IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF MICHIGAN
NORTHERN DIVISION
___________________________________
)
COMMODITY FUTURES TRADING )CIVIL ACTION NO._________
COMMISSION,)
)
Plaintiff,)COMPLAINT FOR INJUNCTIVE
)AND OTHER EQUITABLE RELIEF
v.)FOR VIOLATIONS OF THE
)COMMODITY EXCHANGE ACT, AS
DANIEL M. O'SHAUGHNESSEY, an)AMENDED, 7 U.S.C. 1 ET
individual, GLORY FUND I, INC.,)SEQ., AND THE REGULATIONS
a Michigan corporation, and)PROMULGATED THEREUNDER,
GLORY FUND, L.L.C., a Michigan)17 C.F.R. 1.1 ET SEQ.
limited liability company,)
)
Defendants.)
___________________________________)
I.
INTRODUCTION
Plaintiff, Commodity Futures Trading Commission ("CFTC"), hereby alleges that defendants Daniel M. O'Shaughnessey ("O'Shaughnessey"), Glory Fund I, Inc. ("GFI"), and Glory Fund, L.L.C. ("Glory Fund") have engaged and are engaging in acts and practices which constitute violations of Sections 4b(a)(i), 4b(a)(ii), and 4o(1) of the Commodity Exchange Act, as amended ("Act"), 7 U.S.C. 6b(a)(i), 6b(a)(ii) and 6o(1) (1994), and Regulations 4.20(c) and 4.41(a) promulgated thereunder ("CFTC Regulations"), 17 C.F.R. 4.20(c) and 4.41(a) (1996).
Accordingly, pursuant to Sections 6c of the Act, 7 U.S.C. 13a-1 (1994), the CFTC brings this action against defendants O'Shaughnessey, GFI and Glory Fund to enjoin such acts and practices and to compel compliance with the provisions of the Act and the CFTC Regulations. In addition, the CFTC seeks a prohibition on the solicitation or acceptance of new customers or new deposits by defendants, a civil monetary penalty, disgorgement of unlawfully obtained funds, restitution, rescission, and such other ancillary equitable relief as the Court may deem necessary or appropriate under the circumstances.
Unless restrained and enjoined by this Court, defendants are likely to and will continue to engage in the acts and practices alleged in this Complaint and in similar acts and practices as more fully described below.
II.
JURISDICTION AND VENUE
The Commodity Exchange Act establishes a comprehensive system for regulating the purchase and sale of commodity futures contracts and options. This Court has jurisdiction over the subject matter and the parties to this action pursuant to Section 6c(a) of the Act, 7 U.S.C. 13a-1(a) (1994). Section 6c(a) provides that whenever it shall appear to the CFTC that any person has engaged, is engaging, or is about to engage in any act or practice constituting a violation of the Act or any rule, regulation or order thereunder, the CFTC may bring an action against such person in the proper district court of the United States to enjoin such practice, to enforce compliance with the Act, to remove any danger of violation of the Act and for civil penalties.
Venue properly lies with this Court pursuant to Section 6c(e) of the Act, 7 U.S.C. 13a-1(e) (1994), in that defendants Glory Fund, GFI and O'Shaughnessey are found in, inhabit, and transact business in this district, and the acts and practices in violation of the Act and CFTC Regulations have occurred, are occurring, and are about to occur within this district, among other places.
III.
PARTIES
Plaintiff CFTC is the independent federal regulatory agency of the United States charged with the responsibility for administering and enforcing the provisions of the Act and the CFTC Regulations, and possesses independent litigating authority. The mission of the agency is to regulate and oversee the commodity futures industry in order to ensure open and competitive markets, and to protect the public and the markets from price manipulation and fraud.
Defendant O'Shaughnessey is an individual residing at 506 Bark Lane, Midland, Michigan 48640. In April 1996, O'Shaughnessey formed GFI as a Michigan corporation and Glory Fund as a Michigan limited liability company. O'Shaughnessey is president and registered service agent of both companies. O'Shaughnessey is the sole principal of GFI, and since July 31, 1996, he has been registered with the CFTC as an Associated Person ("AP") with GFI, pursuant to Section 4k of the Act, 7 U.S.C. 6k (1994).
