UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
|COMMODITY FUTURES TRADING COMMISSION,||)||Civil Action No. 99-CIV-9669|
|PRINCETON GLOBAL MANAGEMENT, LTD.,||)|
|PRINCETON ECONOMIC INTERNATIONAL LTD.,||)|
|and MARTIN ARMSTRONG,||)|
COMPLAINT FOR PERMANENT INJUNCTION AND OTHER EQUITABLE RELIEF
1. Since approximately November 1997 or earlier, defendants Princeton Global Management Ltd. ("PGM"), Princeton Economics International Ltd. ("PEI") and Martin Armstrong ("Armstrong") have defrauded customers in connection with an investment scheme that involved the trading of commodity futures and the operation and management of a commodity pool, thereby concealing substantial trading losses as the result of commodities futures trading. Specifically, defendants have issued reports to customers which fraudulently represented the net asset value of interests in the commodity pool. The commodity pool has been funded with hundreds of millions of dollars in proceeds generated from defendants' sale of unsecured notes to Japanese corporate and institutional customers and possibly others. As of August 31, 1999, however, the assets currently held in the commodity pool total no more than approximately forty-six million dollars ($46,000,000).
2. On September 9, 1999, the Japanese Financial Supervisory Agency suspended further sales of the Princeton Notes based upon allegations that material misrepresentations had been made to purchasers of the Notes by the defendants or their agents.
3. Thus, defendants have engaged, are engaging, and are about to engage in acts and practices which violate the anti-fraud and registration provisions set forth in Sections 4b, 4m and 4o(1) of the Commodity Exchange Act, as amended ("Act"), 7 U.S.C. 6b, 6m, and 6o(1) (1994).
4. Accordingly, pursuant to Section 6c of the Act, 7 U.S.C. 13a-1 (1994), the Commission brings this action to enjoin such acts and practices, and to compel compliance with the provisions of the Act. In addition, the Commission seeks restitution, disgorgement, civil penalties, and such other equitable relief as the Court may deem necessary and appropriate.
5. Given the defendants' pattern of fraudulent activity, unless restrained and enjoined by this Court, they are likely to continue to engage in the acts and practices alleged in this Complaint, as more fully described below.
II. JURISDICTION AND VENUE
6. The Act prohibits fraud in connection with the purchase and sale of commodity futures contracts and options and establishes a comprehensive system for regulating the purchase and sale of commodity futures contracts and options. This Court has jurisdiction over this action pursuant to Section 6c of the Act, 7 U.S.C. §13a-1 (1994), which authorizes the Commission to seek injunctive relief against any person whenever it shall appear to the Commission that such person has engaged, or is about to engage in any act or practice constituting a violation of any provision of the Act or any rule, regulation or order thereunder.
7. Venue lies with the Court pursuant to Section 6c of the Act, 7 U.S.C. §13a-1(e) (1994), in that the defendants transact business in this district, and the acts and practices in violation of the Act have occurred, are occurring or are about to occur within this district.
III. THE PARTIES
8. Plaintiff Commission is an independent federal regulatory agency charged with the responsibility for administering and enforcing the provisions of the Act, 7 U.S.C. §§ 1 et seq. (1994), and the Regulations promulgated under it, 17 C.F.R. §§ 1 et seq. (1998).
9. Upon information and belief, Princeton Economics International Ltd. is a corporation that maintains a business office at 214 Carnegie Center, #303, in Princeton, New Jersey. At all times relevant to this Complaint, PEI has transacted business in the Southern District of New York, including but not limited to, maintaining customer funds and trading accounts at Republic New York Securities Corp.
10. Upon information and belief, Defendant Princeton Global Management Ltd. is a wholly owned subsidiary of PEI, and maintains a registered office at P.O. Box 103 MacLaw House, Duke Street, Grand Turk, Turks and Caicos Island, British West Indies. At all times relevant to this Complaint, PGM has transacted business in the Southern District of New York, including but not limited to, maintaining customer funds and trading accounts at Republic New York Securities Corp.
