UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION
| ________________________________________________ | ||
| ) | ||
| In the matter of: | ) | CFTC Docket No. 00-05 |
| ) | ||
|
� DARRYL M. OSLER |
) | COMPLAINT AND NOTICE OF HEARING |
|
� 924 Jasmine Drive |
) | PURSUANT TO SECTIONS 6(c), 6(d), |
|
� Delray Beach, Florida 33408, |
) | 8a(3) and 8a(4) OF THE COMMODITY |
| ) | EXCHANGE ACT, AS AMENDED | |
| Respondent. | ) | |
| ________________________________________________ | ) |
�
The Commodity Futures Trading Commission ("Commission") has received information from its staff which tends to show, and the Commission's Division of Enforcement ("Division") alleges, that:
I.
SUMMARY
1. Respondent Darryl Osler ("Osler") was a co-manager of the Delray Beach office of Ceres Trading Group, Inc. ("Ceres"), a registered introducing broker ("IB") that solicited members of the public to open accounts and trade commodity futures options. While he was the co-manager, Osler instructed the associated persons ("APs") at the Delray Beach office to make fraudulent and deceptive statements in the course of soliciting customers to trade commodity options, including misrepresenting the profit potential of purchasing heating oil call options, misrepresenting the price movements of options by implying that they move penny for penny with the underlying futures price, and conveying a sense of urgency to open accounts and make trades that was unwarranted and false.
II.
RESPONDENT
2. Darryl M. Osler ("Osler"), 924 Jasmine Drive, Delray Beach, Florida 33483, was a co-manager of Ceres' Delray Beach office from January 1996 to May 1999. Osler was registered as an AP of Ceres from January 19, 1996 to May 21, 1999. Osler is currently registered as an AP and principal of the Atlantic Capital Group, Inc., a registered IB located in Delray Beach, Florida.
III.
FACTS
3. From approximately January 1996 through May 1999 (the "relevant period"), Osler acted as one of two co-managers of the Delray Beach office of Ceres, a guaranteed registered IB. Ceres and its associated persons ("APs"), including APs at the Delray Beach office, engaged in the business of trading, and soliciting customers to trade, commodity options. The Delray Beach office was one of five Ceres offices, and, during the relevant period, represented between approximately 20 and 33% of Ceres' business.
4. The Delray Beach office solicited customers to trade commodity options using television, radio, and print advertisements. Prospective customers responded to the advertisements and spoke with APs in that office, who encouraged them to deposit funds and open trading accounts immediately. Few customers who opened accounts with the Delray Beach office had any experience trading commodity options, and many relied on APs to follow the market and make trading recommendations for them.
5. During the relevant period, the Delray Beach office had at least 875 customers, of which at least 200 traded either grain or heating oil options. Net customer losses at the Delray Beach office during at least part of the relevant period were approximately as follows: 1996 - $8,707,200; 1997 - $11,625,250; 1998 - $4,829,250. For those same years, the commissions earned by Delray Beach ranged from $975,361 to $1,682,504, or between 20 and 33% of the overall commissions earned by Ceres.
6. Osler was the principal supervisor of the Delray Beach APs regarding the solicitation of customers and the handling of customer accounts.
7. Osler was principally responsible for working with the Delray Beach office APs on developing sales solicitations. Osler told the APs what commodities to recommend to customers, and instructed APs on how to solicit customers who called the office in response to an advertisement.
8. Osler also gave the APs sales scripts to use in soliciting customers. The scripts focused on a single commodity, and took the customer step by step through an introduction, explanation of leverage, profit projection discussion, and explanation of purported current market conditions affecting the commodity being discussed.
9. Under the supervision and direction of Osler, Delray Beach APs were expected or required to use the information from the sales scripts, or the scripts themselves, in soliciting customers to trade commodity options.
10. Besides scripts, Osler also provided APs with sales aids. The sales aids consisted of a series of scripted arguments aimed at overcoming possible customer objections to trading options, and at convincing customers to open accounts and to trade options immediately.
11. Osler pressured APs to open customer accounts and trade them quickly, setting stringent production targets for the APs.
12. Osler instructed APs to mislead customers about the profit potential of trading options. The misrepresentations that APs made to customers at Osler's direction fall into three categories: misrepresentations about the profitability of heating oil call options; deceptive statements that options prices move penny for penny with price changes in the underlying futures contracts; and misrepresentations about the need to trade quickly to earn profits.
Misrepresentations About Heating Oil Options
13. Between the fall of 1997 and the early winter of 1998, Osler instructed APs in the Delray Beach office to use a heating oil sales script when soliciting customers.
