Opinion
Case No. 5:01-CV-0362-8 (HL)
April 23, 2002
Notice to the Commission: Lael E. Campbell, Esq., Division of Enforcement Michael Lee, Vincent A. McGonagle, Attorneys for Commodity Futures Trading Commission Washington, D.C.
Notice to the Monitor: Dan Driscoll, National Futures Association, Chicago, IL.
Notice to the Defendant: Ellery Coleman, Warner Robins, GA.
CONSENT ORDER OF PERMANENT INJUNCTION AND TO PAY A CIVIL MONTETARY PENALTY
On September 13, 2001, Plaintiff, the Commodity Futures Trading Commission (the "Commission"), filed and served the complaint in this matter against Defendant Ellery Coleman d/b/a Granite Investments ("Coleman") seeking injunctive and other equitable relief for violations of the Commodity Exchange Act (the "Act"), as amended, 7 U.S.C. § 1et seq. (2001), and Regulations promulgated thereunder, 17 C.F.R. § 1et seq. (2001). The Court entered a Consent Order of Preliminary Injunction against Coleman on October 3, 2001.
I. CONSENTS AND AGREEMENTS
1. To effect settlement of the matters alleged in the Complaint in this action without a trial on the merits or any further judicial proceedings, Coleman consents to the entry of this Consent Order of Permanent Injunction. ("Order").
2. Coleman acknowledges service of the summons and complaint.
3. Coleman admits that this Court has jurisdiction over him and the subject matter of this action.
4. Coleman admits that venue properly lies with this Court pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1 (1994).
5. In addition, Coleman waives: (a) all claims which he may possess under the Equal Access to Justice Act, 5 U.S.C. § 504 (1994) and 28 U.S.C. § 2412 (1994), as amended by Pub.L. No. 104-121, §§ 231-32, 110 Stat. 862-63, and Part 148 of the Commission's Regulations, 17 C.F.R. § 148.1 et seq., to seek costs, fees and other expenses relating to, or arising from, this action; (b) the entry of findings of fact and conclusions of law in this action as provided by Rule 52 of the Federal Rules of Civil Procedure, except as provided below in Section II; (c) any claim of Double Jeopardy based upon the institution of this proceeding or the entry in this proceeding of any order imposing a civil monetary penalty or any other relief; and (d) all rights of appeal from this Order.
6. By consenting to the entry of this Order, Coleman neither admits nor denies the allegations of the Complaint or findings or conclusions in this Order except as set forth in paragraphs 3 and 4 above. Coleman agrees that neither he nor any of his agents, servants, employees, contractors or attorneys shall take any action or make any public statement denying, directly or indirectly, any allegation in the Complaint or findings or conclusions in the Order or creating, or tending to create, the impression that the Complaint or this Order is without a factual basis; provided, however, that nothing in this provision shall affect Coleman's (a) testimonial obligations; or (b) right to take legal positions in other proceedings to which the Commission is not a party. Coleman shall take all necessary steps to ensure that all of his agents, servants, employees, contractors and attorneys understand and comply with this agreement.
7. Coleman agrees that he has read this Order and agrees to this Order voluntarily and that no promise or threat has been made by the Commission or any member, officer, agent or representative thereof, or by any other person, to induce consent to this Order, other than as set forth specifically herein.
8. Coleman consents to the continued jurisdiction of this Court for the purposes of enforcing this order and for any other purposes relevant to this case.
II. FINDINGS
The Court, being fully advised in the premises, finds that there is good cause for the entry of this Consent Order and that there is no just reason for delay. The Court therefore directs the entry of findings of fact, conclusions of law and a permanent injunction and ancillary equitable relief, pursuant to § 6c of the Act, 7 U.S.C. § 13a-1 (1994), as set forth herein. THE COURT FINDS THAT:
1. This Court has jurisdiction over the subject matter of this action and all parties hereto pursuant to Section 6c of the Commodity Exchange Act, as amended ("Act"), 7 U.S.C. § 13a-1 (2001), which authorizes the Commission to seek injunctive relief against any person whenever it shall appear that such person has engaged, is engaging or is about to engage in any act or practice constituting a violation of any provision of the Act or any rule, regulation or order thereunder.
2. Venue properly lies with this Court pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1, in that the defendant is found in, inhabits, or transacts business in this district, and the acts and practices in violation of the Act have occurred, are occurring, or are about to occur within this district.
3. Plaintiff Commodity Futures Trading Commission is an independent federal regulatory agency that is charged with responsibility for administering and enforcing the provisions of the Act, 7 U.S.C. § 1 et seq. (2001), and the Regulations promulgated thereunder, 17 C.F.R. § 1 et seq. (2001).
