One of the largest cases of alleged fraud the CFTC has ever dealt with, according to new lawsuit filed against three Monex companies
By CoinWeek News Staff ….
On Wednesday, September 6, the Commodity Futures Trading Commission (CFTC) filed a civil injunction against three associated precious metals trading companies and the father and son partners who run them. The three companies, based out of Newport Beach, California, are Monex Deposit Company, Monex Credit Company, and Newport Services Corporation. Michael Carabini and his father, Louis Carabini, are also charged. The CFTC filed the injunction in the U.S. District Court for the Northern District of Illinois.
The suit alleges that Monex and its affiliated companies and agents defrauded customers of “hundreds of millions of dollars”. According to Enforcement Director James McDonald, the case against Monex represents “one of the largest precious metals fraud cases in the history of the Commission.”
Specifically, the company is accused of selling its “off-exchange” Atlas leveraged precious metals trading service to customers as a safe and reliable way to invest in gold, silver, platinum and palladium despite the fact that it operates entirely outside of the regulatory system of exchanges established and required by the Commodity Exchange Act of 1936 (which the CFTC exists to enforce) and the Dodd-Frank Act of 2010, and despite total Atlas retail customer losses between July 16, 2011 and March 31, 2017 of more than $290 million USD. This averages to about $4 million in losses per month.
At no point, the CFTC suit alleges, did Monex inform potential customers of these losses. Instead, the company and its agents overstated the profits that could be earned through participation in their Atlas program. “High pressure” sales tactics allegedly were also employed.
Additionally, because the trades took place outside of the regulatory system of legal exchanges and because Monex served as the counterparty to any and all Atlas trades, the companies could rig each trade in its favor – which often meant that Monex directly benefited from customer losses, according to the CFTC.
As controlling agents, Michael and Louis Carabini are held liable for the actions of Monex.
The CFTC lawsuit seeks to compel the companies and other involved parties to stop trading in precious metals and would prevent them from having trades made in their name by other companies or agents. The CFTC also seeks “restitution, rescission, disgorgement, civil monetary penalties, and such other equitable relief as this Court may deem appropriate.” A monitor would be appointed to ensure compliance.
Monex was founded in 1987 as Monex Deposit Company (MDC) and Monex Credit Company (MCC).
MDC is the company that makes retail precious metals trades. A sales team of telemarketers is employed to convince customers to partake in the services of the Atlas program. MDC serves as a counterparty to these trades. MCC is the financing half of the company, providing loans and accepting payments on a line of credit to make Atlas purchases. MCC may also serve as a counterparty.
Newport Service Corporation primarily provides administrative and accounting services to MDC and MCC, but it can also accept payment from customers for Atlas trades.
Louis Carabini founded the company, but by 2011 and over the duration of the relevant time period as mentioned in the court filing, he had handed most of the responsibility for the operation of Monex to his son Michael. The pair stand charged with the “offering of the unlawful leveraged commodity transactions” and the “fraud and registration violations as controlling persons of Monex who knowingly induced the underlying violations or failed to act in good faith.”
CoinWeek reached out to Monex before this article went to press. The following is their statement in its entirety:
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Response of Monex to CFTC Lawsuit
September 6, 2017
Today the Commodity Futures trading Commission (“CFTC”) filed an action in federal court against Monex Deposit Company, Monex Credit Company (collectively “Monex”), et al., alleging that Monex’ leveraged Atlas account trades are illegal retail precious metals transactions under the recent Dodd-Frank legislation. Monex vehemently denies the CFTC’s assertion of jurisdiction and its allegations of customer fraud.
Throughout its 30-year history, both before and after Dodd-Frank was implemented, Monex has lawfully offered physical precious metals transactions exempt from CFTC jurisdiction.
Prior to Dodd-Frank, Monex’ exemption was recognized by the CFTC and its administrative law judges. Since Dodd-Frank, Monex has complied with the CFTC’s interpretive guidance for exempt precious metals dealers involved in financial transactions.
Monex makes delivery of precious metals to every customer on every sale, including financed transactions where the precious metals are held in an independent depository in the customer’s name. The terms and conditions of the Monex Atlas program are fully disclosed to its customers before transactions are made, and the disclosures satisfy all regulatory requirements. All bid and ask prices and spreads are disclosed on the internet live and can be compared to prices and spreads offered by other precious metal dealers. The average bid/ask spread on a financed Atlas transaction is one of the most competitive in the physical precious metals market with average spreads less than 2% and commissions averaging less than one quarter of a percent during the last 5 years.
The company will vigorously defend against the CFTC’s unwarranted action.
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According to the Better Business Bureau website, Michael Carabini is also listed as President of Monaco Rare Coins. As part of our initial investigation, we reached out to Adam Crum, Vice President of Monaco, with questions relating to the lawsuit and its potential effect on the company. General Counsel of Monex Greg Walker replied on Crum’s behalf that he did not anticipate that Monex’s legal issues will impact Monaco.
In conjunction with consumer advocate Joshua Gibbons of About.ag, CoinWeek will feature an in-depth, two-part examination of Monex and its alleged precious metals fraud starting next week.