1. The Lexus Infomercials

Radio infomercials were Lexus' primary means of attracting customers. Virtually every Lexus customer originally called as a result of hearing one of the infomercials. The Lexus infomercials were the first contact that many customers had with the firm or the commodities industry generally, and they provided the first opportunity for customers to learn about the risks of commodity options investing.

Every one of at least 56 Lexus radio infomercials over a period of four years represented that the cash price of the advertised commodity was about to go up because demand would exceed supply, often due to seasonal patterns, e.g., demand for unleaded gasoline always increases in summer when people take driving vacations, or demand for heating oil always increases in autumn due to the impending onset of colder weather. The Lexus infomercials then represented that Lexus customers who purchased options on futures contracts in the commodity being advertised would profit from these cash price increases, and suggested that there is a one-to-one correlation between an increase in the cash price of a commodity and the resulting profit to the holder of a commodity option.

The Lexus infomercials repeatedly identified a "standard" cash price movement for the commodity, as well as the return that such a price movement purportedly would yield to the holder of a commodity option. Each infomercial also referred at least once to an extraordinary historical cash price movement for the advertised commodity and/or an extraordinary return that could be achieved by the holder of a commodity option in the event the extraordinary price move occurred again.

Lexus' infomercials also downplayed the risks involved with commodity options trading. The infomercials mentioned only briefly that a customer could lose all or part of his investment, and then immediately offset that statement with the suggestion that one could manage the risk by taking advantage of seasonal tendencies or other known supply and demand forces in the cash market for the commodity.

2. The Telephone Sales Solicitations of the Lexus APs

Singer and Luger hired APs with no prior training or experience in analyzing commodity markets or in selling commodity options. When Lexus APs talked to customers who responded to the Lexus infomercials, the Lexus APs routinely repeated the misrepresentations that the customers previously had heard in the infomercials. In particular, Lexus APs: 1) promised an imminent increase in the cash price of the advertised commodity; 2) indicated that there is a direct correlation between the cash price movement of a commodity and the resulting profit on a commodity option; 3) promised customers large and virtually certain profits in a short period of time; and 4) minimized the risk inherent in trading commodity options, as general and fleeting references to risk were nullified by the APs' assurances that purchasing commodity options with Lexus was virtually risk-free.

Finally, in their telephone sales solicitations to customers, Lexus APs often made misrepresentations that overstated the performance records of Lexus' customers. In fact, Lexus' actual trading results for its customers were disastrous - from January 1, 1993 through June 30, 1996, nearly 90% of the 823 accounts opened at Lexus lost money. Total losses in Lexus' unprofitable accounts exceeded $6.8 million, while profits in Lexus' profitable accounts totaled approximately $355,000.

3. Singer and Luger

b. The Role of Singer and Luger in the Lexus Infomercials and Telephone Sales Solicitations

As Singer and Luger were getting the firm off the ground in December 1992, Lexus' sales efforts focused on options on coffee futures contracts. In their own telephone solicitations during that early period, Singer and Luger presented a uniform story about coffee, telling customers that: 1) an international coffee committee would be meeting in a week or two and was going to try to hold back some coffee so that the price of coffee was likely to go up; 2) for every 5 or 10 cents that coffee went up, the holder of a commodity option on coffee would make approximately $1,800 or $3,750, respectively; and 3) coffee, which at the time was trading at about 80 cents, had in the past traded for $1.50. Over time, Singer and Luger continued to engage in telephone solicitations of customers regarding various commodity options, during which they also made most of the same misrepresentations regarding profit potential, risk of loss, and Lexus' performance record, as did the other Lexus APs.

Luger and Singer jointly decided to use the infomercials at Lexus. Luger knew that most Lexus customers came to the firm as a result of hearing those infomercials. Yet, Luger never listened to any one of the Lexus infomercials in its entirety.

Singer appeared in most of the infomercials with another Lexus AP, Todd Alan Thomas.² When Thomas appeared alone in some live infomercials that ran for a few months in 1994, Singer listened to tapes of those infomercials shortly after they aired. Singer set up Thomas as Lexus' on-air spokesperson in the infomercials, discussed everything that was to be in the infomercials with Thomas in advance, and actively encouraged some of the most exaggerated profit claims made by Thomas. In a Lexus heating oil infomercial, for example, Singer described Thomas' prediction of a ten-cent move in the heating oil market as too pessimistic. And in a sugar infomercial, Singer urged Thomas to "forget conservative" in describing the profit potential of trading commodity options on sugar.

c. Knowledge of Singer and Luger

Singer and Luger were aware of the results of the option trades of Lexus' customers. Lexus received a daily equity run from its futures commission merchant showing the positions of each Lexus customer. In addition, Lexus received a duplicate of each customer month-end account statement showing all open positions (including the unrealized gain or loss on those positions) and whether option positions that closed during the month were profitable or had expired worthless.

