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No. 11-99 March 19, 1999 |
Weekly Advisory
Commodity Futures Trading Commission Three Lafayette Centre
1155 21st Street, NW Washington, DC 20581 Telephone: (202) 418-5080
Facsimile: (202) 418-5525 |
March 19, 1999, 9:15 a.m., Chairperson
Brooksley Born will host the International Regulators
Meeting, Boca Raton Resort & Club, Boca Raton, Florida.
On March 12, 1999, the Commission held
a closed meeting to discuss surveillance matters.
On March 15, 1999, the Commission held
a closed meeting to discuss adjudicatory matters.
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#4243-99
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March 16, 1999
CFTC ISSUES PROPOSED RULES CONCERNING ORDER ROUTING AND
ELECTRONIC ACCESS TO FUTURES EXCHANGES OPERATING PRIMARILY OUTSIDE THE
U.S.
Washington, D.C. � The Commodity Futures Trading Commission
(Commission) today proposed a new Rule
30.11 that would establish an exemption procedure under which
exchanges operating primarily outside the U.S. could petition the
Commission for orders that would permit electronic access to those
exchanges from within the U.S. without requiring them to be designated as
U.S. contract markets. The Commission's proposals would also allow
U.S. customers to use order routing systems, including Internet-based
systems, to enter orders on the exempt electronic exchanges, as well as
on U.S. futures exchanges. The proposed rules set forth certain basic,
minimum safety standards for the operation of these order routing
systems. The proposed rules are based on the general framework that
previously had been outlined by the Commission in a concept release
published in the Federal Register (63 Fed. Reg. 39779, July 24,
1998).
The Commission's proposed rules are intended to create a flexible,
open-ended framework for addressing the regulatory issues that arise from
the advent of electronic trading and from the increasing globalization of
futures markets. The Commission's proposals would provide a procedure
for seeking an exemption from the contract market designation requirement
and related requirements for boards of trade that have historically
operated solely within countries other than the U.S., but that, as a
result of a desire to take advantage of technological advancements, now
wish to make their products accessible from within the U.S. via trading
screens, the Internet, or other automated trading systems.
The Commission's proposals are designed to foster the growth of the
global marketplace while allowing the Commission to fulfill its
obligations under the Act to protect U.S. customers and to maintain the
integrity and competitiveness of U.S. markets. The process set forth in
the proposed rules would avoid duplicative regulation, would encourage
other countries to allow electronic access to U.S. exchanges and would
encourage global competition and open markets in the futures
industry.
The proposed rules will be published shortly in the Federal
Register. Public comment on the proposed rules must be received
within 30 days of the date of publication in the Federal
Register. Copies of the proposed rules may be obtained by contacting
the Commission's Office of the Secretariat, Three Lafayette Centre,
1155 21st Street, N.W., Washington, D.C. 20581, (202)
418-5100, or by accessing the Commission's website, www.cftc.gov.
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March 17, 1999
CFTC FILES COMPLAINT AND OBTAINS STATUTORY AND TEMPORARY
RESTRAINING ORDER AGAINST MARK E. CHULIK IN ANTI-FRAUD ACTION; CHULIK, OF
MANHATTAN BEACH, CA., IS ACCUSED OF COMMODITY FRAUD
The CFTC Complaint Alleges that Chulik Committed Fraud By
Misrepresenting the Profitability of a Commodity Pool that He Controlled
and by Commingling and Misappropriating the Pool's
Funds
WASHINGTON � The Commodity Futures Trading Commission (CFTC)
announced that on March 11, 1999, U.S. District Judge George H. King of
the Central District of California issued a statutory and temporary
restraining order against Mark E. Chulik of Manhattan
Beach, California. The order freezes Chulik's assets, prohibits him
from destroying records, restrains him from further violating the
Commodity Exchange Act (CEA), and prohibits him from further soliciting
clients or customers or accepting funds from them.