4. Defendant Coleman, individually and d/b/a Granite Investments, is a sole proprietorship located in Warner Robins, Georgia. Neither Coleman nor Granite Investments is registered with the Commission as a Commodity Trading Advisor ("CTA") or in any other capacity.
5. Defendant Coleman engaged in conduct in violation of Section 4 o of the Act, 7 U.S.C. § 6 o, Commission Regulations 4.16 and 4.41(a) and (b), 17 C.F.R. § 4.16 and 4.41(a) and (b), and the Commission's May 1, 2000 Order, In the Matter of Ellery Coleman d/b/a Granite Investments, Order Instituting Proceedings Pursuant To Sections 6(c) and 6(d) Of The Commodity Exchange Act and Findings and Order Imposing Sanctions, CFTC Docket No. 00-16 (May 1, 2000) ("Commission's May 1, 2000 Order"). (attached as appendix)
III. ORDER OF PERMANENT INJUNCTION
IT IS HEREBY ORDERED THAT:
1. Defendant Coleman is permanently restrained, enjoined and prohibited from directly or indirectly:
(a) Employing any device, scheme or artifice to defraud any client or participant or prospective client or participant, or engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon any client or participant or prospective client or participant in violation of Section 4 o of the Act, 7 U.S.C. § 6 o.
(b) Advertising in a manner that employs any device, scheme or artifice to defraud any client or participant or prospective client or participant, or involves any transaction, practice, or course of business that operates as a fraud or deceit upon any client or participant or prospective client or participant in violation of Commission Regulation 4.41(a), 17 C.F.R. § 4.41(a).
(c) Presenting the the performance of any simulated or hypothetical commodity interest account, transaction in a commodity interest or series of transactions in a commodity interest of a commodity pool operator, CTA, or any principal thereof, unless such performance is accompanied by one of the following:
i. The following statement: "Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown."
ii. A statement prescribed pursuant to rules promulgated by a registered futures association pursuant to section 17(j) of the Act,
or presenting any simulated or hypothetical performance by any means other than oral, without one of the prescribed statements described above in paragraphs i. and ii. being prominently disclosed, in violation of Commission Regulation 4.41(b), 17 C.F.R. § 4.41(b).
(d) Representing or implying in any manner whatsoever that Defendant Coleman's abilities or qualifications have in any respect been passed upon, by the Commission, the Federal government or any agency thereof while acting as a commodity pool operator, CTA, principal thereof or a person who solicits therefore in violation of Commission Regulation 4.16, 17 C.F.R. § 4.16.
2. Defendant Coleman is restrained and enjoined from directly or indirectly violating:
(a) Any provision of the Commission's May 1, 2000 Order, including but not limited to the undertakings outlined in Section VI of the Order;
(b) Any other Commission Order.
3. Defendant Coleman is further permanently restrained, enjoined and prohibited from applying for registration or claiming exemption from registration with the Commission in any capacity and engaging in any activity requiring such registration or exemption from registration, except as provided for in Regulation 4.14(a)(9), 17 C.F.R. § 4.14 (a)(9) (2001), or acting as a principal, agent, officer or employee of any person registered, required to be registered, or exempted from registration, except as provided for in Regulation 4.14(a)(9), 17 C.F.R. § 4.14(a)(9) (2001).
4. The injunctive provisions of this Consent Order shall be binding upon Coleman, upon any person insofar as he or she is acting in the capacity of officer, agent, servant, employee or attorney of Coleman, and upon any person who receives actual notice of this Consent Order, by personal service or otherwise, insofar as he or she is acting in active concert or participation with Coleman.
IV.
ORDER TO PAY A CIVIL MONETARY PENALTY
IT IS FURTHER ORDERED THAT:
1. Defendant Coleman shall pay a contingent civil monetary penalty in the amount of up to one hundred and seventy thousand dollars ($170,000) pursuant to the payment plan set forth below. Pursuant to the plan, Defendant Coleman shall make an annual civil monetary penalty payment ("Annual CMP Payment") as directed by a Monitor designated by the Plaintiff Commission ("the Monitor") on or before July 31 of each calendar year, starting in calendar year 2002 and continuing for ten years (or until the civil monetary penalty is paid in full, if that happens first). The ten-year period shall run from January 1, 2001 through December 31, 2010, and Annual CMP Payments shall take place by July 31 of the following year. Therefore the first Annual CMP Payment for the year 2001 shall take place on or before July 31, 2002, and the final Annual CMP Payment for the year 2010 shall take place on or before July 31, 2011, unless the entire amount of the contingent civil monetary penalty has been paid in full prior to that date. Defendant Coleman shall make each such Annual CMP Payment by electronic funds transfer, or by U.S. postal money order, certified check, bank cashier's check, or bank money order, made payable to the Commodity Futures Trading Commission, and sent to Dennese Posey, or her successor, Division of Trading and Markets, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington D.C. 20581 under cover of a letter that identifies Defendant Coleman and the name and docket number of the proceeding. A copy of the cover letter and the form of payment shall be simultaneously transmitted to the Division of Enforcement, Commodity Futures Trading Commission, at 1155 21st Street, N.W., Washington, D.C. 20581. Defendant Coleman's contingent civil monetary penalty obligation will terminate at the end of the ten-year payment period.
