Commodities / Futures
/ Options Investment Frauds
Count Your Blessings
After starting an investment fund known as Hedged Investments
the owner attracted investors by claiming he had developed a sophisticated
method of trading in stock options which resulted in substantial
returns. Upon enticing someone to invest, he sold them units in
one of three limited partnerships that he had established as investment
vehicles for the fund.
He told investors he would invest partnership capital from the
fund according to his trading strategy. Though he actually did
use investors' contributions to trade in stock options, the fund
amassed enormous trading losses.
To hide these losses, he reported false earnings and allocated
false profits to investors' accounts. He then allowed investors
to withdraw cash from their accounts on the basis of these falsely
attributed profits. In effect, he ran a Ponzi scheme —he
paid these so-called profits to investors who chose to make cash
withdrawals, from the contributions of other investors.
While hundreds of people collectively lost hundreds of millions
of dollars in the Hedged Investments scheme, one lady, after making
over a million dollars over and above her initial investment, sued
after it collapsed because she didn't get all that she was promised.
Over the course of her participation she invested about $750,000
in the fund and received transfers totaling a little over $2 million.
She was among the very few investors who received more money than
they had invested, as opposed to the many who lost every cent they
had.
A Cut in Corporate Profits
A well-known Beverly Hills-based money manager convinced a large
company to invest some of its excess cash with him. He told them
that he could outperform Treasury securities by using certain proprietary
strategies.
That year the company's brokerage trading account statements seemed
to show large losses but the account statements which the money
manager prepared appeared to reflect healthy profits. When questioned,
he lied, claiming they definitely had gains. The company
became concerned when they learned that his options trading was
highly risky.
Unable to determine what he was doing and uncertain whether the
company had gains or losses, they asked for their money back. He
promptly returned all the company's money with a sizable profit
- but not through liquidating their investments, as he claimed.
Instead, he raised the money by secretly transferring out other
peoples' money through a misallocation scheme.
For two years he misrepresented his strategy as fully- hedged
and low- risk. Unbeknownst to anyone he was commingling the company's
funds with other investors' funds, placing futures trades, and
routinely shifting profitable trades to some clients and losses
to other clients through massive trade misallocations, while simultaneously
generating enormous commissions, fees, and income for himself.
The following year, the company gave him another shot, by investing
$28.1 million, but told him to buy only short-maturity Treasury
securities. Instead, he covertly shifted almost all of the company's
money back to other clients who wanted to cash out of the accounts
which he had previously plundered.
Within six months the company again questioned his trading. When
confronted, he admitted that he had engaged in unauthorized options
trading. He then told the company that it would have a very sizable
$2 million loss if he liquidated their investments right away.
In reality, the losses amounted to $26 million.
Relying on his version of events, they instructed him to try to
recoup the company's losses, and to do so he placed increasingly
risky bets in Treasury options for their account. Finally, when
it was determined that he could not recover any more of the company's
funds, the company disclosed to its shareholders that it had lost
$15.9 million on its investments.
What Did You Learn, Class?
One enterprising fellow offered a "Treasury Bond Futures" trading
course to the public, promising to teach a trading methodology
that would yield high returns over a short period. He offered a
double-your-money-back guarantee if students did not earn at least
a certain weekly sum after using the process for a few weeks.
He stated that he was an experienced and successful futures trader
whose successes resulted in an opulent lifestyle. He was, however,
neither experienced nor successful as a commodity trader and was,
in fact, verging on bankruptcy.
He would show account statements for his own account reflecting
phony trading profits to reinforce his assertions that he was a
profitable, high-volume trader. He claimed to have taught
students to become successful traders using his trading methods,
when in fact he hadn't. He also never returned any tuition
payments.
A Whale of a Lie
09/17/02 WASHINGTON, D.C. - The U.S. Commodity Futures Trading
Commission filed an enforcement action in federal court in Florida
against defendants Donald C. O'Neill, and eight interrelated companies
he owned, controlled, or managed.
The companies named are: Frecom Technology, a Delaware
corporation, Shelaley Holdings, LLC, a Nevada Corporation,
and Momentum Trading Group, Inc., NDT Fund, LLC, Orca Funds,
Inc., Orca Capital Fund A, LLC of Florida, Orca Mohave
A, LLC and Orca Hopi A, LLC, all Florida corporations.
He referred to some of the companies as a "foreign currency
hedge fund" or an "alternative asset management" firm.
They are charged with fraudulent solicitation and with misappropriating
at least $10.6 million of $13 million from 29 investors for the
purpose of trading foreign currency futures contracts then using
the investors' money for business, personal, and luxury expenditures
between January 2001 and continuing through at least July 2002.
The complaint also names as relief defendants his wife, mother-in-law
and brother who allegedly received investor funds. A federal court
order freezes the assets of the defendants and prohibits the destruction
of documents.
O'Neill spent at least $5.75 million to finance an extravagant
lifestyle that included a nearly $3 million home for himself and
two other houses for his wife and mother-in-law in an exclusive
Florida coastal community; several high-end automobiles; more than
$900,000 in airplane charters; and junkets to Las Vegas over a
period of 45 days that resulted in gambling losses of over $800,000.
According to the complaint, defendants even traded some portion
of investors' funds and sustained an overall net trading loss of
around $487,000.
When soliciting the funds and attempting to lull investors who
inquired about their investments O'Neill claimed to have hundreds
of millions of dollars under management, although he never did;
to have substantial trading experience with a financial firm that
did not exist; and to have traded investors' funds at two brokerage
firms, when those firms, in fact, were only corporate accommodation
addresses that O'Neill created, and never existed as going concerns.
Among the victims of the fraud were two groups of Native American
investors -- the Fort Mojave tribe and the Hopi Tribal Housing
Authority. Their investments represented nearly $10 million of
the total money raised in the scheme.
In its continuing litigation, the CFTC is seeking preliminary
and permanent injunctive relief, an accounting, restitution to
customers, disgorgement of ill-gotten gains, and civil monetary
penalties of $120,000 or triple the monetary gain, whichever is
greater, for each violation of the Commodity Exchange Act.
CFTC Division of Enforcement staff responsible for this case include
Susan Bovee, Wendy Z. Woods, Ghassan Hitti, Patricia Gomersall,
and Alan Edelman.
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