California Resident and Forex Company CEO Victor Yu has been prosecuted, sharing liability with his company, VFRS LLC and ordered by the CFTC to pay restitution of nearly $2.15 million, disgorgement of more than $270,000, and a civil monetary penalty of over $800,000. The Order also imposes permanent trading and registration bans against Yu and VFRS and permanently prohibits them from further violations of federal commodities law, as charged.
The Order for Default Judgment and Permanent Injunction was entered on March 26, 2013, by Judge Yvonne Gonzales Rogers of the U.S. District Court for the Northern District of California. The Order stems from a CFTC Complaint filed on July 26, 2012, that charged Yu and VFRS with defrauding clients in connection with off-exchange foreign currency (forex) trading and failing to register with the CFTC as a Commodity Trading Advisor (CTA).
The court’s Order finds that the Defendants fraudulently induced more than 100 individuals to open forex trading accounts. In their client solicitations, the Defendants misrepresented that they had developed trading software that made forex trading “extremely safe” and that would prevent clients from ever reaching certain loss thresholds, the Order finds. The Defendants also misrepresented to some prospective clients that their trading software had shown positive returns on every trade it ever made and had successfully predicted activity in the currency markets back to the 1920s, according to the Order.
The Order further finds that, from 2009 to the present, the Defendants induced their clients to invest over $5 million in forex trading accounts, and clients lost almost $2.15 million during the same period. The Defendants received over $270,000 in service fees from those clients, the Order finds.
Once clients opened forex trading accounts, the Order finds that Yu and VFRS instructed them to give Defendants their log-in and password information so that the Defendants could place trades in their accounts. By this conduct, Yu acted as a CTA without being registered as such, according to the Order.
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CFTC Division of Enforcement staff members responsible for this case are Robert Howell, Jennifer Smiley, Joseph Patrick, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard Wagner.
The CFTC takes a very strict approach when bringing non-registered CTAs to book, often resulting in disqualification and very high monetary penalties. Generally, forex trading is regarded as an “execution-only” product by most financial regulators, meaning that no actual financial advice took place on the part of the broker, and the client of such a broker chose though his own free will to trade forex, and therefore as long as the terms and conditions are made clear, such a transaction does not violate any law.
At present, it is still legal in most jurisdictions to act as a portfolio manager for forex investors, by using a Multi-Account Manager (MAM) which is available from most forex brokers. Such MAM accounts consist of a master trading account, and several sub-accounts which are funded with investors’ money. The operational function of this type of account is that the trader executes trades on the master account, and these are cascaded automatically to investors’ sub accounts.
This constitutes trading on behalf of others, and is currently legal and the trader does not need a financial adviser’s license. The same applies to Expert Advisers (EAs) and copy-trade social trading platforms such as ZuluTrade and Tradency’s Mirror Trader platform.
As the US government is taking a close look at this side of the forex industry, it may be only a matter of time before companies promoting EAs or copy-trade software may fall foul of yet to be introduced rules deeming this a type of financial advice, or a non-licensed entity trading on behalf of the investor.
Will the rest of the world follow the US’s lead? Interesting times are ahead.