Before the
COMMODITY FUTURES TRADING COMMISSION
| ___________________________________________________ | ||
| ) | CFTC Docket No. 99-7 | |
| In the Matter of: | ) | |
| ) | COMPLAINT AND NOTICE | |
| ���� DUNHILL FINANCIAL GROUP, INC. | ) | OF HEARING PURSUANT |
| ���� 2830 Clearview Place | ) | TO SECTIONS 6(c), 6(d), |
| ���� Suite 210 | ) | 8a(3) and 8a(4) OF THE |
| ���� Doraville, Georgia 30340, | ) | COMMODITY EXCHANGE |
| ) | ACT, AS AMENDED | |
| ���� MARK HUTCHERSON | ) | |
| ���� 1120 Old Woodbine Road | ) | |
| ���� Atlanta, Georgia 30319, | ) | |
| ) | ||
| ���� KEVIN JACKAM | ) | |
| ���� 1780 Ridgemill Terrace | ) | |
| ���� Dacula, Georgia 30019, | ) | |
| ) | ||
| ���� NEW MILLENNIUM PROMOTIONS | ) | |
| ���� 4957 Overlook View Court | ) | |
| ���� Duluth, Georgia 30096, | ) | |
| ) | ||
| ���� MICHAEL THOMAS | ) | |
| ���� 4957 Overlook View Court | ) | |
| ���� Duluth, Georgia 30096, | ) | |
| ) | ||
|
����� - and - |
) | |
| ) | ||
| ���� FORREST DAYTON, JR. | ) | |
| ���� 2930 Carrollton Court | ) | |
| ���� Marietta, Georgia 30066, | ) | |
| ) | ||
|
Respondents. |
) | |
| ___________________________________________________ |
) |
�
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. From October 1995 through the present, Dunhill Financial Group, Inc. ("Dunhill") solicited customers and prospective customers ("customers") to open accounts to trade options or option spreads on commodity futures contracts. Dunhill solicited customers through radio and Internet advertisements, written promotional materials called "Special Reports," and telephone solicitations (collectively "customer solicitations"). In the customer solicitations Dunhill misrepresented, and failed to disclose, material facts concerning, among other things, (i) the customer's ability to profit from seasonal and other existing and known supply and demand forces in the underlying commodity markets; (ii) the risk involved in trading options; and (iii) the amount of commissions charged and the substantial impact that commissions had upon the customer's ability to earn a profit on options trading, in particular with respect to the commissions charged to trade option spreads.
II.
RESPONDENTS
2. Dunhill Financial Group, Inc., a Georgia corporation, has been registered with the Commission as an independent introducing broker since September 27, 1995. Dunhill conducts business from 2830 Clearview Place, Suite 210, Doraville, Georgia 30340, where it currently employs approximately nine associated persons.
3. Mark Hutcherson ("Hutcherson"), who resides at 1120 Old Woodbine Road, Atlanta, Georgia 30319, is the Chief Executive Officer, Sales Manager, 51 percent owner and a principal of Dunhill. Hutcherson has been registered as an associated person ("AP") of Dunhill since November 1995.
4. Kevin Jackam ("Jackam"), who resides at 1780 Ridgemill Terrace, Dacula, Georgia 30019, is the Director of Compliance, 20 percent owner and a principal of Dunhill. Jackam has been registered as an AP of Dunhill since September 1995.
5. New Millennium Promotions ("NMP"), a Georgia corporation located at 4957 Overlook View Court, Duluth, Georgia 30096, has never been registered with the Commission in any capacity.
6. Michael Thomas ("Thomas"), who resides at 4957 Overlook View Court, Duluth, Georgia 30096, is the owner of NMP. Thomas is a former AP and principal of Dunhill. Thomas was not registered in any capacity from July 1997 through September 10, 1998. Thomas obtained a temporary license as an AP of Dunhill on September 11, 1998, and on October 2, 1998 his registration as an AP became effective.
7. Forrest Dayton, Jr. ("Dayton"), who resides at 2930 Carrollton Court, Marietta, Georgia 30066, was registered as an AP of Dunhill from December 6, 1995 to June 14, 1996, but was no longer registered when he became involved in Internet advertising for unhill.
III.
FACTS
8. Dunhill's business consists primarily of soliciting members of the general public to open accounts to purchase and sell exchange-traded options on commodity futures contracts.