Defendant GFI is a Michigan corporation doing business at 506 Bark Lane, Midland, Michigan 48640. GFI has been registered with the CFTC as a Commodity Pool Operator ("CPO") and Commodity Trading Advisor ("CTA") pursuant to Section 4m(1) of the Act, 7 U.S.C. 6m(1) (1994), since July 31, 1996. GFI operates and manages the Glory Fund commodity pool.
Defendant Glory Fund is a Michigan limited liability company also doing business at 506 Bark Lane, Midland, Michigan 48640, and is the commodity pool operated by GFI.
IV.
FACTUAL BACKGROUND
During the period from at lest April 1996 to the present, defendants O'Shaughnessey and GFI directly and indirectly solicited members of the public to participate in the Glory Fund commodity pool by, among other things, holding seminars and meetings and mailing promotional literature. As a result of these solicitations, O'Shaughnessey and GFI received in excess of $200,000 from at least twelve individuals, either for direct investment in Glory Fund or as loans to O'Shaughnessey that O'Shaughnessey and GFI later converted or "rolled" into pool investments. Thereafter, O'Shaughnessey and GFI issued false statements concerning the performance of Glory Fund and other commodity investments managed by O'Shaughnessey and GFI; issued false statements to investors purporting to show that their funds were invested in a commodity pool trading account; issued false statements to investors concerning the value of their investments; and commingled funds belonging to the pool with the property of O'Shaughnessey or GFI. The continued activities of the defendants pose a threat of additional and continuing violations of the Act.
A. Statutory and Regulatory Requirements
A commodity pool is any investment trust, syndicate or similar form of enterprise engaged in the business of investing its pooled funds in trading commodity interests. See CFTC Regulation 4.10(d)(1), 17 C.F.R. 4.10(d)(1) (1996).
A CPO is any firm or individual engaged in a business which 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. See Section 1a(4) of the Act, 7 U.S.C. 1a(4) (1994).
Pursuant to CFTC Regulation 1.3(aa)(3), 17 C.F.R. 1.3(aa)(3) (1996), an associated person of a CPO is defined as any natural person associated with the CPO as a partner, officer, employee, consultant or agent (or any natural person occupying a similar status or performing similar functions), in any capacity which involves the solicitation of funds, securities, or property for a participation in a commodity pool or the supervision of any person so engaged.
Pursuant to Section 4b(a) of the Act, 7 U.S.C. 6b(a) (1994), it is unlawful for any person, 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--
(i) to cheat or defraud or attempt to cheat or defraud such other person, or
(ii) willfully to make or cause to be made to such other person any false report or statement thereof.
Pursuant to Section 4o(1) of the Act, 7 U.S.C. 6o(1) (1994), it is unlawful for a CPO or persons acting as APs of a CPO, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, (A) to employ any device, scheme, or artifice to defraud any client or participant or prospective client or participant; or (B) to engage 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.
Pursuant to CFTC Regulation 4.20(a)-(b), 17 C.F.R. 4.20(a)-(b) (1996), a CPO must operate its pool as a legal entity separate from that of the pool operator and all funds, securities, or other property received by a CPO from an existing or prospective pool participant for the purchase of an interest or as an assessment (whether voluntary or involuntary) on an interest in a pool that it operates or that it intends to operate must be received in the pool's name. Pursuant to CFTC Regulation 4.20(c), 17 C.F.R. 4.20(c) (1996), no CPO may commingle the property of any pool that it operates or that it intends to operate with the property of any other person.
Pursuant to CFTC Regulation 4.41(a), 17 C.F.R. 4.41(a) (1996), no CPO, CTA or any principal thereof, may advertise in a manner which: (1) employs any device, scheme or artifice to defraud any participant or client or prospective participant or client; or (2) involves any transaction, practice or course of business which operates as a fraud or deceit upon any participant or client or prospective participant or client.