14. The heating oil script stated that customers could expect to profit from trading in heating oil options based on a predictable price increase of heating oil due to the seasonal demand for heating oil that took place in the winter months.
15. APs in the Delray Beach office used this script while soliciting customers to trade heating oil options.
16. The representations made by Ceres' Delray Beach APs to customers and potential customers about heating oil prices, which included representations about the effect of seasonal price changes on futures prices, were deceptive and misleading, because the seasonal price movement of heating oil in fact confers no price advantage on futures customers. The seasonal increase in demand for heating oil is a well-known market event, and seasonal supply and demand forces therefore were already incorporated into the premium of options with winter expiration dates that APs were attempting to convince customers to trade.
Misrepresentations Concerning the Relationship Between Options and Futures Price Changes
17. Between October 1997 and May 1998, Osler instructed APs in the Delray Beach office to use a corn script that contained a profit example showing that every penny increase in the price of a corn futures contract would result in a penny increase in the price of a corn option.
18. APs used this script while soliciting customers to trade corn options.
19. The profit example in the corn script was false and misleading, because if an option is out of the money, the price of the option does not change penny for penny with changes in the price of the underlying futures contract. Rather, the option price tends to move only a fraction of the change in the futures price.
20. In the case of a long out-of-the-money call options, futures prices would have to increase more than the customer was led to believe for the price of the call options to increase sufficiently to yield a profit. The majority of corn trades by Delray Beach APs were out-of-the-money long calls.
Solicitations Involving Unwarranted and False Urgency
21. From time to time between at least April 1996 and May 1998, Osler instructed the APs in the Delray Beach office to convey a sense of urgency when soliciting customers that was unwarranted and false.
22. Osler gave APs sales aids intended to create a sense of urgency to open accounts and /or trade options that was unwarranted and false, including but not limited to statements along the lines of: "I trade over 50 different markets and I can't give you a stronger recommendation than [name of commodity option], but we have to move now"; and "It was like, listen, the market is moving already. The longer you wait, the less profit we'll make."
23. Osler also instructed APs, without reference to the sales aids, to convey a sense of urgency when soliciting customers that was unwarranted and false.
24. APs conveyed a sense of urgency when soliciting customers that was unwarranted and false.
25. The messages of urgency as instructed by Osler suggested to customers the occurrence of important market events that could not have been occurring at all times the trades were being recommended, because such messages were not tied to market activities, events or conditions and were to be conveyed to customers regardless of what was occurring in the market.
26. Osler also instructed APs to tell customers to use Federal Express to deliver their checks and account opening documents quickly, lending credibility to, and heightening, the false message of urgency.
Scienter
27. Osler knew or recklessly disregarded the fact that the statements in the heating oil script, the corn script, the sales aids and other statements about urgency, and the statements the APs actually made to customers, were materially false, deceptive and misleading, or omitted material facts that would make the statements not misleading.
Supervision Failures
28. The Delray Beach office purportedly operated in accordance with the policies and procedures established by Ceres' futures commission merchant, Iowa Grain Co. Inc. ("Iowa Grain"). Osler had supervisory duties and obligations at the Delray Beach office, and was obligated to follow those policies and procedures.
29. When Osler instructed APs to engage in false and misleading sales solicitations, he failed to adequately implement, carry out, monitor or enforce the policies and procedures of the supervisory system set forth in Iowa Grain's manual that was designed to deter and detect violations of the Act or the Commission's Regulations.
30. Osler monitored and supervised sales solicitations in the Delray Beach office by listening to telephone sales presentations made by APs to customers, but failed to stop APs from engaging in false and misleading solicitations. He therefore failed to adequately implement, carry out, monitor or enforce the policies and procedures of the supervisory system set forth in Iowa Grain's manual that was designed to deter and detect violations of the Act or the Commission's Regulations.
IV.
VIOLATIONS OF THE ACT AND COMMISSION REGULATIONS
VIOLATIONS OF SECTION 4c(b) OF THE
COMMODITY EXCHANGE ACT,
AS AMENDED, 7 U.S.C. � 6c(b) (1994), AND OF SECTIONS 32.9 AND
33.10
OF THE COMMISSION'S REGULATIONS, 17 C.F.R. �� 32.9 and
33.10 (1999):
FRAUD BY MISREPRESENTATION AND OMISSION
OF
MATERIAL FACTSIN CONNECTION WITH THE SOLICITATION
AND MAINTENANCE OF COMMODITY OPTIONS TRANSACTIONS
31. The allegations contained in paragraphs 1 through 30 above are re-alleged and incorporated herein by reference.
32. In or in connection with an offer to enter into, the entry into, the confirmation of the execution of, or the maintenance of commodity option transactions, Osler, directly or indirectly, cheated, defrauded or deceived, or attempted to cheat, defraud, or deceive, other persons by engaging in various acts including, but not limited to, the practices set forth above, in violation of Section 4c(b) of the Act and Sections 32.9 and 33.10 of the Commission's Regulations.