2. The amount of Defendant Coleman's Annual CMP Payment shall consist of a portion of (1) the adjusted gross income (as defined by the Internal Revenue Code) earned or received by Defendant Coleman during the course of the preceding calendar year, plus (2) all other net cash receipts, net cash entitlements or net proceeds of non-cash assets received by Defendant Coleman during the course of the preceding calendar year. The Annual CMP Payment will be determined as follows:
(a) Where Adjusted Gross Percent of total to be Income Plus Net Cash paid by Defendant Coleman Receipts Total: is:
Under $25,000 0%
$25,000 up to and 20% of the amount between including $50,000 $25,000 and $50,000
$50,000 up to and $5,000 (20% of $25,000) including $100,000 plus 30% of the amount between $50,000 and $100,000
Above $100,000 $20,000 (20% of $25,000 plus 30% of 50,000) plus 40% of the amount above $100,000
(b) Defendant Coleman shall cooperate fully and expeditiously with the Monitor and the Commission in carrying out all duties with respect to the civil monetary penalty payments. He will cooperate fully with the Monitor and the Commission in explaining his financial income and earnings, status of assets, financial statements, asset transfers and tax returns, and shall provide any information concerning himself as may be required by the Commission and/or the Monitor. Furthermore, Defendant Coleman shall provide such additional information and documents with respect thereto as may be requested by the Commission and/or the Monitor.
3. Defendant Coleman agrees that the National Futures Association is hereby designated as the Monitor for a period of eleven years commencing January 1, 2002. Notice to the Monitor shall be made to Daniel A. Driscoll, Esq., Executive Vice President, Chief Compliance Officer, or his successor, at the following address: National Futures Association, 200 West Madison Street, Chicago, IL 60606.
4. Defendant Coleman shall provide a sworn financial statement to the Commission, by providing it to the Monitor on June 30 and December 31 of each calendar year, starting June 30, 2002 and continuing through and including December 31, 2011. The financial statement shall provide:
(a) A true and complete itemization of all of Defendant Coleman's rights, title and interest (or claimed in) any asset, wherever, however and by whomever held;
(b) An itemization, description and explanation of all transfers of assets with a value of $1,000 or more made by or on behalf of Defendant Coleman over the preceding six-month interval; and
(c) A detailed description of the source and amount of all of Defendant Coleman's income or earnings, however generated.
Defendant Coleman shall also provide the Monitor with complete copies of his signed federal income tax returns, including all schedules and attachments thereto (e.g., IRS Forms W-2) and Forms 1099, as well as any filings he is required to submit to any state tax or revenue authority, on or before June 30 of each calendar year, or as soon thereafter, beginning in 2002 and ending in 2011. If Coleman moves his residence at any time he shall provide written notice of his new address to the Monitor and the Commission, through the Director, Division of Enforcement, Commodity Futures Trading Commission, at 1155 21St Street, N.W., Washington, DC 20181, within ten calendar (10) days thereof.
If, during the same time period, Defendant Coleman elects to file a joint tax return, he shall provide all documents called for by this paragraph, including the signed and filed joint tax return, plus a draft individual tax return prepared on IRS Form 1040 containing a certification by a licensed certified public accountant that the "Income" section (currently lines 7-22 of Form 1040) truly, accurately and completely reflects all of Defendant Coleman's income, that the "Adjusted Gross Income" section truly, accurately and completely identifies all deductions that Defendant Coleman has a right to claim, and that the deductions contained in the "Adjusted Gross Income" section are equal to or less than 50% or the deductions that Defendant Coleman is entitled to claim on the joint tax return; provided however that Defendant Coleman may claim 100% of the deductions contained in the "Adjusted Gross Income" section that are solely his. Such individual tax return shall include all schedules and attachments thereto (e.g., IRS Forms W-2) and Forms 1099, as well as any filing required to be submitted to any state tax or revenue authority.
5. Based on the information contained in Defendant Coleman's tax returns, Defendant Coleman's sworn Financial Disclosure Statement and other financial records provided to the Commission, the Monitor shall calculate the Annual CMP Payment to be paid by Defendant Coleman for that year. On or before July 31 of each year, and starting in calendar year 2002, the Monitor shall send written notice to Defendant Coleman with instructions to immediately pay the Annual CMP Payment.