The National Futures Association ("NFA") is a futures association registered with the CFTC pursuant to Section 17 of the Act, 7 U.S.C. 21 (1994). NFA is a private corporation that serves as an industry self-regulatory organization. Its membership is composed of futures commission merchants, commodity pool operators, commodity trading advisors, introducing brokers and other futures professionals registered with the CFTC. NFA is responsible, under CFTC oversight, for certain aspects of the regulation of these futures entities and their associated persons. NFA focuses primarily on the qualifications and proficiency, financial condition, retail sales practices, and business conduct of its members.
B.Factual Allegations
O'Shaughnessey, GFI and Glory Fun at all relevant times acted 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 one behalf of any other persons, where such contracts for future delivery were or may have been used for the purposes set forth in paragraph 14.
Actual Trading Losses
O'Shaughnessey, GFI and Glory Fund each have open commodity accounts at LFG, L.L.C. ("LFG"), a registered futures commission merchant. O'Shaughnessey opened his personal account in October 1995; O'Shaughnessey and GFI opened a corporate trading account for GFI in May 1996; and O'Shaughnessey and GFI opened a commodity pool account for Glory Fund in September 1996. (Hereafter, these accounts will be referred to as the "personal account," "corporate account," and "pool account"). O'Shaughnessey also has opened separate bank accounts for himself, GFI and Glory Fund.
O'Shaughnessey's performance in trading commodity futures and commodity options for his personal account, the GFI corporate account and the Glory Fund pool account, reflect overall trading losses of approximately $300,000 since October 1995. None of the accounts has been profitable.
The LFG account statements for Glory Fund show that the pool account has received net deposits of $141,000 since it began trading on September 20, 1996. The pool account's liquidating value, as of November 12, 1996, including open trade equity on futures positions and options market value, was $34,923. This reflects trading losses of approximately $100,000 in two months.
Meanwhile, the LFG account statements for O'Shaughnessey's personal trading account show that O'Shaughnessey made a net investment of $65,965 in his account since he began trading on October 13, 1995. However, the account balance as of September 30, 1996, was just $265, reflecting trading losses of approximately $65,000 over twelve months.
Similarly, the LFG account statements for GFI's corporate trading account show a net investment of $125,748 in the corporate account since it began trading on June 13, 1996. However, the account balance as of September 30, 1996, was $0, reflecting trading losses of approximately $125,000 over five months.
Persons Whose Investments Were Deposited in Glory Fund
O'Shaughnessey and GFI provided Disclosure Documents concerning Glory Fund to at least some of the prospective investors they solicited. At least four investors executed formal Glory Fund pool agreements with GFI and made investments in connection with their agreements.
O'Shaughnessey and GFI deposited funds totaling $141,000 in Glory Fund's account at LFG in September, October and November, 1996. Thereafter, O'Shaughnessey and GFI reported profitable performance results to these participants. The statements they received from O'Shaughnessey and GFI show that their Glory Fund pool participation interests have increased in value. In fact, the pool account lost money in the time it has been open.
Pool Participants with Written Loan Agreements
Beginning in at least April 1996, O'Shaughnessey solicited personal loans from members of the public. In at least three instances, O'Shaughnessey has executed a written loan agreement that provides he will repay the principal of the loan plus interest at an annual percentage rate ("APR") of 20% until loan maturity on December 31, 1996; and in at least one instance, O'Shaughnessey has executed a written loan agreement that provides he will repay the principal of the loan plus interest at an APR of 8% until loan maturity on December 31, 1996. The written terms of the loan agreements make no reference to the performance of Glory Fund or any other commodity pool.
At least four of the persons who entered into these written loan agreements believe that, with their assent, O'Shaughnessey and GFI converted or "rolled" their loan interests into participation interests in Glory Fund in or about June 1996.
