UNITED STATES OF AMERICA
BEFORE THE
COMMODITY FUTURES TRADING COMMISSION
________________________________________
:
In the Matter of: :
: CFTC Docket No. 97-4
LEXUS FINANCIAL GROUP, INC. :
450 North Park Road:
Suite 403:
Hollywood, Florida 33021,: COMPLAINT AND NOTICE
: OF HEARING PURSUANT TO
DAVID ALAN LUGER : SECTIONS 6(c), 6(d),
17890 Northeast 31st Court: 8a(3) AND 8a(4) OF THE
North Miami Beach, Florida 33060,: COMMODITY EXCHANGE
: ACT, AS AMENDED
- and - :
:
MARK LEE SINGER :
570 Carrington Drive :
Fort Lauderdale, Florida 33526, :
:
Respondents :
________________________________________:
I.
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:
RESPONDENTS
1. Lexus Financial Group, Inc. ("Lexus") is a Florida corporation that has been registered with the Commission as an independent introducing broker ("IB") since December 16, 1992. Lexus conducts business from 450 North Park Road, Suite 403, Hollywood, Florida 33021, where it currently employs approximately seven associated persons ("APs") and has three principals.
2. David Alan Luger ("Luger"), who resides at 17890 Northeast 31st Court, North Miami Beach, Florida 33060, is President, a 51% shareholder, and a principal of Lexus. Since February 1984, Luger has been registered as an AP of the following IBs in Florida that solicited the public to trade commodity futures and options: American Futures Group, Inc. ("AFG"); Trinity Financial Group, Inc.; First Sierra Corp.; RGL Investments, Inc.; Options Trading Corp.; International Futures Strategists, Inc. ("IFS"); National Commodities Trading Corp.; and International Trading Group, Ltd. Luger has been registered as an AP of Lexus since November 3, 1992.
3. Mark Lee Singer ("Singer"), who resides at 570 Carrington Drive, Fort Lauderdale, Florida 33526, is Vice President, a 40% shareholder, and a principal of Lexus. Since December 1987, Singer has been registered as an AP of the following IBs in Florida that solicited the public to trade commodity futures and options: AFG; Grandview Holding Corp.; The Winner Group, Inc.; IFS; International Investment Center; FSG International, Inc.; and JCC, Inc. Singer has been registered as an AP of Lexus since November 3, 1992.
GENERAL ALLEGATIONS
4. Unless otherwise specified, the time period relevant to this Complaint is November 3, 1992 to the present.
5. Luger and Singer incorporated Lexus in late 1992. They are the only two corporate officers of Lexus.
6. Lexus' business consists primarily of soliciting members of the general public to open accounts to purchase and sell exchange-traded options on commodity futures contracts.
7.Lexus attracts prospective customers ("prospects") primarily through the use of thirty-minute radio advertisements, or infomercials, which air across the country and in Canada. Each infomercial spotlights a particular commodity selected by Singer. Singer produces the infomercials and determines their content. Singer has appeared in almost every infomercial.
8.Lexus' infomercials utilize a two-step solicitation which virtually guarantees a commodity price increase and then misrepresents the effect of any such increase on the profitability of an option on a futures contract on that commodity.
9.Lexus' infomercials first 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 increasing demand for heating oil every winter and unleaded gasoline every summer, or increasing demand for sugar in high-population nations like China and India. Lexus' infomercials present historical data purportedly demonstrating that such a price increase has occurred regularly, and they repeatedly emphasize the predictability of the price increase.
10. Lexus' infomercials then represent that, when a price increase in the advertised commodity occurs, an options customer will profit from that price increase to the same extent as if he had purchased the commodity itself or a futures contract on that commodity. Lexus' infomercials suggest that the customer's strike price is the price of the commodity at the time of the investment, and that if the price increases from there, the options customer will achieve the same profit as a customer owning the commodity or a futures contract on the commodity, but with only the limited option premium (i.e., the amount paid to purchase the option) at risk of loss.
11.A typical Lexus infomercial on heating oil, which aired in late summer or early autumn of 1994, represented first, that an increase in the price of heating oil was imminent as demand increased with the impending onset of colder weather, and second, that "just" a ten-cent increase in the price of heating oil would return a profit of as much as $42,000 on a $10,000 options investment. Similarly, Lexus aired an infomercial on sugar in the summer of 1995 which represented first, that economic problems in the sugar-producing nation of Cuba and increasing demand for sugar in China and India would cause the price of sugar to rise, and second, that a one-cent increase in the price of sugar would yield a return of $1,120 per option, a two-cent increase would yield a return of $2,240, and a 2.5-cent increase would yield a return of $2,800. Virtually all Lexus infomercials follow the same pattern illustrated by the two foregoing examples, regardless of the commodity being advertised.