6. Any failure by Defendant Coleman to carry out any of the terms, conditions or obligations under any paragraph of this Order shall constitute an Event of Default. If any Event of Default occurs, the Commission (or its designee) shall be entitled to:
(a) an order requiring immediate payment of any unpaid Annual CMP Payments, or, at the Commission's option, the entire unpaid balance, or any unpaid portion, of the civil monetary penalty; and/or
(b) move the Court for imposition of all other available remedies, including, but not limited to, an order holding Defendant Coleman in contempt for violation of this Order.
7. Upon the occurrence of an Event of Default based upon a claim or cause of action that Defendant Coleman failed to make any Annual CMP Payments when due, Defendant Coleman will be barred from asserting any defense, including expiration of any statute of limitations, waiver, estoppel or laches, where such defense is based on the alleged failure of the Commission to pursue such claims or causes of action during the pendency of this civil action, during the negotiation of the Defendant Coleman's Consent to this Order or while this Order remains in effect. The only issue that Defendant Coleman may raise in defense is whether he has made the Annual CMP Payments as directed by the Monitor. Any motion by the Commission for entry of an order pursuant to this paragraph requiring payment of less than the full amount of the civil monetary penalty, or any acceptance by the Commission of partial payment of the Annual CMP Payments made by the Defendant Coleman, shall not be deemed a waiver of the Commission's right to require Defendant Coleman to make further payments pursuant to the payment plans set forth above, or, in the event of a further Event of Default, a waiver of the
Commission's right to require immediate payment of the entire remaining balance, or any unpaid portion, of civil monetary penalty.
8. Based upon Defendant Coleman's sworn representations in his Financial Disclosure Statements and other evidence provided by Defendant Coleman to the Commission regarding his financial condition, the Commission has agreed that this Order would not require his immediate payment of the entire civil monetary penalty. The Commission's determination not to require immediate payment of the entire civil monetary penalty is contingent upon the accuracy and completeness of Defendant Coleman' Financial Disclosure Statements and other evidence provided by Defendant Coleman regarding his financial condition. If at any time following the entry of this Order, the Commission obtains information indicating that Defendant Coleman's representations to the Commission concerning his financial condition were fraudulent, misleading, inaccurate or incomplete in any material respect as of the time such representations were made, the Commission may move this Court for an order requiring Defendant Coleman to make immediate payment of his entire civil monetary penalty, or of any portion thereof, the amount of which shall be determined by the Commission. In connection with any such motion, the only issues shall be whether the financial information provided by Defendant Coleman was fraudulent, misleading, inaccurate or incomplete in any material respect as of the time such representations were made. In its motion, the Commission may move this Court to consider all available remedies, including, but not limited to, ordering Defendant Coleman to pay funds or transfer assets or directing the forfeiture of any assets, and the Commission may also request additional discovery. Defendant Coleman may not, by way of defense to such motion, challenge the validity of his Consent or this Order, or contest any of the findings of fact or conclusions of law set forth in this Order, assert that payment of a civil monetary penalty should not be ordered, or contest the amount of the civil monetary penalty to be paid. If in such motion the Commission moves for, and the Court orders, payment of less than the full amount of the civil monetary penalty, such motion will not be deemed a waiver of the Commission's right to require Defendant Coleman to make further payment pursuant to the payment plans set forth above.
V. MISCELLANEOUS PROVISIONS
1. Upon being served with copies of this Consent Order after entry by the Court, Defendant Coleman shall sign an acknowledgment of such service and serve such acknowledgment on the Commission within seven (7) calendar days.
2. This Court shall retain jurisdiction of this action in order to implement and carry out the terms of all orders and decrees that may be entered herein, to entertain any suitable application or motion for additional relief within the jurisdiction of this Court, and to assure compliance with this Order.
3. If any provision of this Order or the application of any provision or circumstance is held invalid, the remainder of this Order, and the application of the provision to any other person or circumstance, shall not be affected by the holding.
4. All notice required to be given by any provision in this Order shall be sent by certified mail, return receipt requested, as follows:
Notice to the Commission: Lael E. Campbell, Esq., Division of Enforcement Washington, D.C.
Notice to the Monitor: Dan Driscoll, National Futures Association, Chicago, IL.
Notice to the Defendant: Ellery Coleman, Warner Robins, GA.
APPENDIX
CFTC Docket No. 00-16
ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTIONS 6(c) AND 6(d) OF THE COMMODITY EXCHANGE ACT, AS AMENDED, MAKING FINDINGS AND IMPOSING SANCTIONS
I.
