omissions that
Exaggerated the Likelihood of Profit
18. In his telephone sales solicitations at Lexus, Cambridge and Wellington, Thomas misrepresented to prospects and customers the likelihood and the magnitude of profit that purchasers of options on futures contracts are likely to achieve, including, but not limited to, the following:
(i) that coffee prices would "skyrocket," and that "the sky's the limit," or words to that effect;
(ii) that "big, big profits" were to be made in soybeans due to flooding in the Midwest, or words to that effect;
(iii) that there were large profits to be made because of an anticipated early freeze in Florida, or words to that effect;
(iv) that the customer was "guaranteed to double or triple [his] money in 30-60 days," or words to that effect;
(v) that the customer's account would grow from $5,000 to $20,000 or $30,000 if he bought soybean options and the customer would be in the market only a few days, or words to that effect; and
(vi) that following Thomas' trading advice would make "tremendous profits," or words to that effect.
c. Misrepresentations and Omissions
that Minimized the Risk of Loss
19. In his telephone sales solicitations at Lexus, Cambridge and Wellington, Thomas routinely failed to disclose adequately the risk of loss inherent in trading commodity options. Occasional references to risk were nullified by Thomas' high-pressure sales tactics and by his misrepresentations and omissions which falsely conveyed that while losses on commodity options are theoretically possible, purchasing commodity options with Thomas was virtually risk-free. Such misrepresentations and omissions included, but were not limited to, the following:
(i) that there was no way to lose because of the success of his trading strategies, or words to that effect;
(ii) that since winter was coming, "the chance was small of losing" on heating oil options, or words to that effect;
(iii) that the risk of investing in gold options was similar to investing in a mutual fund, or words to that effect; and
(iv) that there was "very little risk" because investing in coffee options was "safe" and "chances are you're going to make a lot of money," or words to that effect.
d. Misrepresentations that
Overstated Performance Record
20. In his telephone sales solicitations at Lexus, Cambridge and Wellington, Thomas misrepresented and overstated his performance record to prospects and customers, including, but not limited to, the following:
(i) that he had made substantial profits for his clients, or words to that effect;
(ii) that he had a "good track record with investments" and that most of his customers made money, or words to that effect;
(iii) that his clients never lost in heating oil trades and that he had made a lot of money, "millions," for his clients, or words to that effect; and
(iv) that he was a very successful broker and he had made his clients a lot of money using his superior trading strategy, or words to that effect.
21. Thomas' customers at Lexus, Cambridge and Wellington typically purchased bundles of options each costing approximately $1,000 (i.e., options with premiums in the range of approximately $700-$800 plus a $200 commission charge per option). These $1,000 options were routinely out-of-the-money, and often significantly so. In order for an account to profit on such an option purchase, the value of the option must increase by at least 25% prior to the option's expiration date, an event that was highly unlikely and, in fact, rarely occurred.
22. Thomas' customers at Lexus, Cambridge and Wellington entered into commodity option trades which seldom, if ever, returned profits of the magnitude represented by Thomas in his infomercials and telephone sales solicitations. Even when options purchased by Thomas' customers moved into a profitable position, those positions usually were liquidated after generating far smaller profits than Thomas had represented. Most Thomas customers who closed a position at a small profit lost money on their accounts as a whole.
23. Thomas opened approximately 188 customer accounts at Lexus through June 30, 1996. Over ninety percent (90%) of these accounts suffered net losses. During that time period, Thomas' customers invested approximately $1.8 million, of which approximately 65% was lost. Total profits in Thomas' profitable accounts for this time period were only approximately $54,586, while total losses in his unprofitable accounts exceeded $1.2 million. Thomas' commissions during this period were approximately $871,000, equal to nearly three-fourths of customer losses.
24. Thomas opened 12 customer accounts at Wellington from the time he started the firm through September 30, 1997. All of these accounts suffered net losses. The total losses in these accounts during that time period were approximately $58,000.