11. Defendant Martin A. Armstrong is the founder and chairman of PEI, and he is the chairman and a director of PGM. Upon information and belief, he resides in Maple Shade, New Jersey. At all times relevant to this Complaint, Armstrong transacted business in the Southern District of New York, including but not limited to, maintaining customer funds and trading accounts at Republic New York Securities Corp. The Commission previously imposed a civil monetary penalty, cease and desist order, and a twelve-month trading ban against Armstrong, who was a controlling person of firms that had engaged in fraudulent advertising and that had failed to disclose to customers commission-sharing agreements with a third party. In the Matter of Armstrong [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) § 25,657 (CFTC Feb. 8, 1993), remanded sub nom., Armstrong v. CFTC, 12 F. 3d 401 (3d Cir. 1993); on remand, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) §26,332 (CFTC March 10, 1995), aff'd, 77 F.3d 461 (3d Cir. 1996) (without opinion), cert. denied, __ U.S. __ (1996), 116 S. Ct. 2502 (1996).
A. STATUTORY BACKGROUND
12. A commodity pool is defined in Commission Regulation 4.10(d)(1), 17 C.F.R. § 4.10(d)(1), as any investment trust, syndicate or similar form of enterprise engaged in the business of investing its pooled funds in trading commodity futures and options.
13. A commodity pool operator ("CPO") is defined in Section 1a(4) of the Act, 7 U.S.C. § 1(a)(4), as any person engaged in a business that is of the nature of an investment trust, syndicate, or similar form of enterprise, and who, in connection therewith, solicits, accepts or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock or other forms of securities or otherwise, for the purpose of trading in any commodity for future delivery on or subject to the rules of any contract market.
14. A commodity trading advisor ("CTA") is defined in Section 1a(5)(A) of the Act, 7 U.S.C. § 1a(5)(A) (1994), as any person who for compensation or profit, engages in the business of advising others as to the value of or the advisability of trading in: (i) any contract of sale of a commodity for future delivery made or to be made on or subject to the rules of a contract market; (ii) any commodity option authorized under Section 4c of the Act, 7 U.S.C. § 6c (1994); or (iii) any leverage transaction authorized under Section 19 of the Act, 7 U.S.C. § 23 (1994); or a person who for compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the activities referred to above.
B. THE COMMODITY POOL SCHEME
15. From at least February 1996 until the present, Armstrong, acting through companies he controls, including PEI and PGM, induced companies located in Japan to purchase billions of dollars in fixed-term promissory notes issued by PEI and its subsidiaries. None of the notes was offered for sale on any securities exchange, but instead they were negotiated and sold privately by the defendants to the customers. In general, the notes provide for and guarantee the repayment of principal and interest of 4.0% interest per annum until maturity.
16. Under the terms and conditions of the notes, the principal amount of the notes paid by customers would be, and in fact has been, used to fund the purchase of derivative instruments, bonds and/or currencies available in the international financial markets, including futures contracts and options ("the Fund"). PEI serves as Manager of the Fund and is authorized by the notes to use the Fund to purchase and sell bonds, notes, currencies, options and/or futures contracts. The notes further provide that the Manager's fee consists of the excess income derived from the management and trading of the Fund over and above the guaranteed 4.0% per annum interest rate.
17. Upon information and belief, Armstrong has served, and continues to serve, as the primary trading advisor for the Fund. A promotional brochure distributed by a PGM brokerage affiliate in Japan (Cresvale Tokyo) states that "full responsibility for all investment decisions [for the Fund] lies with Mr. Martin Armstrong, Chairman of Princeton Economics International Ltd." In that capacity, Armstrong has advised and instructed the Fund to margin and purchase futures contracts which are traded on contract markets duly designated by the Commission for that purpose. The Fund has, at various times, maintained positions in futures contracts in a variety of commodities including, but not limited to, Japanese Yen, crude oil and precious metals.
18. During the course of administering, advising and directing the Fund, Armstrong has opened trading accounts with a number of futures brokerage houses registered with the Commission as Futures Commission Merchants ("FCMs"), including at Republic New York Securities Corporation ("Republic"). Armstrong has directed that assets of the Fund be placed on deposit in accounts at Republic for the purpose of trading futures contracts and options.
19. In approximately November 1997, Armstrong directed that the trading accounts at Republic be commingled in a single, consolidated account, with futures trading conducted through various sub-accounts (the "trading accounts"). In addition, Armstrong directed that additional sub-accounts be established for the purpose of holding cash and other assets which would serve as the collateral and margin capital to support the futures trading done in the trading accounts (the "collateral accounts"). Assets of the Fund, constituting the principal from proceeds of the sale of the notes, have been deposited in the collateral accounts at Republic and have been used to margin and purchase commodity futures contracts.