Misrepresentations in Radio Advertisements
9. From October 1995 through approximately July 1997, Dunhill obtained prospective customers to solicit by purchasing from advertising entities the names of people who responded to the entities' radio advertisements concerning commodity futures.
10. The radio advertisements for heating oil and unleaded gasoline that were the primary sources of the leads purchased by Dunhill represented that customers were likely to make large profits from trading options on those commodities, and emphasized a seasonal move of these commodities in previous years, i.e., a "track record," as the purported basis for the recommendation.
11. Dunhill reviewed and approved the text of each radio advertisement from which it purchased leads prior to (1) the broadcast of the advertisement and (2) its purchase of the leads from the advertisement.
12. In January 1997, Dunhill itself solicited prospective customers by creating, and arranging for its broadcast for two weeks of, a radio advertisement which recommended to prospective customers that they purchase unleaded gas options. The radio advertisement claimed that a $5,000 investment could return as much as $25,000, and attempted to support the claim with references to historical seasonal moves in unleaded gasoline. Hutcherson and Jackam were responsible for the content of Dunhill's radio advertisement.
Misrepresentations in Internet Advertisements
13. Since June 1997 Dunhill has primarily used the Internet to solicit prospective customers, first by creating and sending unsolicited bulk e-mail over the Internet ("Internet advertising"), and later by creating an Internet website. Each Internet advertisement spotlighted a particular commodity. Hutcherson and Jackam were responsible for the content of the Internet advertisements.
14. Dunhill contracted with NMP for NMP to send the internet advertisements over the Internet in order to solicit prospective customers for Dunhill APs to call. Dunhill paid NMP a fee, each month, in return for generating prospective customers for Dunhill APs to solicit. Thomas, NMP's sole employee, was responsible for carrying out the solicitation. Thomas contracted with Dayton to choose those prospective customers to whom to send the Internet advertisements, receive responses from prospective customers and forward the responses to Thomas, who in turn forwarded them to Dunhill.
15. Dunhill's Internet advertisements make two fundamental misrepresentations: they misrepresent (1) the likelihood of a price increase in the futures price of the underlying commodity; and (2) the effect of any such increase on the profitability of an option on a futures contract on that commodity.
16. First, the Internet advertisements represent that the price of the advertised commodity is about to go up because demand will exceed supply for some stated reason, e.g., seasonal patterns such as increased demand for heating oil every winter and unleaded gasoline every summer. The advertisements present historical data purportedly demonstrating that such price increases have occurred regularly, to emphasize the predictability of the price increases.
17. Second, the Internet advertisements also represent that when a price increase in the advertised commodity occurs, an options customer will profit from that price increase, and the advertisements emphasize a specific profit so as to convey the impression that such an amount of profit is a realistic expectation.
18. A typical Dunhill Internet advertisement for heating oil, which was disseminated in the summer of 1997, showcased the following profit prediction: "Learn how to be an informed investor and how a $.10 gain in your Heating oil option values could return as much as $21,000 by this fall." The advertisement attempted to support this profit prediction first by representing that there would be an increase in the demand for heating oil with the impending onset of colder weather, and that heating oil prices would increase as a result of the increased demand.
19. The Internet advertisement then further attempted to support the specific amount of profit prediction by representing that "For 18 out of the last 18 years Heating Oil futures prices have risen an average of over $.21 between June 1 and March 31. The seasonal approach to trading is designed to anticipate, enter and capture these recurrent trends as they emerge."
20. Dunhill routinely includes in its Internet advertisements the statement: "Past performance is not indicative of future results". This statement reinforces the impression that other Dunhill customers have actually achieved the predicted profits when, in fact, none have.
21. Virtually all Dunhill Internet advertisements follow the same pattern illustrated by the above example, regardless of the commodity being advertised.
22. Both representations in Dunhill's Internet advertising, set forth in paragraphs 13-19 above, are false, deceptive and misleading. The first representation, that the price of the advertised commodity is about to increase, is false, deceptive and misleading because, among other things:
i) the representations as to profit potential are based on historical movements of the commodity futures prices rather than the options marketed by Dunhill;
ii) such a futures price increase is not assured;
iii) the futures contract in connection with the option being sold to the customer is not the futures contract on which the representations as to profit potential are based;
iv) even when the futures price of the commodity does trend upward, there still are significant price fluctuations with highs and lows over time which affect a customer's ability to profit on the market movement;
v) in certain of the past years discussed in the advertisements, the futures price of the commodity did not trend upward, but rather trended downward; and
vi) an advantage in trading options will not be obtained based on seasonal and other existing and known supply and demand forces because those forces already are reflected in the price paid for the option and in the price of the option's underlying futures contract.