The Commodity Futures Trading Commission ("Commission") has reason to believe that Ellery Coleman, individually and d/b/a Granite Investments ("Coleman"), has violated Sections 4b(a)(i) and (iii) and 4o(1) of the Commodity Exchange Act (the "Act"), 7 U.S.C. § 6b(a)(i) and (iii) and 6o(1) (1994), and Section 4.41(a) of the Commission's Regulations, 17 C.F.R. § 4.41(a) (1999). Therefore, the Commission deems it appropriate and in the public interest that administrative proceedings be, and hereby are, instituted to determine whether Coleman engaged in the violations set forth in this Order and to determine whether any Order should be issued imposing remedial sanctions.
II.
In anticipation of the institution of this administrative proceeding. Coleman has submitted an offer of settlement ("Offer"), which the Commission has determined to accept. Without admitting or denying the findings in this Order, and prior to any adjudication on the merits, Coleman acknowledges service of this Order. Coleman consents to the use of the findings in this Order in this or any other proceedings brought by the Commission or to which the Commission is a party.
Coleman does not consent to the use of the Offer or this Order, or the findings herein, as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of this Order. He does not consent to the use of the Offer or the Order, or the findings herein, by any other party in any other proceeding. The findings consented to in the Offer or made in the Order are not binding on any other person or entity in any other proceeding before the Commission.
III.
The Commission finds the following:A. Summary
Ellery Coleman, d/b/a Granite Investments, sells through an Internet website various products and services, including two computer-run commodity trading systems and an advisory service that furnishes subscribers with trading recommendations by e-mail. Through his website, Coleman falsely claims that his trading systems and advisory service have generated huge profits with little risk, and that Coleman has personally made substantial profits through futures trading. Coleman's activities in fraudulently advertising his trading course and trading systems violated Sections 4b(a)(i) and (iii) and 4o(1) of the Act, and Section 4.41(a) of the Commission's Regulations.
The Internet is a highly beneficial medium that facilitates the dissemination of information, but which also enables potential violators to reach millions of people worldwide quickly and at very low cost. By this and other proceedings, the Commission is addressing fraud committed on the internet to promote the integrity of promotions made concerning commodity futures and options trading systems on the web.
B. Respondent
Ellery Coleman, individually and d/b/a Granite Investments, is a sole proprietorship located at 133 Bunkers Trail, Warner Robins, Georgia 31088. Neither Coleman nor Granite Investments is registered with the Commission as a Commodity Trading Advisor ("CTA").
C. Facts
Products And Services Sold Through The "Choicedaytrades" Website
Granite Investments, through its principal, Ellery Coleman, sells various products and services to assist customers in "daytrading" SP 500 futures, including computer-run commodity trading systems, on-line training, a book on commodities trading authored by a third party, and subscriptions to an advisory service that provides specific trading recommendations. Coleman began selling his products and services in 1997 through mail solicitations, and then in approximately July 1998 began conducting sales and marketing through an Internet website (www.choicedaytrades.com).
Among the products and services available through the Internet site are two commodity trading systems that generate trading recommendations in SP 500 futures — the SP Savvy and the Reliable Pattern Match ("RPM"). Purchasers of the trading systems receive computer software, a manual for trading SP 500 futures, and access to online training. Customers purportedly use these trading systems by entering each day's opening, high, low, and closing prices, after which the systems generate three to four "scenarios" for the next day's trading, including specific entry and exit prices. Coleman also sells Choice Daytrades, a subscriber service through which customers receive trading recommendations via e-mail. On the website, Coleman claims that he relies on a trading system to inform the recommendations he makes to Choice Daytrades subscribers, but that he also exercises "some discretion" in selecting the recommended trades. These services can be purchased on a quarterly or annual basis, with annual prices ranging from $2450 to $3995.
Claims Concerning Profits
Coleman's website claims that his advisory service and trading systems have generated extraordinary profits. For instance, Coleman claims:
The website purports to provide a disclaimer with respect to the profits attributable to Choice Daytrades recommendations. Specifically, the website states that "some" but "not all" of the trades recommended to subscribers were "taken in real time with real money," and therefore "[t]he CFTC requires" a disclaimer. The disclaimer provided is the one set forth in Section 4.41(b) of the Commission's Regulations for hypothetical or simulated performance results. However, in most instances, the website fails to specify which claims or trades attributed to the Choice Daytrades advisory service are the result of hypothetical or simulated trading.