20. Upon information and belief, Armstrong and PGM advised customers that the principal amount of their notes would be segregated on the books and records of Republic. To that end, Armstrong purportedly assigned and allocated the assets of the various collateral accounts to individual customers. For example, one Japanese customer purchased a PGM 4.0% note on or about March 30, 1999 bearing a maturity of March 30, 2000. This particular note was denominated "M-3" by PGM, which corresponds to a PGM collateral account which is denominated "sub a/c M-3 - PHL/411-21216" on the books and records of Republic.
21. In administering, advising and directing the Fund, Armstrong arranged for Republic to issue certain letters to PGM which purported to state the Net Asset Value of particular collateral accounts as of a particular date (the "NAV letters"). Upon information and belief, in excess of two hundred such NAV letters have been issued at Armstrong's request during the period February 1996 until the present. Upon information and belief, Armstrong and PGM have transmitted the NAV letters to customers in Japan and have represented that the NAV in the collateral account pertaining to the PGM Note held by the customers is true and accurate.
22. In fact, however, the NAV letters have inflated the value of the assets actually held in the individual collateral accounts in virtually every instance. In the example of one Japanese customer cited in paragraph 19 above, Armstrong caused the issuance of a false NAV letter on August 16, 1999 purporting to show a collateral account NAV as of June 30, 1999. Upon information and belief, Armstrong and PGM delivered this NAV letter to the customer and represented that the value of assets in "sub a/c M-3 - PHL/411-21216" was $12,787,123.27. In fact, the amount actually in that collateral account was approximately $10,539,000.00. Moreover, the value of the customer's interest in the commodity pool was less than the amount reported because the NAV did not reflect substantial losses in the trading accounts that were being supported by the customer's collateral. All of the assets held in the customer's collateral account were subsequently depleted to pay debit balances in PGM's futures trading accounts at Republic.
23. By June 30, 1999, the aggregate net trading balance for the trading accounts was at a deficit of more than $500,000, 000. Between July 2, 1999 and August 30, 1999, Armstrong instructed Republic to transfer funds from the collateral accounts to pay the deficit balance in the trading accounts. The losses in the trading accounts and the transfers of funds from the collateral accounts to pay for those losses have not been reported to customers. Instead, Armstrong and PGM issued the false NAV letters to deceive customers by concealing the fact that massive trading losses had occurred.
24. Upon information and belief, the current principal amount (exclusive of interest) of outstanding PGM Notes is approximately one billion dollars ($1,000,000,000), most of which are due to mature in the year 2000. The assets currently in the Fund, however, total no more than approximately forty-six million dollars ($46,000,000).
V. VIOLATIONS OF THE COMMODITY EXCHANGE ACT
VIOLATIONS OF SECTION 4b OF
FRAUD BY MISREPRESENTATIONS
25. Paragraphs 1 through 24 are re-alleged and incorporated herein.
26. Beginning in at least November 1997 and possibly earlier, by arranging for Republic to issue fraudulent NAV letters to customers, defendants violated Section 4b(a) of the Act, 7 U.S.C. § 6b(a) (1994), in that they have (i) cheated or defrauded or attempted to cheat or defraud other persons; (ii) willfully made or caused to be made to other persons false reports or statements thereof, or willfully entered or caused to be entered for other persons false records thereof; or (iii) willfully deceived or attempted to deceive other persons.
27. Defendants engaged in this conduct in or in connection with orders to make, or the making of, contracts of sale of commodities for future delivery, made, or to be made, for or on behalf of other persons where such contracts for future delivery were or may have been used for (a) hedging any transaction in interstate commerce in such commodity, or the products or byproducts thereof, or (b) determining the price basis of any transaction in interstate commerce in such commodity, or (c) delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof.
VIOLATIONS OF SECTION
4o(1) OF THE ACT:
FRAUD BY COMMODITY TRADING ADVISORS
AND COMMODITY POOL OPERATORS
28. Paragraphs 1 through 27 are re-alleged and incorporated herein.
29. Since approximately November 1997 and continuing through the present, defendants, acting as a CTA and CPO, by use of the mails or other instrumentalities of interstate commerce, directly or indirectly, employed devices, schemes or artifices to defraud customers, or engaged in transactions, practices, or a course of business conduct which operated as a fraud or deceit upon customers, in violation of Section 4o(1) of the Act, 7 U.S.C. § 6o(1) (1994), by the same conduct identified in Paragraph 25.
