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Federal Court Orders Monex and Owners to Pay $38 Million for Fraud

Federal Court Orders Monex and Owners to Pay $38 Million for Fraud

Commodity Futures Trading Commission (CFTC) ……
On December 21, the Commodity Futures Trading Commission (CFTC) announced the U.S. District Court for the Central District of California entered a consent order for permanent injunction, monetary sanctions, and equitable relief against Monex Deposit Company, Monex Credit Company, Newport Services Corporation, and their owners Louis Carabini and Michael Carabini.

The order requires the defendants to pay $33 million USD in restitution to customers, and a $5 million civil monetary penalty. The order further bars the defendants from trading futures or options on a regulated market, unless such trading is for the purpose of hedging. It also bans the defendants from registering in any capacity with the CFTC for 10 years, and permanently enjoins them from engaging in off-exchange leveraged retail commodity transactions or fraud.

“This settlement resolves a long-standing and significant precious metals case that CFTC Enforcement staff fiercely and successfully litigated at the district court level, up to the court of appeals, and back to the district court,” said Acting Director of Enforcement Gretchen Lowe.

“First, the CFTC won a judgment against the defendants for illegally offering leveraged retail commodity transactions and established important law on the meaning of ‘actual delivery’ of commodities under the CEA (Commodity Exchange Act). This settlement resolved the remaining charges of fraudulent solicitation that lured unsuspecting customers into the highly risky leveraged trades, and obtained significant restitution for the victims of the unlawful conduct,” Lowe continued. “The CFTC will take any action necessary to prevent and terminate such illegal transactions and return funds to the defrauded customers. I thank the team for their tenacious commitment to this case and ultimate success.”

General Counsel Rob Schwartz said, “This is an historic case for the agency with implications far beyond metals trading. Not only did staff put a stop to a large-scale fraud and shut down an illegal, unregistered trading platform, but in the process developed important caselaw on the subject of actual delivery of any commodity, and fortified the agency’s strong anti-fraud authority. This comes at a critical time when the agency is contending with fraud across a broad range of commodity assets, both traditional and digital.”

The order resolves a CFTC action filed against the defendants on September 6, 2017, alleging that, while acting as a common enterprise, the defendants executed illegal, off-exchange leveraged retail commodity transactions for thousands of customers, and engaged in pervasive fraudulent sales solicitations.

The order comes after substantial litigation, including two appeals to the Ninth Circuit, entry of a preliminary injunction against the defendants, an order granting summary judgment in favor of the CFTC on the charges relating to the offering and execution of illegal retail commodity transactions, and also imposing a permanent injunction prohibiting the defendants from engaging in leveraged retail commodity transactions.

Case Background

As found in the order, between July 16, 2011 and August 31, 2021, the defendants operated a retail over-the-counter trading platform, known as “Atlas”, which allowed customers to speculate on precious metals price movements, with Monex acting as the counterparty to every transaction. During the relevant period, the defendants executed thousands of leveraged trades with retail customers, all of which were required to be executed on a regulated exchange, but were not, as found by the court in an earlier order.

The order also finds the majority of these trades resulted in losses for Monex’s customers and the defendants engaged in fraud in the solicitation of customers. Specifically, Monex touted the importance of precious metals as a hedge against economic uncertainty. Monex’s solicitations highlighted profits, claiming that precious metals offer “outstanding price appreciation” and “outstanding profit potential.” Monex trained its sales representatives to pitch leveraged trading with descriptions of the possibility of “30-40% net gains,” “annualized rate of return of 20% or more” and “unlimited upside potential” according to the order. Monex also trained its sales force to gain customers’ trust in order to make sales. In addition, Monex incentivized its sales staff to push customers into leveraged trading with increased commissions and bonuses, the order finds.

Monex never disclosed that the majority of its customers lost money, according to the order. As a result, Monex’s claims about the profitability of leveraged trading of precious metals were misleading. Moreover, Monex’s customers who expected to make profits from such trading instead lost money, the order finds. The order further finds that Louis and Michael Carabini controlled Monex and are liable for its illegal activities.

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 Division of Enforcement staff members responsible for this case are Carlin Metzger, Ansley Schrimpf, Bryan Hsueh, Stacie Pan, Anthony Marozas, Matthew Flagge, Jon Kramer, Elizabeth Pendleton, David Terrell, Joseph Konizeski, Scott Williamson, and Robert Howell. The Division of Enforcement also received substantial support from Kyle Druding, Anne Stukes, and Robert Schwartz of the Office of General Counsel, who represented the CFTC in the Ninth Circuit. Former Division of Enforcement staff members Jeffrey Gomberg, Michael Frisch, Brigitte Weyls, Mary Beth Spears, and Rosemary Hollinger also contributed to this matter.

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CFTC’s Precious Metals Customer Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Precious Metals Fraud Advisory, which alerts customers to precious metals fraud and lists simple ways to spot precious metals scams.

The CFTC also strongly urges the public to verify a company’s registration with the CFTC before committing funds. If unregistered, a customer should be wary of providing funds to that entity. A company’s registration status can be found at NFA BASIC.

Customers and other individuals can report suspicious activities or information, such as possible violations of commodity trading laws, to the Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382), file a tip or complaint online, or contact the Whistleblower Office. Whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected paid from the Customer Protection Fund financed through monetary sanctions paid to the CFTC by violators of the CEA.

Coinweek is the top independent online media source for rare coin and currency news, with analysis and information contributed by leading experts across the numismatic spectrum.

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