Dating back to at least June 1996, O'Shaughnessey and GFI provided some or all of these former lenders with monthly correspondence on "Glory Funds" letterhead and accompanying pool statements discussing the performance of their "membership accounts." These "Dear Investor" letters mention trading strategies purportedly used by O'Shaughnessey and GFI, discuss "performance" of their "membership account[s] in Glory Fund L.L.C.," mention industry terms such as "closed trades" and "open trade equity," discuss GFI's registration status as a CPO, and project "realistic expectations to exceed 100% per year on your investments." Taken together, the letters and statements purport to show not only that the investors were pool participants, but also that their participation interests increased in value because of the pool's allegedly profitable trading activity.
During at least April 1996 to the present, O'Shaughnessey and GFI told the former lenders that O'Shaughnessey's personal commodity futures and options account was profitable. O'Shaughnessey and GFI also told these persons that the Glory Fund pool account was profitable. They made these representations about the pool's performance before the pool account began trading on September 20, 1996. Moreover, at all relevant times, O'Shaughnessey's personal account, the GFI corporate account, and the Glory Fund pool account were unprofitable.
Commingling Pool Funds with Personal Assets
On or about June 26, 1996, at the direction of O'Shaughnessey and GFI, two individuals wired $20,000 to Glory Fund's bank account at Michigan National Bank. However, after these funds were received in Glory Fund's account, O'Shaughnessey and GFI wired $10,000 from the pool's bank account to GFI's corporate trading account at LFG and $6,900 to O'Shaughnessey's personal bank account.
Although these two investors provided their funds for investment in Glory Fund, O'Shaughnessey and GFI have not recognized their investments as pool participation interests. However, since making their respective investments, these investors have received correspondence and statements from O'Shaughnessey and GFI showing that they are pool members and that their participation interests have increased in value.
Other Investors
On information and belief, the CFTC alleges that O'Shaughnessey and GFI have solicited and accepted funds from other persons for investment in Glory Fund, and thereafter provided these investors with correspondence and statements showing that they are pool members and that their participation interests have increased in value. On further information and belief, the CFTC alleges that O'Shaughnessey and GFI have not formally recognized their investments as pool participation interests and have misappropriated their funds.
NFA Audit of O'Shaughnessey, GFI and Glory Fund
In mid-September, 1996, O'Shaughnessey solicited a prospective customer in California to invest in the Glory Fund. O'Shaughnessey mailed that prospective customer a letter dated September 16, 1996, in which he represented that CFTC regulations pertaining to suitability guidelines prevented him from accepting the customer's funds. O'Shaughnessey suggested, instead, that the customer send him $5,000 as a personal loan, which O'Shaughnessey would deposit into his personal trading account. O'Shaughnessey promised to pay "20% APR or match the Glory Fund performance (whichever is higher)." The letter indicates that once the customer's funds grew, he could invest in the pool itself.
Upon being forwarded a copy of this letter in mid-October 1996, the NFA sent a team of auditors to O'Shaughnessey's and GFI's office in Midland, Michigan, to question O'Shaughnessey about the letter and to review GFI's operation. O'Shaughnessey and GFI reported this event to at least some Glory Fund investors, and in so doing claimed that NFA issued them "a clean bill of financial health." O'Shaughnessey and GFI had no basis upon which to make that representation.
On the contrary, on November 15, 1996, the NFA issued a Member Responsibility Action against GFI and an Associate Responsibility Action against O'Shaughnessey (collectively, "MRA") captioned In the Matter of Glory Fund I, Inc. and Daniel M. O'Shaughnessey, NFA Case Nos. 96-MRA-006 and 96-ARA-003, because NFA had reason to believe that GFI and O'Shaughnessey have provided false reports to pool participants, have provided false and misleading information to NFA, and have commingled property of the Glory Fund with their own personal assets.
IV.
VIOLATIONS OF THE COMMODITY EXCHANGE ACT AND CFTC REGULATIONS
COUNT I
VIOLATIONS OF SECTION 4b(a)(i) OF THE ACT,
7 U.S.C. 6b(a)(i): CHEATING AND DEFRAUDING
PERSONS IN CONNECTION WITH COMMODITY FUTURES
CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Paragraphs 1 to 36 are realleged and incorporated herein by reference.
