An experienced futures broker, Jeffrey Gustaveson of Morgan Hill, California, who according to the NFA website held seven senior positions over the past ten years across various NFA registered brokerages, was ordered by a Federal court today to pay $410,000 in client restitution and a $1,200,000 civil monetary penalty in connection to a complaint filed by the CFTC in late August (CFTC Press Release 6341-12).
The complaint charged Gustaveson with fraud, misappropriation and issuing false statements in an approximate $2.5 million commodity pool scheme according to the CFTC’s injunctive action and subsequent filings.
The federal court order, which resolved the complaint filed last month by the CFTC, awarded restitution for defrauded commodity customers in the amount of $410,000, and a civil monetary penalty of $1.2 million against Gustaveson in connection with the commodity pool investment scheme, including a permanent ban from registering with the NFA/CFTC.
According to the statement by the CFTC today, to conceal his misappropriation, Gustaveson distributed false trading account statements to the pool participants that misrepresented the value of the pool, reported false profits, and failed to disclose his misappropriation of pool participants’ funds.
Scope of CFTC Findings
When his fraud was exposed, Gustaveson returned a significant portion of the pool participants’ funds, leaving $410,000 of the customers’ funds unpaid, the Order finds. As to the amount still owed, Gustaveson admitted that he spent the money on personal expenses, past-due taxes, and repaying a previous investor, according to the Order.
Whether these actions were devised as part of a long-term plan to defraud investors or whether they were a series of ill-made decisions based on greed or financial difficulties is less-relevant, as the more concerning aspect is the risks posed by the CPO structure in general with regards to how they can be used inappropriately as vehicles of fraud.
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The risk posed to investment pool participants with regards to the credit-trustworthiness of pool operators is further exacerbated today as the increased need for greater protection of investor’s deposits from ponzi schemes and frauds – becomes ever so obvious.
Commodities Pools Structure under Scrutiny
With regards to the US, Forex Magnates opines that this risk appears to be the greatest in the Commodity Pools Operator (CPO) category, where investors hand off funds to the CPO operator which despite evolving regulatory oversight and restrictions – still holds a degree of fiduciary responsibility – a power that can be violated at customer’s expense (even with funds held at a Futures Commission Merchant since they remain in the name of the pool controlled by the CPO – and not in the name of the investor).
This is not the case for other hedge fund-like structures or managed account programs where funds remain under the customer’s name at the brokerage house (FCM), in a CPO there are special entities created (such as limited partnerships) where the operator can move around funds quite easily. Assuming a large percentage of CPOs in the industry are fully legitimate and trustworthy and strive to uphold high degrees of commercial honor and aligned with their customer’s interest, these above-mentioned risks still exist.
Last but not least, such findings as stated above make an otherwise perfectly functioning CPO segment harder for existing CPO operators, as a result of any tainted perception by investors with regards to commodity pools. As a result, regulators are squeezed to consider ways to improve the process at the expense of remaining CPO operators who could be affected from subsequent regulatory tightening (although, this could benefit investors long term, if done right).
The paradox remains as to how the regulatory changes that can build markets and brokerage integrity – can evolve for the many, as a result of tragic financial losses caused from the illegal acts of the few. This case parallels a previous update from the CFTC today, regarding a forex related case brought to closure following a court order on the other side of the US coast. Comments regarding the structure of CPOs are welcome.
*The CFTC Division of Enforcement was responsible for handling this case.