Before The
COMMODITY FUTURES TRADING COMMISSION
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:
In the Matter of:CFTC Docket No. 95-15
:
:ORDER MAKING FINDINGS
:AND IMPOSING
AMERICAN FUTURES GROUP, INC.,:REMEDIAL SANCTIONS
GEORGE J. PERK, THOMAS G. :
REEVES and JOSEPH J.:
MARCHIANO,:
:
:
:
Respondents.:
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I.
On July 31, 1995, the Commodity Futures Trading Commission ("Commission") filed a Complaint and Notice of Hearing ("Complaint") against American Futures Group, Inc. ("AFG"), George J. Perk ("Perk"), Thomas G. Reeves ("Reeves"), and Joseph J. Marchiano ("Marchiano"). The Complaint charges, inter alia, that AFG, Perk, Reeves and Marchiano each violated 166.3 of the Commission's Regulations ("Regulations").
II.
AFG, Perk, Reeves and Marchiano have submitted Offers of Settlement ("Offers") which the Commission has determined to accept. Without admitting or denying the findings herein, and prior to any adjudication on the merits, AFG, Perk, Reeves and Marchiano acknowledge service of this Order Making Findings And Imposing Remedial Sanctions ("Order"). AFG, Perk, Reeves and Marchiano consent to the use of the findings contained in this Order in this proceeding and in any other proceeding brought by the Commission or to which the Commission is a party.
III.
The Commission finds the following:
A.RESPONDENTS
(1) AFG maintains its principal place of business at Two World Trade Center, 15th floor, Suite 1530, New York, New York 10048. AFG has been registered as a non-clearing futures commission merchant ("FCM") since June 27, 1988, a commodity trading advisor ("CTA") since August 21, 1984, and a commodity pool operator ("CPO") since June 12, 1984. Previously, AFG was registered as an introducing broker ("IB") under the name American Energy and Petroleum, Inc., from March 12, 1985 through June 27, 1988.
(2) Perk is currently the Chief Executive Officer ("CEO") of AFG,, and has been listed as a principal of the firm since at least June 12, 1984.
(3) Reeves is currently President of AFG, and has been listed as a principal of the firm since at least June 12, 1984.
(4) Marchiano was been registered with the Commission as an AP of AFG from September 11, 1991 until January 17, 1994. He was the manager of the AFG branch office located in Aventura, Florida. Marchiano is currently registered as an AP of Alpine Financial Corp.
B.FACTS
(1) The Aventura Branch Office
AFG operated a branch office in Aventura, Florida, from September 1991 until August 1993, and in Fort Lauderdale, Florida, from September 1993 until January 17, 1994 (hereinafter referred to as the "Aventura branch"). Marchiano was hired by Perk and Reeves on September 1, 1991 to establish, run and supervise, the Aventura branch. He had direct responsibility for recruiting, hiring and training account executives ("AEs"). Marchiano was also responsible for the day to day supervision of the branch's AEs, including monitoring their customer solicitations and trading activity. He also received all customer complaints involving the Aventura branch and coordinated customer issues with Perk or Reeves in New York.
Between September 1, 1991 and December 31, 1993, Marchiano supervised AEs with approximately 827 customer accounts.
(2) Supervision
AFG, Perk, Reeves and Marchiano failed diligently to supervise the manner in which their officers, employees and agents (or persons occupying a similar status or performing a similar function) handled the commodity interest accounts carried by AFG in the Aventura branch, and all other activities of such persons relating to their business as Commission registrants.
Perk, in his capacity as president of AFG during the period of the investigation, shared responsibility for the overall management and supervision of the business of AFG with Reeves. Perk's responsibilities included all aspects of AFG's back-office operations, as well as "the financial side of the business," involving, among other duties, the day-to-day bookkeeping of the company, issuance of checks, margining of accounts, broker payouts, data entry to ensure accurate entry of trades, correction of trade errors and reviewing the equity runs for the entire AFG network of offices. Eventually, Perk became more involved in the supervisory side of the business and assumed responsibility for the compliance department.