• "Day Trading the SP 500" through Choice Daytrades — "$144,650 per contract in 1999"
• "SP Savvy up $44,050 for March99 contract"
• SP Savvy had a "net profit of $62,425" per December98 contract. . . Return on account 2041%"
• SP Savvy "made at least $25,000 for each contract period in the last three years"
• RPM "Results: Up $151,500 per 2 contracts on 1997"
• If customers had traded through RPM on October 15, 1998, they would have seen a "profit of a whopping $28,250" (emphasis in original)
Coleman has also represented that he trades SP futures for his own account, and that he has made huge profits by using his trading systems. For example, Coleman states that:
• On October 15, 1998 when the SP long position shot up over 20 before noon, "[i]t is my custom to take profits of 20 points when up that much by noon, so we made $10,000 per 2 contracts very quickly." Coleman added that "[t]his was not a hypothetical trade but was actually traded." (emphasis in original); and
• He achieved a profit of $13,361.57 in seven days and "tripled the account."
Coleman's own trading demonstrates that his claims about profits associated with the advisory service and trading systems are false. Of Coleman's three commodity trading accounts, two reflect trades of March99 contracts. Those trades resulted in a net loss of $431.22. Additionally, none of the three accounts reflect any trades involving December98 contracts. In fact, Coleman's first account, which was opened in January 1995 and closed one month later. sustained a net loss of $2,289.74. In another account opened in September 1996 and closed in April 1998, Coleman lost $4,782.54. In a third account, which was opened in February 1997, he achieved a short-term profit of over $13,000, as he claims on his website, but rather than tripling in value, as he claims, further trading resulted in losses of $4,961.56. Finally, on the day Coleman claims to have made a quick $10,000 profit on a SP long position, there is no record that any trades were executed on his behalf.
Claims Concerning Risk of Loss
Through his website, Coleman claims that his trading systems minimize the risk of trading losses. For instance, Coleman promises to:
• "keep your risk low" because the contract is not held overnight
• minimize risks because "nothing stacks the odds in your favor like [it]"
• provide a system "with low risk stops."
These claims are also false. As exemplified by Coleman's own trading of SP 500 futures, his trading systems do not minimize the risks of trading.
D. Legal Discussion
Coleman Violated sections 4b(a)(i) and (iii) of the Act
Sections 4b(a)(i) and (iii) of the Act provide that is shall be unlawful, in or in connection with any order to make or the making of a futures contract, for or on behalf of any other person, (i) to cheat or defraud, or attempted to cheat or defraud, such other person, or (iii) willfully to deceive or attempt to deceive such other person by any means whatsoever in regard to any such order or contract or the disposition or execution of any such contract, or in regard to any act of agency performed with respect to such order or contract for such person. Misrepresentations and omissions of material facts made with scienter regarding futures transactions constitute fraud under Section 4b(a) of the Act. Additionally, Sections 4b(a)(i) and (iii) require that the material misrepresentations and omissions of material facts be made "in connection" with futures transactions.
In these Matter of RW Technical Services, Inc., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,582 at 47, 740-47, 741 (CFTC Mar. 16, 1999), aff'd in relevant part, RW Technical Svcs., Inc. v. CFTC, 2000 WL 217498 (5th Cir. Feb. 24, 2000). See, e.g. Saxe v. E.F. Hutton, 789 F.2d 105, 110 (2d Cir. 1986); Kelley v. Carr, 442 F. Supp. 346, 351-54 (W.D. Mich. 1977), aff'd in part, rev'd in part, 691 F.2d 800 (6th Cir. 1980); CFTC v. J.S. Love Associates Options, Ltd., 422 F. Supp. 652, 655 (S.D.N.Y. 1976).
Fraudulent statements that induce members of the public to purchase software that generates specific buy and sell signals for commodity futures trading satisfy the "in connection with" requirement of Section 4b(a). RW Technical Svcs., 2000 WL at *5-6. See also Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977) (noting that the "in or in connection with" requirement should be interpreted flexibly to include deceptive conduct that occurs prior to the opening of an actual commodity trading account).
Coleman has violated Sections 4b(a)(i) and (iii) through fraudulent acts by: misrepresenting that recommendations generated by his advisory service and trading systems have generated huge profits, including in his own trading; and minimizing the risks of trading SP 500 futures through the system. Coleman also represented that his systems had generated tremendous profits, knowing that such claims were not based on actual trading, but rather on hypothetical trading. "Because simulated results inherently overstate the reliability and validity of an investment system, and because extravagant claims understate the inherent risks in commodities trading, a reasonable investor would find [such] fraudulent misrepresentations to be material." RW Technical Svcs., 2000 WL at *3. See also CFTC v. Skorupska, 605 F. Supp. 923, 933 (E.D. Mich. 1985) (misrepresenting performance tables as being actual trading results violated Section 4b of the Act).