The order also requires the defendant to show cause why a preliminary
injunction should not be granted to prohibit further violations of the
CEA and the regulations thereunder, and to show cause why he should not
be ordered to file an accounting. A hearing has been scheduled for March
25, 1999.
The court issued the temporary restraining order as a result of a
six-count civil complaint filed by the CFTC on March 9, 1999, against
Chulik, individually and doing business as Westgate
Partners, MEC Management, and MEC
Capital Management. The complaint alleges that Chulik violated
the anti-fraud provisions of the CEA, acted as an unregistered commodity
pool operator (CPO), misappropriated pool participants' funds,
commingled their funds with his own, and failed to provide required CPO
disclosure documents and reports to pool participants.
The complaint alleges that since May 1997, Chulik, who is registered
with the CFTC as a commodity trading advisor (CTA), obtained in excess of
$750,000 from at least seven investors and pooled these funds for the
purpose of trading commodity futures contracts. The complaint further
alleges that Chulik transferred substantial portions of the pool's
funds and commingled them with funds in his own personal futures trading
account. The complaint alleges that Chulik lost in excess of $500,000
trading futures contracts in that account in 1998 and that Chulik
reported fictitious profits to pool participants when, in fact, his
trading resulted in significant losses, not profits. Finally, the
complaint alleges that in individual customer accounts, where Chulik
directed trading as a CTA, he fraudulently exaggerated the actual balance
in such accounts.
The complaint seeks orders of preliminary and permanent injunction to
prohibit Chulik from, among other things, cheating and defrauding members
of the public, soliciting new funds, and operating his business in any
manner which would violate the CEA. The CFTC also seeks an order
requiring Chulik to disgorge his ill-gotten gains, to make restitution,
and imposing civil monetary penalties of up to$110,000 or triple the
monetary gain for each violation of the CEA of CFTC regulations.
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(CV-98-N-1755-S)
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March 17, 1999
U.S. District Court for the Northern District of Alabama Orders
Payment of $45 Million and a Permanent Injunction By Default Against Dr.
Richard E. Busch in Alabama Commodity Pool Fraud Case
WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced
that Dr.�Richard E. Busch, defendant in CFTC v.
The ChateauForte Consortium, Inc. et. al., has been ordered to pay
over $45 million as part of an order of permanent injunction entered
against him by default for his violations of the anti-fraud and
registration provisions of the Commodity Exchange Act (CEA). The order
directs Busch to make full restitution to investors of
at least approximately $13 million, including prejudgment interest, and
to pay a civil monetary penalty of over $32 million. Judge Edwin L.
Nelson of the Northern District of Alabama signed the order on March 5,
1999.
In its order, the court finds that Busch failed to
answer or otherwise plead to the complaint filed by the CFTC in the
Northern District of Alabama on July 7, 1998 (see CFTC News Release
#4166-98, July 13, 1998) and that all the allegations and facts contained
in the CFTC's complaint and other pleadings are deemed admitted as
true.
Based on the complaint and the court's order, the court finds that
since approximately October 1996, Busch participated
with other defendants in soliciting Alabama residents to invest at least
$10.8 million in The Millennium Fund, an unregistered
commodity pool. The court further finds that, Busch,
acting through co-defendant The ChateauForte Consortium,
Inc., misappropriated investor funds, acted as an unregistered
commodity pool operator, and failed to comply with commodity pool
reporting and disclosure requirements. Busch, according
to the complaint, lives in Fort Wayne, Indiana.
The court's order enjoins Busch from violating the anti-fraud and
registration provisions of the CEA, as well as certain reporting and
disclosure provisions, and from engaging in any commodity futures-related
activity, including entering into any commodity futures transactions or
accepting funds from investors for the purpose of trading commodity
futures contracts. Furthermore, the order leaves in place the court's
July 7, 1998 order freezing assets, preserving records, and appointing a
receiver over all named defendants, including
Busch.