From at least April 1996 to the present, defendants O'Shaughnessey and GFI have violated Section 4b(a)(i) of the Act, 7 U.S.C. 6b(a)(i) (1994), in that they cheated and defrauded or attempted to cheat and defraud other persons by falsely: making oral and written representations concerning the performance of Glory Fund and other commodity investments managed or operated by O'Shaughnessey and GFI; making oral and written representations to investors purporting to show that their funds were invested in the Glory Fund commodity pool; making oral and written representations to investors concerning the value of their investments; making written representations that customers' pool participation interests had earned a "profit" from trading in commodity futures contracts; making oral and written representations that defendants had converted or "rolled" investor loan interests into pool interests in Glory Fund; making oral and written representations concerning the NFA audit; and misappropriating funds belonging to the pool.
COUNT II
VIOLATIONS OF SECTION 4o(1) OF THE ACT, 7 U.S.C. 6o(1):
FRAUD BY A COMMODITY POOL OPERATOR AND
FRAUD BY ASSOCIATED PERSONS OF A COMMODITY POOL OPERATOR
Paragraphs 1 through 36 are realleged and incorporated herein.
From at least April 1996 to the present, by acts and practices occurring in the State of Michigan and elsewhere, defendant GFI, in its capacity as a CPO, and O'Shaughnessey, in his capacity as an AP of a CPO, have violated Section 4o(1) of the Act, 7 U.S.C. 6o(1) (1994), in that they have been, and are, employing a device, scheme, or artifice to defraud clients or prospective clients, or have engaged in transactions, practices or a course of business which operated as a fraud or deceit upon clients or prospective clients by means of the acts and practices described above. These acts were effected by use of the mails and other instrumentalities of interstate commerce, directly or indirectly.
COUNT III
VIOLATIONS OF SECTION 4b(a)(ii) OF THE ACT,
7 U.S.C. 6b(a)(ii): FALSE STATEMENTS
Paragraphs 1 through 36 are realleged and incorporated herein.
From at least April 1996 to the present, defendants O'Shaughnessey, GFI and Glory Fund violated Section 4b(a)(ii) of the Act, 7 U.S.C. 6b(a)(ii) (1994), by willfully making or causing to be made false written statements or reports to investors: concerning the performance of Glory Fund and other commodity investments managed or operated by O'Shaughnessey and GFI; showing that their funds were invested in the Glory Fund; concerning the value of their investments; showing that their pool participation interests had earned a "profit" from trading in commodity futures contracts; and showing that defendants had converted loan interests into pool interests in Glory Fund.
COUNT IV
VIOLATION OF CFTC REGULATION 4.20(c), 17 C.F.R. 4.20(c):
COMMINGLING OF POOL PARTICIPANTS' FUNDS
Paragraphs 1 through 36 are realleged and incorporated herein.
From at least April 1996 through the present, defendant GFI, in its capacity as a CPO, and O'Shaughnessey, in his capacity as an AP of a CPO, have violated CFTC Regulation 4.20(c), 17 C.F.R. 4.20(c) (1996), by commingling the property of a commodity pool with property of another person.
COUNT V
VIOLATION OF CFTC REGULATION 4.41(a), 17 C.F.R. 4.41(a):
FALSE ADVERTISING BY COMMODITY POOL OPERATORS
Paragraphs 1 through 36 are realleged and incorporated herein.
From at least April 1996 through the present, defendant GFI, in its capacity as a CPO, and O'Shaughnessey, in his capacity as a principal of a CPO, have violated CFTC Regulation 4.41(a), 17 C.F.R. 4.41(a) (1996), by advertising in a manner which: (1) employs any device, scheme or artifice to defraud any participant or client or prospective participant or client; or (2) involves any transaction, practice or course of business which operates as a fraud or deceit upon any participant or client or prospective participant or client.
VI.
