CFTC swoops on FX fraud

WASHINGTON -- The Commodity Futures Trading Commission (CFTC) last week filed its first complaint against an FX trading service, following new regulations for FX trading brought in last December.

The complaint, filed on April 18, against Boca Raton, Florida-based SunState FX and its chief investment officer Ulrich Garbe, claimed the firm illegally offered FX options to the retail public, and fraudulently operated a commodity pool with funds solicited for trading FX futures.

The CFTC said in a statement that SunState FX violated the newly amended Commodity Exchange Act and Commissions regulations by trading retail FX options without being a "designated contract market".

This was one of the new regulations brought into effect in December, which effectively outlawed many FX trading services.

Trading with counterparties worth less than $10 million was restricted to a list of designated institutions, including futures commissions merchants, broker/dealers and financial institutions and exchanges, among others.

Some FX trading services responded to the regulations by seeking to register with the CFTC as a futures commissions merchant (FX Week April 16) -- although it is still not clear how long firms have to re-register before they have to stop trading.

The December regulations brought all retail FX trading clearly within the CFTC’s jurisdiction for the first time. A spokesperson for the CFTC in Washington told FX Week that, previously, trading services acting fraudulently could escape litigation if they were trading spot FX because it was not regulated by the CFTC.

The CFTC said SunState also acted fraudulently by soliciting money from investors to trade foreign currencies, and using the money in a commingled fund to trade commodity futures.

The Commodity Exchange Act requires FX trading services to keep investors’ money in separate trading accounts.

"SunState and Garbe have solicited, accepted and pooled funds from investors, purportedly to trade forward and spot foreign currency," said a statement released by the CFTC last week.

In April 2000, SunState and Garbe defrauded investors by misappropriating and transferring $1 million of their commingled funds into a commodity trading account, and using the money to trade commodity futures, the statement continued. This means SunState operated a commodity pool that was not registered with the Commission.