Previously, on August 24, 1998, the court entered a consent order of
preliminary injunction against defendants James Michael
Hanks and Financial Planning Alliance
International (see CFTC News Release #4184-98, August 27, 1998).
In the pending litigation, the CFTC seeks a court order permanently
enjoining The ChateauForte Consortium, Inc.,
WorldEx, S.A., John La Tourette, and
William E. Amos from violations of the CEA and requiring the
defendants to make an accounting, to disgorge profits, to make
restitution to defrauded customers, and to pay civil fines not exceeding
$110,000 per violation or triple the defendants' monetary gain.
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97-5691)
For
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1999
Minnesota District Court Bars James M. Zoller And The Tech-Comm
Limited Partnerships From The Futures Industry For Fraudulent Scheme;
Orders Restitution to Defrauded Investors of Over $4.91
Million
WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced
that U.S. District Court Judge David S. Doty of the District of Minnesota
entered a consent order of permanent injunction against James M.
Zoller of Apple Valley, Minnesota, and the Tech-Comm
Limited Partnerships, a series of 29 Minnesota Limited
Partnerships operated by Zoller as commodity pools.
The court's order permanently enjoins the defendants from further
violations of the federal commodity laws and regulations, orders Zoller
to pay restitution to defrauded investors totaling $4,914,783.60 (plus
prejudgment and post-judgment interest thereon), and prohibits the
defendants from ever engaging in activities in the futures industry, on
behalf of themselves or others.
The court's order, entered on February 23, 1999, stems from a
six-count civil injunctive action filed by the CFTC on November 21, 1997
against Zoller and the Tech-Comm pools (see CFTC News Release #4083-97,
November 25, 1997). The order finds that from 1984 until October 1997,
Zoller and the Tech-Comm pools accepted more than $13 million from at
least 219 investors throughout the country and fraudulently
misappropriated $4,914,783.60 of investors' funds.
The order further finds that Zoller misrepresented to investors that all
of their funds would be used to trade commodity futures when, in fact,
Zoller placed only approximately $719,000 of the approximately $13
million raised into commodity trading accounts. The order also finds that
Zoller violated the anti-fraud provisions of the Commodity Exchange Act
by misrepresenting to investors, both orally and in written statements,
that they were earning profits from the futures trading he conducted
when, in fact, Zoller consistently lost money in the trading that he
actually did engage in over the last 13 years.
According to the findings in the order, to facilitate his operation of
the Tech-Comm pools, Zoller used some of the investors' funds to make
returns of principal and purported profits to other investors, in a
manner akin to a Ponzi scheme. This was done, according to the order, to
deceive investors into believing that their funds were being utilized to
profitably trade commodity futures and to attract additional funds.
Finally, the court's order finds that Zoller illegally acted as a
commodity pool operator without proper registration with the CFTC;
violated the CFTC's regulations by accepting funds in his own name
and not in the name of the pools; and illegally commingled investors'
funds with his own.
In a related criminal action brought by the United States Attorney for
the District of Minnesota, Zoller pled guilty in June 1998 to four counts
of mail fraud and one count of embezzlement. Zoller was sentenced to 41
months in prison and he is currently serving that sentence.
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March 17, 1999
CFTC Issues a Decision in In re R&W Technical Services,
Ltd., Gregory M. Reagan, and Dorothy Worsham, as Executrix of the Estate
of Marshall L. Worsham, CFTC Docket No. 96-3
WASHINGTON--On March 16, 1999, the Commodity Futures Trading Commission
issued a decision imposing cease and desist orders and civil monetary
penalties of $2,375,000 on R&W Technical Services, Ltd.
("R&W") and Gregory M. Reagan ("Reagan") for
violations of the Commodity Exchange Act ("Act") and the
Commission's regulations.
