High Court Sides with CFTC on its Authority Scope over $290M Fraud Case

The cert petition was the latest effort from Monex and its principals to push back against a 2017 enforcement action.

The U.S. Supreme Court ruled in favor of the Commodity Futures Trading Commission to proceed with its lawsuit that accuses a Newport Beach-based company of defrauding thousands of customers out of $290 million.

The court refused earlier this week to hear the claims of the California-based precious metals dealer, which sought to review the CFTC’s authority to bring enforcement cases against its alleged market manipulation.

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The cert petition was Monex’s latest effort to push back against a 2017 enforcement action. It was filed shortly after the Ninth Circuit Court of Appeals also ruled in favor of the CFTC. The federal judge said that the district court was wrong in dismissing the regulator’s case against the company and its principals Louis Carabini and Michael Carabini. It ruled that the CFTC’s charges of fraud and illegal trading could proceed.

Although the derivatives regulator has jurisdiction over only swaps and commodity futures contracts, the CFTC has historically also had enforcement authority on the spot or physical markets.

“The Ninth Circuit’s decision, now final, confirmed (1) that the Commodity Exchange Act (CEA) empowers the CFTC to prosecute fraud in cash-commodity markets regardless of whether there has also been market manipulation; and (2) that in order to escape regulation under the CEA, a purveyor of leveraged retail commodity transactions must actually deliver that commodity, and may not rely on sham arrangements in which no commodity ever changes hands. In Monex’s case, the transactions were in metals, but these issues are also important in the context of digital assets including virtual currencies. Earlier this year, the CFTC issued final interpretive guidance on actual delivery for digital assets,” the regulatory notice further reads.

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In 2017, the Commodity Futures Trading Commission (CFTC) had filed a federal lawsuit in Illinois, charging three affiliated companies located in Newport Beach of California with defrauding customers through commodity investment pools.

The CFTC alleges that beginning in 2011 and through March 2017, Monex Deposit Company, Monex Credit Company, and Newport Services Corporation solicited the public to invest in commodity trading pools, scamming thousands of retail customers out of more than $290 million.

According to court records, California-based Monex Deposit and its subsidiaries offered leveraged trading in gold, silver, platinum, and palladium to retail customers through its ‘Atlas’ program.

The order also finds that the company accepted clients’ trades and funds and therefore acted as a Futures Commission Merchant (FCM), without registering as such with the CFTC.

Using high-pressure sales tactics, the agency claims that Monex representatives “deceptively pitched leveraged trading through the Atlas program as a safe, secure, and profitable way to invest in precious metals.” In reality, Monex’s Atlas trading program defrauded over 12,000 trading accounts through large price spreads on trades, plus commissions, interest on loans, and administrative fees. In some cases, Monex’s spreads were 100 times higher than the standard rates offered on regulated exchanges.

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