VIOLATIONS OF SECTION 4m OF
ACTING AS AN UNREGISTERED COMMODITY
POOL OPERATOR AND COMMODITY TRADING ADVISOR
30. Paragraphs 1 through 29 are re-alleged and incorporated herein.
31. Since approximately November 1997 and continuing through the present, defendants, while not registered with the Commission as a CPO and while not exempt from such registration, made use of the mails or other means or instrumentality of interstate commerce by soliciting, accepting or receiving funds from members of the public to participate in a commodity pool formed and operated for the purpose of trading commodity futures contracts on contract markets, all in violation of Section 4m(1) of the Act, 7 U.S.C. § 6m(1) (1994).
32. Since approximately November 1997 and continuing through the present, defendants, while not registered with the Commission as a CTA and while not exempt from such registration, made use of the mails or other means or instrumentality of interstate commerce by engaging in the business for compensation or profit of advising others as to the value or the advisability of trading in any contract of sale of a commodity for future delivery made or to be made on or subject to the rules of a contract markets, in all in violation of Section 4m(1) of the Act, 7 U.S.C. §6m(1) (1994).
VI. RELIEF REQUESTED
WHEREFORE, Plaintiff respectfully requests that this Court, as authorized by Section 6c of the Act, 7 U.S.C. § 13a-1, and pursuant to its own equitable powers, enter:
A. An order of permanent injunction enjoining defendants and all persons insofar as they are acting in the capacity of agents, servants, employees, successors, assigns, or attorneys of defendants, and all persons insofar as they are acting in active concert or participation with defendants who receive actual notice of the Order by personal service or otherwise, from directly or indirectly:
1. Cheating or defrauding or attempting to cheat or defraud other persons, willfully making or causing to be made to other persons false reports or statements thereof, or willfully entering or causing to be entered for other persons false records thereof, or willfully deceiving or attempting to deceive other persons in or in connection with any order to make, or the making of, any contract of sale of any commodity for future delivery, made, or to be made, for or on behalf of any other person if such contract for future delivery is or may be used for (a) hedging any transaction in interstate commerce in such commodity or the products or byproducts thereof, or (b) determining the price basis of any transaction in interstate commerce in such commodity, or (c) delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof, in violation of Section 4b of the Act, 7 U.S.C. § 6b (1994);
2. Employing any device, scheme, or artifice to defraud any client or participant or prospective client or participant, or engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant, by use of the mails or any means or instrumentality of interstate commerce, in violation of Section 4o(1) of the Act, 7 U.S.C. § 6o(1) (1994); and
3. Making use of the mails or any means or instrumentality of interstate commerce in connection with the business of a CPO or CTA unless registered with the Commission as such, in violation of Section 4m of the Act, 7 U.S.C. § 6m (1994).
B. An order requiring defendants to disgorge all benefits received from acts or practices which constitute violations of the Act as described herein, including pre-judgment interest;
C. An order requiring defendants to make restitution to every customer whose funds were received or utilized by them as a result of acts and practices which constituted violations of the Act, as described herein, including pre-judgment interest;
D. An order requiring defendants to pay civil penalties under the Act, in an amount of not more than the higher of $100,000 or triple his monetary gain for each violation of the Act committed prior to November 27, 1996, or $110,000 or triple his monetary gain for each violation of the Act committed after that date;
E. An order requiring defendants to pay costs and fees as permitted by 28 U.S.C. §§ 1920 and 2412(a)(2) (1994); and
F. Such other equitable relief as the court may deem necessary or appropriate under the circumstances.
|Date: September 14, 1999||Respectfully submitted,|
|Dennis M. O'Keefe (DO) 4869|
|Vincent McGonagle (VM) 5650|
|Lawrence H. Norton (LN) 2190|
|Associate Director of Enforcement|
|Commodity Futures Trading Commission|
|Division of Enforcement|
|Three Lafayette Centre|
|1155 21st Street, N.W.|
|Washington, D.C. 20581|
|(202) 418-5523 (fax)|
|Kathryn Kwak (KW 4988)|
|Eastern Region Headquarters|
|One World Trade Center, Suite 3747|
|New York, New York 10048|
|Attorneys for Plaintiff|