Singer and Luger also were placed on notice of the misleading nature of the Lexus infomercials on several occasions. First, in mid-1994, Lexus retained a consulting firm to review two Lexus infomercials for compliance with National Futures Association ("NFA") Compliance Rule 2-29, which governs communications between NFA members and the public. The consulting firm presented its conclusions to Lexus in a written report dated September 26, 1994 ("Consultant Report"), which was read by both Singer and Luger.

The Consultant Report specifically warned Lexus that "one could infer from [its infomercial] statements that an option customer would benefit from the full amount of the change in the underlying commodity contract." The Consultant Report noted the misimpression created by the statement in one of the infomercials that "[w]e're looking, conservatively, for a ten-cent move [in heating oil]. Folks, that would bring you back as much as $42,000 in return on premium if you were to see a ten-cent move in the premium of your option." The Consultant Report concluded:

When most of the advertisement centers on the historical trend of the underlying commodity, it can be confusing to switch to discussion of gains or losses in the option premium. An unsophisticated investor could draw the conclusion that the ten-cent rise in heating oil prices would result in $42,000 in profits. In practice, it is highly unlikely that a ten-cent change in heating oil prices would lead to a ten-cent change in the option premium. (Emphasis in the original.)

Second, on July 15, 1995, Singer himself conducted what he termed an "Independent Introducing Broker Examination of Lexus Financial Group," and summarized his findings in a written report ("IIBE Report") that Luger read shortly after it was completed. The IIBE Report was a "self-examination" by Singer and was the only internal audit ever done at Lexus. In evaluating Todd Thomas' performances in the infomercials, Singer wrote in his IIBE Report:

The review of the radio ads indicated that on several occasions pie-in-the sky predictions regarding the soybean market were presented. Note that all predictions must have a reasonable basis in fact. A dollar move over the premium price would be an extreme situation. You should present a more realistic view of the investment. (Emphasis added.)

Third, Lexus received a letter from NFA Compliance Department staff dated March 13, 1996, notifying Lexus of several deficiencies in an infomercial on orange juice that Lexus had aired ("March 13 letter"). The NFA's March 13 letter, which both Singer and Luger read, specifically admonished that the Lexus orange juice infomercial "did not disclose that option prices do not always move in direct proportion to the price of the underlying futures nor did it discuss option pricing characteristics and its effect on profit potential." The NFA's March 13 letter further warned that the infomercial "mentioned the risk of loss; however, it was downplayed and the risk of loss was not mentioned in an equally prominent manner as the potential for profit."

Finally, on May 16, 1996, NFA's Board of Directors issued Notice I-96-11 ("NFA Notice"), a strong statement that seasonality claims of the type made in the Lexus infomercials violate NFA Compliance Rule 2-29:

Claims Regarding Seasonal Trades -- Some Members have suggested almost certain profits from so-called seasonal trades in, among other things, heating oil and unleaded gas. These ads cite historical data which supposedly shows that certain trades produce dramatic profits year in and year out. Invariably, however, the "historical data" involves different products, different time frames or different fee structures. The most telling point, by far, is that the firm's customers have never experienced the types of profits touted by the Member.

The NFA Notice went on to state that seasonality claims "present[] a distorted and misleading view of the likelihood of customers earning dramatic profits by investing with the Member firm, and . . . represent[] a clear violation of NFA sales practice rules."

1. Respondents Committed Fraud in Violation of Section 4c(b) of the Act and Regulation 33.10

In infomercials and telephone solicitations, Respondents built on the foregoing misrepresentations by exaggerating both the likelihood and the magnitude of profit that purchasers of commodity options are likely to achieve. They also minimized the risk of trading commodity options by emphasizing the supposed advantage that knowledge of seasonal or other existing supply and demand forces offers the options investor.3 These are very similar to representations that have been held to be misleading:

Although Staryk does not explicitly state that the predictable nature of the seasonal price trends in gasoline and heating oil decreases the risk or increases the likelihood of profits in options tied to those commodities, no reasonable consumer could fail to take this message away from his sales presentation.

Staryk, � 27,206 at 45,809 (quoting from and endorsing ALJ holding in In re Staryk, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) � 26,701 at 43,928-29 (ALJ June 5, 1996)).