23. The second representation in Dunhill's Internet advertising, that an options customer will profit to the extent predicted in the advertisements from the commodity price increase, is false, deceptive and misleading because, among other things:
i) option values generally do not move in direct proportion to the movement in the underlying commodity prices, if they move at all; and
ii) the advertisements fail to disclose that the profitability of an option will depend in part on the strike price, the amount of the commissions, and when the option is purchased and when it is liquidated.
24. Dunhill's Internet advertisements in 1997 and at various times in 1998 falsely conveyed the impression that the Commission and the National Futures Association, the industry's self-regulatory organization, had approved the content of the advertisements.
Misrepresentations in Dunhill's Special Reports
25. Since at least February 1997, Dunhill has created so-called "Special Reports" ("Reports") concerning various commodities, including coffee, soybeans, unleaded gas, natural gas and heating oil, and has sent them to customers as part of its solicitations to purchase options on futures contracts in the particular commodity discussed in the Report. Jackam coordinated the Reports' development and reviewed their content. Hutcherson contributed to, and provided final approval of, the content of the Reports.
26. The Reports contain a number of purported reasons why the commodity spotlighted is likely to increase in price. Most often, the main reason set forth in the Reports is the purported historical moves in the futures price of the underlying commodity.
27. Reports for the "seasonal" commodities, such as heating oil and unleaded gasoline, include a table of the high and low futures prices of the commodity and the overall difference between the high and low for the past several years.
28. The tables imply that the futures price of the commodity has always moved substantially from low to high in previous years, and that Dunhill customers will profit from that increase.
29. These tables are misleading because, among other things:
i) the representations as to profit potential are based on historical movements of the commodity futures prices rather than the options marketed by Dunhill;
ii) such a futures price increase is not assured;
iii) the futures contract in connection with the option being sold to the customer is not the futures contract on which the representations as to profit potential are based;
iv) even when the futures price of the commodity does trend upward, there still are significant price fluctuations with highs and lows over time which affect a customer's ability to profit on the market movement;
v) in certain of the past years included in the tables, the futures price of the commodity did not trend upward, but rather trended downward; and
vi) an advantage in trading options will not be obtained based on seasonal and other existing and known supply and demand forces because those forces already are reflected in the price paid for the option and in the price of the option's underlying futures contract.
Dunhill Telephone Solicitations
30. Throughout most of its existence, Dunhill has employed approximately eight to ten APs who generally had no prior experience or training in commodity options trading or in the analysis of commodity options markets. These APs were hired by Hutcherson, who makes all hiring and firing decisions at Dunhill. These APs generally have learned their trade on the job at Dunhill, receiving training directly from Hutcherson and by listening to the telephone sales solicitations of Hutcherson and the other APs already at Dunhill. Hutcherson monitors the APs' sales solicitations by listening to the APs talk to customers and prospective customers on the phone.
31. In their telephone solicitations, Dunhill APs routinely predict price moves which translate into large profits to the customer and present that price movement as realistic and to be expected.
32. Dunhill APs support the claims that these profit predictions are realistic by, among other things:
i) referencing historical futures price moves;
ii) misrepresenting that futures prices in "seasonal" commodities, such as unleaded gas and heating oil, always move from low to high such that the customer would expect that the highest futures prices, and the most dramatic increases in the value of their options, are yet to come; and
iii) misrepresenting the customer's ability to profit from known supply and demand forces, including seasonal trends.
33. Dunhill APs mention the risk of options trading to prospective customers, but do not adequately disclose that risk. Moreover, any references to risk are nullified by the APs' misrepresentations and omissions, which convey the impression that purchasing commodity options with Dunhill involves very little risk of losing money.
34. Dunhill APs urge customers to use one of two options trading strategies. The first strategy is the purchase of call (or occasionally put) options, with a commission of $165 per option. The second strategy is the purchase of option spreads, in which the customer purchases and sells call (or occasionally put) options of the same delivery month, with the purchased call bearing a lower strike price than the sold call option (or the purchased put bearing a higher strike price then the sold put). Spread trades generate two commissions of $150 each, one for each leg of the spread, for a total commission of $300.
