Monex Deposit Company and two affiliated companies (collectively, “Monex”), and Louis Cabrini and Michael Cabrini, the firms’ principals, were charged in a civil complaint by the Commodity Futures Trading Commission with fraud and engaging in illegal precious metals transactions with retail clients. The complaint was filed in a federal court in Illinois.

According to the CFTC’s complaint, from July 16, 2011, through March 31, 2017, Monex offered leveraged precious metals trading to retail clients through its “Atlas” trading program. Through this program, retail clients purchased and sold precious metals; paid only a portion of the purchase price; and either borrowed the difference (for purchases) or borrowed the metal (for sales). Clients were subject to margin calls if the value of their account equity declined below a certain level (determined in Monex’s discretion), and forced liquidation, if the value of their account value fell to 7 percent.

The CFTC charged that these leveraged purchase and sales to retail clients constituted prohibited off-exchange futures contracts, and that Monex operated as a futures commission merchant without required registration in facilitating these transactions.

In addition, the CFTC claimed that Monex made material misrepresentations in their claims regarding the Atlas program and that the misstatements constituted fraud. The CFTC alleged that 12,000 leveraged Atlas accounts sustained more than $290 million in losses during the relevant period. Additionally, the CFTC charged that Atlas customers never took possession or control of precious metals they purchased.

In a "Response of Monex to CFTC Law Suit" (click here to access), Monex "vehemently" denied the CFTC’s allegations, claiming that its physical precious metals transactions were exempt from CFTC jurisdiction and that its disclosures to customers “satisfy all regulatory requirements.” The CFTC seeks a permanent injunction, cease-and-desist order, rescission of all contracts and agreements with customers, restoration of all initial payments by customers to Monex and a civil monetary penalty against all defendants.

Prior to filing this lawsuit, the CFTC prevailed in legal actions to compel Monex to produce various documents in response to an investigative subpoena, and later to authorize the Commission to use all documents it received from Monex in any enforcement proceeding against the company. Monex had argued that the CFTC lacked authority to investigate it because the firm was outside the CFTC’s jurisdiction. The federal appeals court in Illinois rejected this argument, claiming the issue of jurisdiction was factual and that the CFTC had authority to require the productions of documents that were relevant to any potential enforcement action. (Click here to access the decision of the US Court of Appeals for the Seventh Circuit.)

Legal Weeds: Under relevant law, all contracts for commodities for future delivery when offered to retail clients on a leveraged or margined basis, or financed “by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis,” must be executed on or subject to the rules of a designated contract market. (Click here to access 7 U.S.C § 2(c)(2)(D(i)) and here to access 7 U.S.C. § 6(a)(1).)

Contracts for commodities that result in actual delivery within 28 days or create an enforceable obligation to deliver between a seller and buyer that have the ability to deliver and accept delivery, respectively, in connection with their line of business, are exempt from this requirement. (Click here to access 7 U.S.C § 2(c)(2)(D(ii)(III).)

Given the arguments raised by Monex during the CFTC’s subpoena enforcement action and its written response, it would not be surprising if the defendants make a motion to dismiss at least some of the charges in the Commission’s lawsuit, arguing that its Atlas program transactions are within this exemption and outside the CFTC’s jurisdiction. Suggesting this, Monex said that it “makes delivery of precious metals to every customer on every sale, including financed transactions where the precious metals are held in an independent depository in the customer’s name” in its written response to the Commission’s complaint.

The CFTC’s anti-manipulation authority adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits manipulation or the dissemination of false information in connection with transactions involving commodities in interstate commerce – not just with futures or swaps. (Click here to access 7 U.S.C § 9(1) and here for CFTC Rule 180.1.)