RELIEF
Wherefore, Plaintiff CFTC respectfully requests, under the Act and CFTC Regulations, where applicable, that this Court enter an order of permanent injunction restraining and enjoining defendants O'Shaughnessey, GFI and Glory Fund, and all agents, servants, employees, successors, assigns, attorneys, and persons in active concert or participation with them who receive actual notice of such orders by personal service or otherwise, from directly or indirectly:
violating Section 4b(a)(i) and 4b(a)(ii) of the Act, 7 U.S.C. 6b(a)(i) and 6b(a)(ii) (1994), by, 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 --
i.cheating or defrauding or attempting to cheat or defraud such other person; or
ii.willfully making or causing to be made to such other person any false report or statement thereof, or willfully entering or causing to be entered for such person any false record thereof;
violating Section 4o(1) of the Act, 7 U.S.C. 6o(1) (1994), by employing a device, scheme, or artifice to defraud clients or prospective clients, 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, directly or indirectly;
violating CFTC Regulation 4.20(c), 17 C.F.R. 4.20(c) (1996), by commingling the property of any pool they operate or intend to operate with that of any other person;
violating CFTC Regulation 4.41(a), 17 C.F.R. 4.21(a) (1996), by, while acting as a CPO, or as a principal of a CPO, advertising in a manner which: (1) employs any device, scheme or artifice to defraud any participant or client or prospective participant or client; or (2) involves any transaction, practice or course of business which operates as a fraud or deceit upon any participant or client or prospective participant or client;
prohibiting defendants from soliciting new customers or new deposits;
requiring defendants to make an accounting from January 1, 1996, to the date of such accounting (which shall occur within ten (10) days after the entry of an order of preliminary injunction), signed and sworn to by each of them, and presented to the Court and the CFTC, of all withdrawals, transfers, disbursements, or other disposition of funds, securities, futures, assets, or other property directly or indirectly owned or controlled by any of them, wherever such property may be or may have been situated. Such accounting shall enumerate:
(1)All funds, securities, futures, assets and other property currently owned or controlled (legally, equitably or otherwise) directly or indirectly by defendants, whether individually or jointly;
(2)All funds, securities, futures, assets and other property received directly or indirectly by defendants, whether individually or jointly, describing the source, amount, disposition, and current location of each listed item;
(3)The name and last known address of each bailee, debtor or other person or entity currently holding any funds, securities, futures, assets or other property owned or controlled (legally, equitably or otherwise) by defendants, whether individually or jointly; and
(4)The name and financial condition (including assets, liabilities, revenues and expenses) of each entity directly or indirectly owned or controlled by defendants, whether individually or jointly;
requiring defendants to disgorge to any officer appointed and directed by the Court all benefits received including, but not limited to salaries, commissions, loans, fees, revenues and trading profits derived, directly or indirectly, from acts or practices which constitute violations of the Act or CFTC Regulations, as described herein, and to pay pre- and post-judgment interest on such amounts, as applicable;
requiring defendants to make restitution by making whole each and every customer or participant whose funds were received or utilized by defendants in violation of the provisions of the Act or CFTC Regulations, as described herein, and to pay pre- and post-judgment interest on such amounts, as applicable;
requiring defendants to pay civil penalties under the Act, to be assessed by the Court separately against each of them, in amounts not to exceed the higher of $100,000 or triple the monetary gain to defendants for each violation of the Act and CFTC Regulations as described herein;
And providing for such other and further relief as this Court may deem necessary and appropriate under the circumstances.
Respectfully submitted,
______________________________
Dennis M. Robb
Regional Counsel
______________________________
Rosemary Hollinger
Senior Trial Attorney
______________________________
Scott R. Williamson
Trial Attorney
Attorneys for Plaintiff
COMMODITY FUTURES TRADING COMMISSION
300 S. Riverside Plaza
Suite 1600N
Chicago, IL 60606-6615
(312) 353-9004 DMR
(312) 353-9011 RH
(312) 886-6303 SRW
(312) 353-4502 facsimile
Local Counsel:
Michael Hluchaniuk
Assistant U.S. Attorney
P.O. 217
Bay City, MI 48707
(517) 895-5712
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