Reeves, in his capacity as vice president, secretary and treasurer of AFG, was directly involved in the supervision of branch-office activity and was responsible for compliance functions at AFG. Reeves' responsibilities included interacting with the branch offices, seeing that the rules were followed and dealing with any problems that required supervision of the employees outside the main office. He reviewed and approved all hiring decisions made by the Aventura branch. Furthermore, all customer complaints, except those of a minor nature, were referred to him for handling.
Marchiano, in his capacity as vice president, a registered AP of AFG, and the manager of the Aventura branch, had responsibility for the overall management of the Aventura office. Among other duties, Marchiano (a) hired, trained and supervised all AEs and other employees who worked in AFG's Aventura branch, (b) created, reviewed and/or approved promotional material and correspondence transmitted by AEs in the Aventura branch to existing and prospective customers of AFG, and (c) established and/or implemented procedures used by AFG's Aventura branch in transmitting customer orders to buy and sell commodity option contracts to the AFG order desk in New York.
AFG, Perk and Reeves failed to supervise Marchiano and the activities of the Aventura branch. They failed to develop or implement adequate written procedures with respect to compliance matters or to provide training or compliance manuals to the branch's AEs. Although Reeves was aware of customer complaints, he took no steps to investigate customer complaints or discuss these matters with Marchiano. In short, AFG, Perk and Reeves failed to design, implement or monitor an appropriate supervision and compliance system in the Aventura branch. Marchiano failed to establish procedures to adequately train and supervise the AEs in the Aventura branch. He failed to develop a system to monitor the solicitation of customer business and the trading activity of the AEs in the Aventura branch. In addition, Marchiano failed to establish procedures to ensure that customer complaints would be fully investigated.
IV.
FINDINGS OF VIOLATIONS
Solely on the basis of the consent evidenced by the Offer, and without any adjudication on the merits, the Commission finds that AFG, Perk, Reeves and Marchiano violated Section 166.3 of the Regulations.
V.
OFFER OF SETTLEMENT
AFG, Perk, Reeves and Marchiano have submitted Offers of Settlement in which, without admitting or denying the findings herein, they: admit the jurisdiction of the Commission with respect to the matters set forth herein; waive: 1) a hearing; 2) all post-hearing procedures; 3) judicial review by any court; 4) any objection to the staff's participation in the Commission's consideration of the Offers; and 5) any claim of a punitive penalty based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein; stipulate that the record basis on which this Order is entered consists solely of this Order and the findings consented to in the Offers which are incorporated in this Order; and consent to the Commission's issuance of this Order, which makes findings, as set forth above, and orders AFG, Perk, Reeves and Marchiano to cease and desist from violating the provisions of the Act they have been found to have violated, orders AFG, Perk and Reeves to pay $450,000 to be used for restitution, and orders Marchiano to pay a civil monetary penalty of $10,000 and to comply with the undertakings set forth below.
VI.
ORDER
Accordingly, IT IS HEREBY ORDERED THAT:
(1)AFG, Perk, Reeves and Marchiano shall cease and desist from violating 166.3 of the Regulations.
(2)(a)The Garden City Group, Inc. is appointed as the Escrow Agent ("Agent") and is authorized, empowered, and directed to perform all duties necessary to administer the terms and conditions of customer redress hereunder. The Agent shall be paid from the funds paid by AFG, Perk and Reeves pursuant to the terms and conditions of this Order. The Commission shall have no liability for the payment of such fees or expenses. AFG, Perk and Reeves shall have no liability for the payment of such fees or expenses in excess of the payment described in Paragraph (2)(b) below.