It is well established that promises of large and certain profits, like the promises made by Respondents in their infomercials and telephone solicitations, are fraudulent. Munnell v. Paine Webber Jackson & Curtis, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) � 23,313 at 32,863 (CFTC Oct. 8, 1986) (statements that an investor could conservatively expect a profit of 32% per year amount to a guarantee of profitability and are inherently fraudulent); CFTC v. Commonwealth, 874 F. Supp. at 1353 (combining claims that risks are subject to certain limitations, with "predictions of profit [that] exceeded `mere optimism'" violated Section 4c(b) of the Act and Section 33.10 of the Regulations); Levine v. Refco, Inc., [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) � 24,488 at 36,115 (CFTC July 11, 1989) ("bold predictions of significant profit coupled with claims that risks are subject to specific limitations amounts to the type of guarantee of profits" that are prohibited).

d. Respondents' Misrepresentations were Material

A statement is material if it is substantially likely that a reasonable investor would consider the matter important in making an investment decision. Sudol v. Shearson Loeb Rhoades Inc., [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) � 22,748 at 31,119 (CFTC Sept. 30, 1985). Respondents' claims regarding the purported ability to exploit existing and known cash market conditions (including seasonality), and the correlation between cash price movements and profits on commodity options, went to the heart of option purchasers' decisions to invest.

The misstatements by Respondents regarding profit potential, risk of loss, and their performance record also were material. JCC, � 26,080 at 41,576 n.23 ("When the language of a solicitation obscures the important distinction between the possibility of substantial profit and the probability that it will be earned, it is likely to be materially misleading to customers"); CFTC v. British Am. Commodity Options Corp., [1977-1980 Transfer Binder] Comm Fut. L. Rep. (CCH) � 20,662 at 22,701 (S.D.N.Y. 1978) ("[U]nsupported and unreasonable predictions [of dramatic price shifts] unmistakably implied the near-certainty of sizeable and immediate returns, and were thus materially misleading to potential investors"); CFTC v. Commonwealth, 874 F. Supp. at 353-54 (misrepresentations regarding the trading record and experience of a firm or broker are fraudulent because past success and experience are material factors to reasonable investors).

e. Respondents Acted with Scienter

Scienter requires proof that the respondent committed the alleged wrongful acts "intentionally or with reckless disregard for [his] duties under the Act." Hammond, � 24,617 at 36,659. A reckless statement is one made with so little care that it is "very difficult to believe the [actor] was not aware of what he was doing." Do v. Lind-Waldock & Co., [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) � 26,516 at 43,321 (CFTC Sept. 27, 1995), quoting Drexel Burnham Lambert v. CFTC, 850 F.2d 742, 748-49 (D.C. Cir. 1988). A finding of intentional wrongdoing may be supported by inferences from circumstantial evidence. JCC, � 26,080 at 41,579; In re Miller, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) � 26,440 at 42,914 (CFTC June 16, 1995).

Respondents knew that their customers did not make anywhere near the profits they advertised in their infomercials and telephone solicitations. The trading results of Lexus' own customers were disastrous, and belied Respondents' claims of tremendous profit potential with only a modest risk of loss. From January 1, 1993 through June 30, 1996, nearly 90% of Lexus customer accounts lost money. Total losses in Lexus' unprofitable accounts exceeded $6.8 million, while profits in Lexus' profitable accounts totaled approximately $355,000. These actual trading results revealed that Lexus customers did not benefit from seasonal or other existing and known supply and demand forces in the cash market, and did not profit from any correlation between commodity price increases and options profits.

Respondents also received specific and ample notice of the serious deficiencies in the Lexus infomercials: 1) in 1994, the Consultant Report admonished Respondents about the infomercials' claims of a direct, one-to-one correlation between cash price movements and resulting profits on commodity options; 2) in 1995, Singer's own IIBE Report expressed concern regarding "pie-in-the sky predictions" in the infomercials; and 3) in 1996, both NFA's March 13 Letter and the NFA Notice warned of the problems with the seasonality approach utilized in the Lexus infomercials. Despite these blunt warnings, though, each Lexus infomercial continued to exhibit the same defects as those that had aired before. Accordingly, the Respondents acted with scienter.

2. Lexus is Liable for Violations of the Anti-Fraud Provisions of

Section 4c(b) of the Act and Regulation 33.10 Committed by its APs

Anti-Fraud Provisions of Section 4c(b) of the Act and Regulation 33.10

4. Singer and Luger are Liable as Controlling Persons for Violations of the

Anti-Fraud Provisions of Section 4c(b) of the Act and Regulation 33.10