35. Dunhill APs routinely represent to customers that the spread strategy provides a better investment, despite the fact that, due to the much higher commissions, the market value of the spread position, after commissions, is lower than the market value of the comparably priced call or put options, after commissions.
36. Dunhill APs rarely, if ever, mention the amount of commissions for the spread. None of the materials Dunhill sent to customers, including the commission price list, explain that each spread trade requires the customer to pay two commissions.
37. Jackam calls each Dunhill customer before each trade to go over the details of the trade and related costs. However, he routinely conceals the total commissions for the trades, especially as to spread trades. Jackam follows a written script he developed which discusses commissions on a per option basis only. Jackam discloses only that the commissions are $150 per option and does not disclose (1) that each leg of the spread trade is considered a separate option; or (2) the total commissions for the option and option spread trades.
38. Dunhill fails to disclose to customers the impact of spread trade commissions on the likelihood that customers will obtain a profit on their own spread trading strategy or the difference in commissions between the two trading strategies.
For the typical $5,000 investment, Dunhill APs often recommend that customers trade five spreads. Such a trade would have a total commission of $1,500. Therefore, after exchange and other fees, such an account has a balance of approximately $3400, and needs to generate approximately a 50 percent profit just to recoup the commissions and fees.
39. Between October 1995 and September 1998, Dunhill customers entered into commodity option trades which seldom, if ever, returned profits of the magnitude represented by Dunhill's advertisements and APs. Even when the price of an advertised commodity has trended upward, Dunhill customers generally lost money on their trades in options on that commodity. In those instances where options purchased by Dunhill customers moved into a profitable position, these positions usually were liquidated after generating far smaller profits than the Dunhill advertisements and APs have represented. Most Dunhill customers who closed a position at a small profit have lost money on their account as a whole. For the three-year period from October 1995 through September 1998, 91.4% of Dunhill customers lost money. Total net losses, including commissions, were in excess of $9.3 million.
40. Hutcherson and Jackam were aware of the types of options purchased by Dunhill customers, as well as Dunhill's trading practices and customer trading results, because they:
i) placed virtually every customer trade with Dunhill's futures commission merchant;
ii) reviewed daily equity runs that disclose the equity positions of Dunhill customer accounts; and
iii) reviewed and resolved customer complaints and reparations claims.
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 SECTION 33.10 OF THE COMMISSION'S REGULATIONS, 17 C.F.R. � 33.10 (1998): FRAUD BY MISREPRESENTATION AND OMISSION OF MATERIAL FACTS IN CONNECTION WITH THE SOLICITATION AND MAINTENANCE OF COMMODITY OPTIONS TRANSACTIONS
41. The allegations contained in paragraphs 1 through 40 above are re-alleged and incorporated herein by reference.
42. 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, Dunhill, Hutcherson and Jackam cheated, defrauded, or deceived, or attempted to cheat, defraud, or deceive, other persons by making false, deceptive, or misleading representations of material facts and by failing to disclose material facts, in soliciting customers and prospective customers, including, but not limited to, those set forth in paragraphs 10, 12, 15-20, 24, 26-28, 31-34, and 36-39, in violation of Section 4c(b) of the Act and Section 33.10 of the Commission's Regulations.
43. Dunhill and its APs, including Hutcherson and Jackam, knew that the statements, representations and omissions in the radio advertisements from which Dunhill purchased leads, and its own radio and Internet advertising, Special Reports and AP telephone solicitations set forth above were false, deceptive or misleading, or had no reason to believe that they were true, and knew that they were failing to disclose material facts to customers and prospective customers.
44. The foregoing acts, omissions and failures of Hutcherson, Jackam and Dunhill APs occurred within the scope of each such person's employment or office with Dunhill, and Dunhill is therefore liable for them. See Section 2(a)(1)(A)(iii) of the Act.
45. Hutcherson and Jackam have willfully aided, abetted, counseled, commanded, induced, procured, caused, or acted in combination or concert with other persons in the foregoing violations of Section 4c(b) of the Act and Section 33.10 of the Commission's Regulations. Hutcherson and Jackam are therefore responsible for these violations by operation of Section 13(a) of the Act.