(b)AFG, Perk and Reeves shall pay into an interest bearing escrow account, established by and under the conrol of the Agent, the sum of $450,000. No portion of the payment of $450,000 shall be deemed a payment of any fine, penalty, or punitive assessment. AFG is liable for $350,000, Perk is liable for $50,000 and Reeves is liable for $50,000. The $450,000 is payble according to the following schedule:
(1) AFG, Perk and Reeves shall pay the sum of $50,000 within ten (10) business days after the entry of this Order;
(2) AFG, Perk and Reeves shall pay the sum of $100,000 on or before January 15, 1997;
(3) AFG, Perk and Reeves shall pay the sum of $100,000 on or before August 15, 1997;
(4)AFG, Perk and Reeves shall pay the sum of $200,000 on or before August 15, 1998.
(c)The sum of $450,000 shall be used to provide redress to all former Aventura branch customers who maintained a commodity futures and/or options trading account between September 1, 1991 and December 31, 1993. In the event the Commission determines in its sole discretion, after consultation with the Agent, that such redress is wholly or partially impracticable, funds not so used shall be deposited in the United States Treasury. In the event that the funds are deposited in the United States Treasury, such payment of funds does not constitute a penalty or fine or punitive assessment.
(d)The Agent shall provide written notice to the former Aventura branch customers that they may submit a claim for losses incurred, including commissions and fees, and shall prepare a Claim Form for that purpose, within three (3) months after the Commission's entry of this Order.
(e)The Agent shall issue from the interest bearing escrow account funds, on a pro rata basis, to each Aventura branch customer who submits to the Agent a valid Claim Form, a refund of the amount of losses, including commissions and fees, paid by the customer in connection with an account at the Aventura branch. The Agent shall file with the Division of Enforcement a report, delineating the identity and amount of each valid claim, the pro rata refund due each customer submitting a valid claim, and the Agent's plan for disbursements of funds to pay each valid claim in the most expeditious manner. AFG, Perk and Reeves shall have no right to contest any decision or action concerning the manner of distribution or any person's entitlement to share in the distribution. In making the pro rata distributions, the Agent shall consider for purposes of determining any appropriate set-offs any previous settlements or judgments involving customers' claims against AFG, Perk and Reeves.
(f)The agent shall notify the customers who will be eligible to receive restitution and disburse any restitution to eligible customers after full payment is received from AFG, Perk and Reeves under Paragraph (2)(b) of this Order.
(g)AFG, Perk and Reeves shall cooperate fully with the Commission and Agent in all matters herein related to their obligations under this Order. This cooperation shall include, but not be limited to, providing immediately upon written request of the Commission any and all documents necessary for the Agent to administer the terms and conditions of the payment obligation including, but not limited to, customer lists (including names, addresses and telephone numbers), customer account opening documents, customer account statements, commission statements, profit/loss statements, equity runs, and records of any payments by AFG, Perk and Reeves in connection with judgments and/or settlements involving customer claims.
(h)If AFG, Perk and Reeves fail to pay any amount of this restitution as set forth above, AFG, Perk and Reeves shall be prohibited automatically from trading on all contract markets and AFG's, Perk's and Reeves's registration with the Commission as a futures commission merchant, commodity trading advisor, commodity pool operator, and/or as an associated person shall be suspended automatically until AFG, Perk and Reeves show to the satisfaction of the Commission that payment of the full amount with interest thereon has been made.
(i)The payment obligation of AFG, Perk and Reeves is an obligation that is non-dischargeable in the event of a voluntary or involuntary proceeding instituted by or against AFG, Perk and Reeves under the United States Bankruptcy Code. In the event that AFG, Perk and Reeves attempt in any manner to discharge their payment obligation hereunder under the United States Bankruptcy Code other than by payment to the Agent of the full payment obligation, the Commission shall have a reservation of all rights to object to such discharge. The entry of this Order shall not act in any manner as a bar to the Commission from objecting to any attempt by AFG, Perk and Reeves to discharge their payment obligation hereunder under the United States Bankruptcy Code.
(j)In the event that AFG, Perk or Reeves defaults in payment of any installment of the payment obligation, as described in paragraph 2 under the terms and conditions of this Offer, and such default remains uncured for a period of fifteen (15) days after notice has been sent by the Agent, via facsimile and certified mail to AFG, Perk and Reeves, the outstanding balance of the payment obligation shall immediately become due and payable.