The Commission found that R&W, a Texas limited liability company
that sells computerized futures trading systems, and partners Reagan and
Marshall L. Worsham ("Worsham") fraudulently solicited
customers by promoting those trading systems as having made respondents
and others tremendous profits in the futures markets without disclosing
that no actual trading profits were involved. The Commission further
found that the respondents misrepresented the risks involved with futures
trading by selling their trading system with a guarantee of
profitability. The Commission affirmed the ALJ's initial decision
that respondents are liable for fraud in the solicitation of customers in
violation of Section 4b of the Act.
The Commission found that respondents acted as commodity trading
advisors under Section 1a(5) of the Act. The Commission also affirmed the
ALJ's initial decision that respondents are liable for fraudulent
solicitation of customers and for fraudulent advertising in violation of
Section 4o of the Act and Commission Regulation 4.41(a). In addition, the
Commission affirmed the ALJ's initial decision that Reagan and
Dorothy Worsham, as Executrix of the Estate of Marshall L. Worsham
("the Worsham estate"), are liable as controlling persons and
as aiders and abettors of R&W's violations.
Finding that there was a reasonable likelihood that R&W and Reagan
would repeat their fraudulent conduct, the Commission affirmed the
ALJ's order that R&W and Reagan cease and desist from violating
Sections 4b and 4o of the Act and Commission Regulation 4.41(a). The
Commission vacated the ALJ's order that R&W and Reagan cease and
desist from violating Section 4m(1) of the Act and Commission Regulations
1.31 and 4.33. Finding that the gravity of the respondents' offenses
was significant but not egregious enough to warrant trebling of the
monetary gains when calculating penalties, the Commission reduced the
amount of civil monetary penalties imposed on R&W and Reagan from
$7,125,000 to $2,375,000, to be paid by them jointly and severally. The
Commission vacated the permanent trading bans imposed on R&W and
Reagan by the ALJ and denied an award of restitution.
On March 17,1999, the Commission designated the Chicago Mercantile Exchange as a contract market in Cash-Settled Butter futures and options on futures contracts.
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No Federal Register Notices were published during this period.
NOTE:
All Comment Letters must be received by the Commission no later than the closing date specified in the applicable Federal Register release. Any requests for an extension of the comment period must be made in writing - - before the expiration of the comment period - - to the Commission's Office of the Secretariat.
Comment period concerning the Chicago Mercantile Exchange's
application to trade E-Mini Nasdaq 100 futures and option contracts ends,
March 19, 1999.
Comment period concerning the Commission's proposal to amend parts
15 and 17 of its rules relating to reporting levels for its Large Trader
Reports (17 CFR parts 15 and 17) ends,April 5,
1999.
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In the Matter of Grace Hsu, Allen Tsui and CMB Capital Management Corp. Filed March 11, 1999. The Commission accepted an offer of settlement from respondent Allen Tsui. Accordingly, the complaint, as it relates to Tsui, was dismissed with prejudice. Administrative Law Judge, Bruce C. Levine. CFTC Docket No. 98-10.
Clarence A. Frese v. Ulrich Gerd Garbe, Carlo Scott
Kearse-McNeil, LFG, L.L.C., M.G. Globe Trading Company, Inc., and Victor
James Smith. Filed March 15, 1999. The parties filed a
stipulation of dismissal. Accordingly, the complaint was dismissed with
prejudice and this matter was terminated in its entirety. Administrative
Law Judge, Bruce C. Levine. CFTC Docket No. 98-R165.
No Opinions and Order were issued during this period.
99-12; Exemption; March 17, 1999; The CPO of a small
pool which started in late 1998 requested exemption from the requirement
of rule 4.22(d) that the pool's 1998 Annual Report be audited. The
participants supported the request. The exemption was granted upon
condition that (1) an unaudited 1998 annual report be provided to the
participants and (2) the audited 1999 report will include 1998 data.
[4.22(c) & (d)] (T&M).
99-13 Interpretation; March 12, 1999; An account funded
at 90 percent or greater is not materially different from an account
which is funded at 100 percent and thus may be treated as part of the
fully funded subset method discussed in Commission Advisory 93-13.
[Advisory 93-13] (T&M).