46. Hutcherson and Jackam, directly or indirectly, controlled Dunhill and the APs that committed the foregoing violations of Section 4c(b) of the Act and Section 33.10 of the Commission's Regulations, and did not act in good faith, or knowingly induced, directly or indirectly, the acts constituting these violations. Hutcherson and Jackam are therefore liable for these violations by operation of Section 13(b) of the Act.
COUNT TWO
VIOLATIONS OF SECTION 4d(1) OF THE COMMODITY EXCHANGE ACT, AS AMENDED, 7 U.S.C. � 6d(1)(1994): ACTING AS AN INTRODUCINGBROKER WITHOUT REGISTRATION
47. The allegations in paragraphs 1 through 40 above are re-alleged and incorporated by reference.
48. An "introducing broker" means any person engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market who does not accept any money, securities, or property to margin, guarantee, or secure any trades or contracts that result or may result therefrom.
49. NMP was an introducing broker, without registering with the Commission as such, in violation of Section 4d(1) of the Act.
COUNT THREE
VIOLATIONS OF SECTION 4k(1) OF THE COMMODITY EXCHANGE ACT, AS AMENDED, 7 U.S.C. �6(k)(1)(1994), AND SECTION 3.12(a) OF THE COMMISSION'S REGULATIONS, 17 C.F.R. 3.12(a) (1997): ACTING AS AN ASSOCIATED PERSON WITHOUT REGISTRATION
50. The allegations in paragraphs 1 through 40 above are re-alleged and incorporated by reference.
51. An "associated person" means any natural person who is associated with an introducing broker as a partner, officer, employee, or agent (or any natural person occupying a similar status or performing similar functions), in any capacity which involves (i) the solicitation or acceptance of customers' orders (other than in a clerical capacity) or (ii) the supervision of any person or persons so engaged.
52. Thomas and Dayton were each associated with NMP, an introducing broker, without registering with the Commission as associated persons, in violation of Section 4k(1) of the Act and Section 3.12(a) of the Regulations.
VIOLATIONS OF SECTION 166.3 OF THE COMMISSION'S REGULATIONS, 17 C.F.R. � 166.3 (1998): FAILURE TO SUPERVISE DILIGENTLY
53. The allegations contained in paragraphs 1 through 40 above are re-alleged and incorporated herein by reference.
54. Dunhill, Hutcherson, Jackam, Thomas and NMP have supervisory duties relating to their business as persons registered or required to be registered.
55. Dunhill, Hutcherson and Jackam have failed to exercise diligently their supervisory duties, including, but not limited to, the following:
i) Failing to supervise diligently the activities engaged in to produce Dunhill's radio, Internet advertisements, and Internet website;
ii) Failing to supervise diligently the review and approval of the radio advertisements from which Dunhill purchased names of prospective customers to solicit;
iii) Failing to supervise diligently the sales practices and the sales solicitations of the Dunhill APs;
iv) Failing to supervise diligently the trading of customer accounts; and
v) Failing to design, implement, monitor and follow a program of supervision and compliance designed to deter and detect violations of the Act or the Commission's Regulations including, but not limited to, the foregoing violations of Section 4c(b) of the Act and Section 33.10 of the Commission's Regulations.
56. Thomas and NMP have failed to exercise diligently their supervisory duties, including, but not limited to, the following:
i) Failing to supervise diligently the activities of Dayton; and
ii) Failing to design, implement, monitor and follow a program of supervision and compliance designed to deter and detect violations of the Act or the Commission's Regulations including, but not limited to, the foregoing violations of Section 4k(1) of the Act and Section 3.12(a) of the Regulations.
57. For all the foregoing reasons, Dunhill, Hutcherson, Jackam, NMP and Thomas have failed to supervise diligently the handling by their partners, officers, employees and agents (or persons occupying a similar status or performing a similar function) of all commodity interest accounts that they have carried, operated, advised or introduced and all other activities of their partners, officers, employees, and agents (or persons occupying a similar status or performing a similar function) relating to their business as Commission registrants, 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.
Section 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 each 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 Lidian Pereira or Karen Kenmotsu, 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 any Respondent fails to file the required Answer or fails to appear at a hearing after being duly served, such Respondent shall be deemed in default, and the proceeding may be determined against such Respondent 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 each 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. | |
| Jean A. Webb | |
| Secretary to the Commission | |
| Commodity Futures Trading Commission |
Date: March 4, 1999
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