33. Osler knew, or recklessly disregarded the fact, that his instructions to APs regarding customer solicitations, and the statements, representations and omissions in the Ceres' scripts and telephone solicitations as set forth above, were false, deceptive or misleading.
COUNT TWO
VIOLATIONS OF SECTION 166.3 OF THE
COMMISSION'S
REGULATIONS, 17 C.F.R. � 166.3 (1998):
FAILURE TO SUPERVISE DILIGENTLY
34. The allegations contained in paragraphs 1 through 33 above are re-alleged and incorporated herein by reference.
35. Osler failed to exercise diligently his supervisory duties by failing to monitor and supervise diligently the sales practices and solicitations of APs in the Delray Beach office, including but not limited to, the acts, practices and conduct set forth in Count One, in violation of Section 166.3 of the Commission's Regulations.
V.
By reason of the foregoing allegations, the Commission deems it necessary and appropriate, pursuant to its responsibilities under the Act, to institute public administrative proceedings to determine whether the allegations set forth in Parts I-IV above are true, and, if so, whether an appropriate order should be entered in accordance with Sections 6(c), 6(d), 8a(3) and 8a(4) of the Act, 7 U.S.C. ��9, 15, 13(b), 12a(3) and 12a(4) (1994).
Section 6(c) allows the Commission to enter an order (1) prohibiting a respondent from trading on or subject to the rules of any contract market and requiring all contract markets to refuse such person all trading privileges thereon for such period as may be specified in the Commission's Order, (2) if the respondent is registered with the Commission in any capacity, suspending, for a period not to exceed six months, or revoking the registration of that respondent, (3) assessing against the respondent a civil penalty of not more than the higher of $100,000 or triple the monetary gain to the respondent for each violation committed prior to November 27, 1996, and not more than the higher of $110,000 or triple the monetary gain to the respondent for each violation of the Act or Regulations committed after November 27, 1996, and (4) requiring restitution to customers of damages proximately caused by the violations of the respondent.
Section 6(d) allows the Commission to enter an Order directing that the respondent cease and desist from violating the provisions of the Act and Regulations found to have been violated.
Sections 8a(3) and 8a(4) allow the Commission to refuse to register, to register conditionally, to suspend, to revoke or to place restrictions upon the registration of any respondent who is found to meet any of the criteria for such action by the Commission provided for in Section 8a(3).
VI.
WHEREFORE, IT IS HEREBY ORDERED that a public hearing for the purpose of taking evidence and hearing arguments on the allegations set forth in Parts I-IV above be held before an Administrative Law Judge, in accordance with the Rules of Practice under the Act, 17 C.F.R. �10.1 et. seq. (1998), at a time and place to be fixed as provided in Section 10.61 of the Rules of Practice, 17 C.F.R. �10.61 (1998), and that all post-hearing procedures shall be conducted pursuant to Sections 10.81 through 10.107 of the Rules of Practice, 17 C.F.R. ��10.81 through 10.107 (1998).
IT IS FURTHER ORDERED that the Respondent shall file an Answer to the allegations against them in the Complaint within twenty (20) days after service pursuant to Section 10.23 of the Rules of Practice, 17 C.F.R. �10.23 (1998), and pursuant to Section 10.12(a) of the Rules of Practice, 17 C.F.R. �10.12(a) (1998), shall serve two copies of such Answer and of any document filed in this proceeding upon Todd Kelly or Julie Reiley, Trial Attorneys, Commodity Futures Trading Commission, Division of Enforcement, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, or upon such other counsel as may be designated by the Division. If the Respondent fails to file the required Answer or fails to appear at a hearing after being duly served, he shall be deemed in default, and the proceeding may be determined against him upon consideration of the Complaint, the allegations of which shall be deemed to be true.
IT IS FURTHER ORDERED that this Complaint and Notice of Hearing shall be served on the Respondent personally or by certified or registered mail forthwith pursuant to Section 10.22 of the Commission's Rules, 17 C.F.R. �10.22 (1998).
In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of the investigative or prosecutorial functions in this or any factually related proceeding will be permitted to participate or advise in the decision upon this matter except as witness or counsel in proceeding held pursuant to notice.
�
| By the Commission | ||
| Dated:� February 22, 2000 | ||
| ________________________________ | ||
| Jean A. Webb | ||
| Secretary to the Commission | ||
| Commodity Futures Trading Commission |