(3)(a) Marchiano shall pay $10,000 as a civil monetary penalty to the United States Treasury to be paid on or before January 2, 1997.
(b)The payment obligation of Marchiano is an obligation that is non- dischargeable in the event of a voluntary or involuntary proceeding instituted by or against Marchiano under the United States Bankruptcy Code. In the event that Marchiano attempts in any manner to discharge his payment obligation hereunder under the United States Bankruptcy Code other than by payment to the United States Treasury of the full payment obligation, the Commission shall have a reservation of all rights to object to such discharge. The entry of this Order shall not act in any manner as a bar to the Commission from objecting to any attempt by Marchiano to discharge his payment obligation hereunder under the United States Bankruptcy Code.
(4)Marchiano shall comply immediately with the following undertakings, which in no way will substitute for any other requirements currently in place to ensure compliance with the Act and Commission, exchange, and National Futures Association rules:
(a)Marchiano agrees to withdraw his AP registration and not re-apply for a period of one year from the date of entry of this Order Making Findings and Imposing Remedial Sanctions;
(b)Marchiano further agrees that, following the period of withdrawal of his registration referred to in Paragraph (4)(b), any registration that Marchiano may obtain shall, for a period of two years, be subject to the following conditions:
(1)Marchiano may not act as a associated person, pursuant to Section 4k of the Commodity Exchange Act, as amended, 7 U.S.C. 6K (1994), and as defined under Section 1.3(aa) of the Commission's Regulations, 17 C.F.R. 1.3 (aa)(1995), unless his activities as an associated person are subject to a Supplemental Sponsor Certification Statement in the form attached hereto, executed and submitted to the Commission by the Commission registrant that employs him. Immediately upon his Sponsor's ceasing to serve as Marchiano's supervisor, Marchiano shall stop acting as an associated person until his activities are once again subject to a Supplemental Sponsor Certification Statement in the form attached hereto, executed and submitted to the Commission;
(2) Marchiano shall not serve on any disciplinary committee, arbitration panel, oversight panel or governing board of any self-regulatory organization subject to regulation by the Commission for such period as his registration is conditioned;
(3) Marchiano shall not directly or indirectly act as a principal, partner, officer, director or branch office manager of any entity registered or required to be registered under the Commodity Exchange Act or the Regulations promulgated thereunder;
(4) Marchiano shall not directly or indirectly exercise supervisory authority over any person required to be registered with the Commission;
(5) Marchiano's registration shall be automatically suspended if he is charged with a disciplinary offense as defined in Commission Regulation 1.63(a)(6), 17 C.F.R. 1.63(a)(6), except that, as to offenses defined in Regulation 1.63(a)(6)(i)(C), suspension shall occur if fines aggregating $5,000 or more are imposed during the period of these conditions rather than during a calendar year;
(6) If Marchiano's registration is automatically suspended pursuant to paragraph (4)(b)(5) above, the period of suspension shall terminate six months after the date of the suspension, unless the Commission files within that period a Notice of Intent to Revoke or Restrict Registration, pursuant to Commission Regulation 3.60(a), 17 C.F.R. 3.60(a)(1995).
(c)Marchiano further agrees to comply with the undertakings in his Offer to cooperate fully with the Division of Enforcement in any investigation, and in any proceeding arising from such an investigation by, among other things: (1) responding promptly, completetly and truthfully to any inquiries or requests for information; (2) providing authentication of documents; (3) testifying completely, truthfully and consistently with any prior sworn statements provided to the Division; and (4) not asserting his privileges under the Fifth Amendment of the United States Constitution in connection with any testimony he is asked to provide.
Unless otherwise specified, the provisions of this Order shall be effective on this date.
A copy of this Order shall be served upon AFG, Perk, Reeves and Marchiano, upon the National Futures Association and all contract markets.
By the Commission._____________________________
Jean A. Webb
Secretary to the Commission
Commodity Futures Trading Commission
Dated: November 22, 1996