November 15, 2018
In CFTC Action, Federal Court Orders Hedge Fund and Its Principals To Pay More Than $1 Million for Fraud and Registration Violations
Washington, DC — A federal court in New York has entered orders against Kevin P. Whylie of Ozone Park, New York, Matthew James Zecchini of East Islip, New York, and the New York hedge fund they co-founded, Algointeractive Inc (together, Defendants), to pay more than $1 million in civil monetary penalties and restitution. The Court’s Orders resolve the Commodity Futures Trading Commission’s (CFTC) enforcement action against the Defendants, filed on April 11, 2018, which charged them with fraudulent solicitation and misappropriation of funds, among other charges (see CFTC Complaint and Press Release 7710-18).
Judge Loretta A. Preska of the U.S. District Court for the Southern District of New York entered two orders (Orders): (1) a consent order approving a settlement between Whylie and the CFTC (Consent Order), filed October 24, 2018, and (2) an order awarding the CFTC default judgment against Zecchini and Algointeractive, who failed to appear in the litigation (Default Order), filed November 13, 2018. The Consent Order requires Whylie to pay a $100,000 civil monetary penalty, and the Default Order requires Zecchini and Algointeractive to pay, jointly and severally, a $721,650 civil monetary penalty. The Orders also require the Defendants to pay $240,550 total in restitution to pool participants, and impose permanent trading and registration bans on the Defendants and permanently enjoin them from further violations of the Commodity Exchange Act and CFTC Regulations.
The Orders specifically find that the Defendants made material misrepresentations and omissions in solicitations to pool participants and prospective pool participants — including misrepresenting or omitting material information about the Defendants’ own experience, track record, and amount of assets under management — and misrepresented that all or substantially all of the participants’ funds would be pooled and invested in, among other things, futures contracts, for the participants’ benefit.
In fact, as the Orders find, only a fraction of the funds solicited were ever deposited into a futures trading account held by Algointeractive, and only $59,450 has been returned to pool participants (including through Ponzi-style payments to participants from other participants’ funds). According to the Orders, the Defendants misappropriated most of the funds for their own benefit, including by using participants’ funds to pay unauthorized personal or business expenses, including food, transportation, and entertainment.
The Orders further find that, in order to perpetuate the fraud and conceal their trading losses and misappropriation, the Defendants made and issued false documents, including monthly participant account statements and monthly expense charts that inflated and misrepresented Algointeractive’s assets and trading returns.
Finally, the Orders find that the Defendants failed to operate their commodity pool as a separate legal entity; received pool participant funds in a name other than that of the pool; commingled pool funds with non-pool property; and failed to register with the CFTC as a Commodity Pool Operator (Algointeractive) and Associated Persons (Whylie and Zecchini) of a Commodity Pool Operator.
The CFTC cautions that orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.
The CFTC thanks the National Futures Association for its cooperation and assistance.
The CFTC Division of Enforcement staff members responsible for this case are Trevor Kokal, David C. Newman, R. Stephen Painter Jr., Lenel Hickson Jr., and Manal M. Sultan.
CFTC’s Commodity Pool Fraud Advisory
The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Commodity Pool Fraud Advisory, which warns customers about a type of fraud that involves individuals and firms, often unregistered, offering investments in commodity pools.
Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.