Coleman Violated Section 4o(1) of the Act and Section 4.41 of the Regulations
Section 4o(1) of the Act prohibits CTAs from (a) employing any device, scheme or artifice to defraud any client or participant or prospective client or participant, or (b) engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant. Section 4.41(a) of the Regulations prohibits a CTA or principal thereof from advertising in a fraudulent or misleading manner. Section 4.41(b) of the Regulations makes it unlawful for a CTA to fail to include the required warnings about the limitations of trading performance numbers based upon hypothetical or simulated data.
Section 4.41(b) of the Regulations provides, in relevant part: "(1) No person may present the performance of any simulated or hypothetical commodity interest account, transaction in a commodity interest or a series of transactions in a commodity interest . . . unless such performance is accompanied by one of the following: (i) The following statement "Hypothetical or simulated performance results have certain inherent limitations". Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve the profits or losses similar to those shown'; or (ii) A statement prescribed pursuant to rules promulgated by a registered futures association pursuant to Section 17(j) of the Act; (2) If the presentation of such simulated or hypothetical performance is other than oral, the prescribed statement must be prominently displayed."
In order to establish a violation of Section 4o of the Act and Section 4.41 of the Regulations, the Division must prove that the respondent was (i) a CTA or, with respect to Section 4.41 of the Regulations, a principal thereof, and (ii) either (a) employed any device, scheme, or artifice to defraud any client or prospective client, or (b) engaged in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. Section 4o(1) of the Act which also requires the use of the mails or any means or instrumentality of interstate commerce, prohibits both registered and unregistered CTAs from defrauding their clients. Section 4.41 of the Regulations also applies to all CTAs, regardless of whether those CTAS are required to be registered.
CFTC v. Savage, 611 F.2d 270, 281 (9th Cir. 1979) (enforcement action charging defendant with making false reports to customers, engaging in "wash" trades and holding himself out to the public as a CTA without being registered with the Commission).
Under Section 1a(5) of the Act, in order to establish that someone is a CTA, it must be shown that the person (i) advised another about the value or advisability of trading in futures contracts, (ii) "either directly or through publications, writings or electronic media," (iii) for compensation or profit, unless that person is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" if such publisher's or producer's provision of commodity futures trading advice is "solely incidental to the conduct of [its] business or profession." Coleman gave commodity futures trading advice for compensation or profit and, therefore, is a CTA.
Section 1a(5) of the Act, 7 U.S.C. § 1a(5). Section 4o(1) of the Act and Section 4.41 of the Regulations thus do not apply to a CTA who is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" whose "furnishing of [advice] . . . is solely incidental to the conduct of their business or profession." This exclusion is designed to protect incidental publishers of advice, such as general magazines and newspapers, not publishers who specifically concentrate on commodities advice. RW Technical Svcs., 2000 WL at *7.
See CFTC v. British American Commodity Options Corp., 560 F.2d 135, 141 (2d Cir. 1977), cert. denied, 438 U.S. 905 (1978) (a firm that "offer[ed] opinions and advice, and issued analyses and reports concerning the value of commodities" to customers, was a CTA under the Act.); Gaudette v. Panos, 644 F. Supp. 826, 839 (D. Mass. 1986) (defendants who represented their advisory skills to be exemplary, suggested that plaintiffs open a commodity account and then recommended certain futures contracts for investment were CTAs).
Coleman's claims concerning the profits and risk associated with his advisory service and trading systems violate Section 4o(1) of the Act and Section 4.41 of the Regulations for the same reasons as they violate Sections 4b(a)(i) and (iii) of the Act.
IV. Offer of Settlement
Coleman has submitted an Offer of Settlement ("Offer") in which he, without admitting or denying the findings of fact or conclusions of law in this Order, before the taking of testimony and without adjudication of any issues of fact or law by the Commission, Coleman:
A. Admits the jurisdiction of the Commission with respect to all matters set forth in the Order;
B. Acknowledges service of this Order;
C. Waives:
1. the filing and service of a Complaint and Notice of Hearing;
2. a hearing;
3. all post-hearing procedures;
4. judicial review by any court;
5. any objection to the staff's participation in the Commission's consideration of the Offer;
6. all claims with Coleman may possess under the Equal Access to Justice Act, 5 U.S.C. § 504 (1994) and 28 U.S.C. § 2412 (1994) as amended by Pub.L. No. 104-121, §§ 231-32, 110 Stat. 847 and Part 148 of the Commission's; and Regulations, 17 C.F.R. § 148.1 et seq., relating to or arising from the Order;
7. any claim of Double Jeopardy based upon the institution of this proceeding or the entry of any order imposing a civil penalty or any other relief
D. Stipulates that the record basis on which the Order may be entered consists solely of the Order and the findings consented to in the Offer, which are incorporated in the Order; and
E. Consents, solely on the basis of this Offer, to entry of the Order in the form attached hereto which:
1. makes findings of fact and finds that Coleman violated Sections 4b(a)(i) and (iii) and 4o(1) of the Commodity Exchange Act, as amended (the "Act"), 7 U.S.C. § 6b(a)(i) and (iii) and 6o(1) (1994), and Section 4.41 of the Commission's Regulations, 17 C.F.R. § 4.41(a) (1999). Respondent Coleman consents to the use of these findings in this and any other proceeding brought by the Commission or to which the Commission is a party; provided, — however, Coleman does not consent to the use of the Offer or the Order, or the findings consented to in the Offer, as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of the Order. Respondent Coleman does not consent to the use of the Offer or the Order, or the findings in the Order consented in the Offer, by any other person or entity in this or in any other proceeding; and
2. directs that:
(a) Coleman shall pay a civil monetary penalty of ($10,000) (ten thousand dollars);
(b) Coleman cease and desist form violating Sections 4b(a) and 4o(1) of the Act, 7 U.S.C. § 6b(a) and 6o(1) (1994); and
(c) Coleman shall comply with his undertakings, as set forth in the Order.