IV. VIOLATIONS OF SECTION 4c(b) OF THE COMMODITY EXCHANGE ACT, AS
AMENDED ("ACT"), 7 U.S.C. § 6c(b) (1994), AND SECTION 33.10 OF THE COMMISSION'S REGULATIONS ("REGULATIONS"), 17 C.F.R. § 33.10 (1997): FRAUD BY MISREPRESENTATION AND OMISSION OF MATERIAL FACTS IN CONNECTION WITH THE SOLICITATION AND MAINTENCANCE OF COMMODITY OPTION TRANSACTIONS
25. Paragraphs 1 through 24 above are re-alleged and incorporated by reference.
26. Thomas knew that the statements, representations and omissions in his infomercials at Lexus and Wellington and his telephone sales solicitations at Lexus, Cambridge and Wellington set forth above were false, deceptive or misleading, or had no reason to believe that they were true, and he knew that both his infomercials and telephone sales solicitations failed to disclose material facts to prospects and customers.
27. In or in connection with an offer to enter into, the entry into, the confirmation of the execution of, or the maintenance of commodity option transactions, Thomas 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 prospects or customers, in violation of Section 4c(b) of the Act and Section 33.10 of the Regulations.
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-IV above are true, and, if so, whether an appropriate order should be entered in accordance with Sections 6(c), 6(d), 8a(3) and 8a(4) of the Act, 7 U.S.C. §§ 9, 15, 13b, 12a(3) and 12a(4) (1994).
Section 6(c) allows the Commission to enter an order (1) prohibiting a respondent from trading on or subject to the rules of any contract market and requiring 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, suspending, for a period not to exceed six months, or revoking the registration of that respondent, (3) assessing against the respondent a civil penalty of not more than the higher of $100,000 or triple the monetary gain to the respondent for each violation committed prior to November 27, 1996, and not more than the higher of $110,000 or triple the monetary gain to the respondent for each violation of the Act or Regulations committed after November 27, 1996, and (4) requiring restitution to customers of damages proximately caused by the violations of the respondent.
Section 6(d) 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.
Sections 8a(3) and 8a(4) allow the Commission to refuse to register, to register conditionally, to suspend, to revoke or to place restrictions upon the registration of any respondent who is found to meet any of the criteria for such action by the Commission provided for in Section 8a(3).
WHEREFORE, IT IS HEREBY ORDERED that a public hearing for the purpose of taking evidence and hearing arguments on the allegations set forth in Parts I-IV above be held before an Administrative Law Judge, in accordance with the Rules of Practice under the Act, 17 C.F.R. § 10.1 et seq. (1997), at a time and place to be fixed as provided in Section 10.61 of the Rules of Practice, 17 C.F.R. § 10.61 (1997), and that all post-hearing procedures shall be conducted pursuant to Sections 10.81 through 10.107 of the Rules of Practice, 17 C.F.R. §§ 10.81 through 10.107 (1997).
IT IS FURTHER ORDERED that Thomas shall file an Answer to the allegations against him in the Complaint within twenty (20) days after service pursuant to Section 10.23 of the Rules of Practice, 17 C.F.R. § 10.23 (1997), and pursuant to Section 10.12(a) of the Rules of Practice, 17 C.F.R. § 10.12(a) (1997), shall serve two copies of such Answer and of any document filed in this proceeding upon Terry Arbit or Lidian Pereira, Trial Attorneys, Commodity Futures Trading Commission, Division of Enforcement, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, or upon such other counsel as may be designated by the Division. If Thomas fails to file the required Answer or fails to appear at a hearing after being duly served, Thomas shall be deemed in default, and the proceeding 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 Thomas personally or by certified or registered mail forthwith pursuant to Section 10.22 of the Commission's Rules, 17 C.F.R. § 10.22 (1997).
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.
By the Commission.
Jean A. Webb
Secretary to the Commission
Commodity Futures Trading Commission
Date: April 27, 1998