CFTC Cases: Cash Flow Financial Must Pay Over $91.9M in Commodity Pool Ponzi Scam, BNP Paribas to Pay $140K Over Improper Segregation of Customer Funds, & Unauthorized Trading Leads to $500K Penalty

Cash Flow Financial Embroiled in Commodity Pool Ponzi Scam
The U.S. Commodity Futures Trading Commission said that Cash Flow Financial LLC, Alan James Watson, and Michael S. Potts will pay over $91.9 million for their involvement in a commodity pool Ponzi scam. The regulator claims that the defendants fraudulently solicited at least $45M from over 600 investors and misappropriated most of their money for their own spending and to cover principal and supposed “returns” to other commodity pool investors.

As part of the default judgment, Cash Flow Financial/Watson must pay restitution and a $2M civil monetary penalty, and interest. The firm is permanently enjoined from taking part in commodity futures, options, swaps, forex, and securities futures product transactions. Potts must pay an over $558K penalty, interest, and disgorge over $186K in illicit profits. Watson will pay over $37M in restitution.

Also, in Virginia, Watson pleaded guilty to wire fraud in a related criminal case. He must serve 12 years behind bars.

BNP Paribas Securities Resolves Charges of Improper Investments Related to Segregated Customer Monies
BNP Paribas Securities Corp. will pay a civil penalty of $140K to settle charges accusing the registered Futures Commission Merchant of violating the regulator’s limits that apply to segregated commodity customer funds and how they are invested. The firm reported two violations to the agency and another one was discovered by CME Group Inc., which is FCM’s designated self-regulatory organization.

According to CFTC, on two of three days, BNP Paribas Securities invested over 10% of segregated customer funds in a money market mutual fund, which was a violation. Also, BNP purportedly invested over 50% of segregated customer funds in money market mutual funds, which was also a violation.

Aside from the monetary penalty, BNP Paribas Securities must cease and desist from violating these same CFTC Regulations in the future. The firm also has to regularly evaluate procedure and policies and make sure staff is trained to ensure proper regulator compliance.

Illinois Court Orders Futures International and Its COO to Pay $500K Penalty for Unauthorized Trading and Other Failures
In the U.S. District Court for the Northern District of Illinois, Judge Robert Gettleman submitted a consent order resolving CFTC charges against Futures International LLC and COO Amedeo Cerrone. The order contends that both of them did not do an adequate enough job of recoding customer orders, failed to keep up the required records involving commodity futures transactions, engaged in unauthorized trading, turned in order tickets that had bogus timestamps, and did not provide sufficient supervision. Cerrone and Futures International will together pay a $500K civil monetary penalty.

Per the court order, from 1/09 and 11/12, the Chicago-based firm did not record all customer orders right upon getting them, which it is required to do under CFTC Regulations. Instead, employees frequently recorded the orders only after they were executed. Cerrone purportedly knew that Futures International employees were regularly time stamping blank order tickets and then using these to document trades to make it look as if the firm was in compliance with the requirements for record keeping. These order tickets were then sent to the Chicago Mercantile Exchange to be cleared.

The order says that Cerrone also was aware that firm employees were communicating about commodity futures transactions electronically, including via instant message, but that the firm did not keep full records of these exchanges. Because of this, there was an incomplete audit trail that impeded the regulator’s efforts to probe whether violations of CFTC Regulation and the Commodity Exchange Act had taken place.

Futures International is also accused of improperly exercising discretion over the accounts of commercial customers without obtaining written powers of attorney and making trades without getting customer directions as to which and how much of a commodity to buy. The firm’s employees are accused of executing trades without knowing in advance whether there was any customer that would accept the trade.

Alan James Watson, Cash Flow Financial LLC, and Michael S. Potts Ordered to Pay More than $91.9 Million in Final Disposition of Commodity Pool Ponzi Scheme Case, CFTC, October 20, 2015

The BNP Paribas Securities Order in the CFTC Case (PDF)

Federal Court in Illinois Orders Futures International LLC and its Chief Operating Officer, Amedeo Cerrone, to Pay $500,000 Penalty for Recordkeeping Violations, False Statements, Unauthorized Trading, and Supervision Failures, CFTC, September 25, 2015