V. Findings of Violations
Solely on the basis of the consent evidenced by the Offer, and prior to any adjudication of the merits by the Commission, the Commission finds that Coleman violated Sections 4b(a)(i) and (iii) and 4o(1), and Commission Regulation 4.41(a).VI. Order
Accordingly, IT IS HEREBY ORDERED THAT:
A. Coleman cease and desist from violating Sections 4b(a)(i) and (iii) and 4o(1) of the Commodity Exchange Act (the "Act"), as amended 7 U.S.C. § 6b(a)(i) and (iii) and 6o(1) (1994), and Sections 4.41(a) of the Commission's Regulations, 17 C.F.R. § 4.41(a) (1999);
B. Coleman pay a civil penalty of $10,000. Coleman shall pay the total amount within ten days of the date of the Order by electronic funds transfer, or by U.S. postal money order, certified check, bank cashier's check, or bank money order, made payable to the Commodity Futures Trading Commission, and sent to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 2lst Street, N.W., Washington, D.C. 20581, under cover of a letter that identifies Coleman and the name and docket number of the proceeding; Coleman shall simultaneously transmit a copy of the cover letter and the form of payment to Phyhis J. Cela, Acting Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581; and
C. Coleman shall comply with the following undertakings:
1. Coleman shall not misrepresent, expressly or by implication:
a. the performance, profits or results achieved by, or the results that can be achieved by, users, including himself, of any commodity futures or options trading system or advisory service; and
b. the risks associated with trading pursuant to any commodity futures or options trading system or advisory service;
2. Coleman shall not present the performance of any simulated or hypothetical commodity interest account, transaction in a commodity interest or series of transactions in a commodity interest unless such performance is accompanied by the following statement, as required by 17 C.F.R. § 4.41(b):
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
In doing so, Coleman shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results.
3. Coleman shall not make any representation of financial benefits associated with any commodity futures or options trading system or advisory service without first disclosing, prominently and conspicuously, that futures trading involves high risks with the potential for substantial losses.
4. Coleman shall not represent, expressly or by implication:
a. the performance, profits or results achieved by, or the results that can be achieved by, users, including himself, of any commodity futures or options trading system or advisory service;
b. the risks associated with trading using any commodity futures or options trading system or advisory service;
c. that the experience represented by any user, testimonial or endorsement of the commodity futures or options trading system or advisory service represents the typical or ordinary experience of members of the public who use the system or advisory service;
unless: (i) Coleman possesses and relies upon a reasonable basis substantiating the representation at the time it is made; and (ii) for two (2) years after the last date of the dissemination of any such representation, Coleman maintains all advertisements and promotional materials containing such representation and all materials that were relied upon or that otherwise substantiated such representation at the time it was made, and makes such materials immediately available to the Division of Enforcement for inspection and copying upon request.
6. By neither admitting nor denying the findings of fact or conclusions of law, Coleman agrees that neither he nor any of his agents or employees under his authority or control shall take any action or make any public, statement denying, directly or indirectly, any findings or conclusions in the Order, or creating, or tending to create, the impression that the Order is without factual basis; provided, however, that nothing in this provision affects Coleman's (i) testimonial obligations, or (ii) right to take factual or legal positions in other proceedings in which the Commission is not a party. Coleman will undertake all steps necessary to assure that all of his agents and employees under his authority and control understand and comply with this agreement.
Unless otherwise specified, the provisions of this Order shall be effective on this date.
By the Commission
Jean A. Webb Secretary to the Commission Commodity Futures Trading Commission