12.During each infomercial, prospects are given a toll- free number to call. Upon calling the number, the prospect leaves his name and phone number, which Singer then distributes to a Lexus AP. Singer provides the AP with the name and phone number of the prospect and the commodity about which the prospect is inquiring.
13. Throughout most of its existence, Lexus has employed a core of about a half-dozen 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 Luger and Singer, who make all hiring and firing decisions at Lexus. These APs have learned their trade on-the-job at Lexus, receiving instructions directly from Luger and Singer and listening to the telephone sales solicitations of the APs already at Lexus. Luger and Singer monitor the APs' sales solicitations by listening to the APs talk to prospects and customers on the phone and by reviewing client account cards on which APs summarize their communications with prospects and customers.
14. Lexus APs severely pressure prospects and customers to purchase commodity options by conveying an urgency to invest. Among other things, prospects receive frequent telephone calls in which Lexus APs heavily emphasize the profits obtainable through options trading. Lexus APs typically urge prospects to open commodity trading accounts immediately, and urge customers to invest additional money, because of what the AP portrays as unusually favorable market conditions. Lexus APs routinely send a prepaid express mail service to pick up account opening documents or checks, telling the prospect or customer that it is imperative to get into the market before the price moves.
15.Before receiving a customer's funds, Lexus sends out a short pamphlet (the "Red Book") giving an introduction to commodity options. While the Red Book defines certain terms such as "call," "put," "in-the-money," "out-of-the-money," and "leverage," it fails to explain the effect of critical factors such as strike price and commissions on the likelihood that the customer will profit on an options trade. After a customer's money is received but prior to placing trades, Lexus also tapes "compliance calls" with customers which mention that the customer could lose part or all of the investment. Luger and Singer do virtually all the compliance taping. These compliance calls are provided in a perfunctory and rapid-fire manner and are almost always done after the customer has decided to make a particular trade.
16. Lexus typically purchases bundles of options costing approximately $1,000 (i.e., options with premiums in the range of approximately $700-$800 plus Lexus' $200 commission charge per option) for its customers. These $1,000 options are routinely out-of-the-money, and often significantly so.
17. Lexus customers enter into commodity option trades which seldom, if ever, return profits of the magnitude represented by Lexus' infomercials and its APs. Even when the price of an advertised commodity has trended upward, Lexus customers generally lose money on their trades in options on that commodity. In those instances where options purchased by Lexus customers move into a profitable position, these positions usually are liquidated after generating far smaller profits than the Lexus infomercials and APs have represented. Most Lexus customers who close a position at a small profit lose money on their accounts as a whole.
18. Luger and Singer are aware of the types of options purchased by Lexus customers, as well as Lexus' trading practices and customer trading results, because they:
(i) place virtually every customer trade with Lexus' futures commission merchant, Vision Limited Partnership;
(ii) review daily equity runs that disclose the equity positions of Lexus customer accounts; and
(iii) review and resolve customer complaints and reparations claims.
19. Lexus opened approximately 826 customer accounts from its inception through June 30, 1996. Over eighty-eight percent (88%) of these accounts suffered net losses. During that time period, Lexus customers invested approximately $10.7 million, of which more than 60% was lost. Total profits in Lexus' profitable accounts for this time period were only approximately $297,716, while total losses in its unprofitable accounts were approximately $6,761,038. Lexus' commissions during this period totalled more than $5.3 million, or well more than three-fourths of customer losses.
COUNT ONE
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 (1996): FRAUD BY MISREPRESENTATION AND OMISSION OF MATERIAL FACTS IN CONNECTION WITH THE SOLICITATIONAND MAINTENANCE OF COMMODITY OPTIONS TRANSACTIONS
20.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, Lexus, Luger and Singer 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 prospects or customers, including, but not limited to, those set forth in paragraphs 7- 11, 14-16 and 22-27, in violation of Section 4c(b) of the Act and Section 33.10 of the Commission's Regulations.
21.The allegations contained in paragraphs 1 through 19 above are re-alleged and incorporated herein by reference.
a.Misrepresentations and Omissions that Virtually
Guarantee Commodity Price Increases and then Overstate the Extent to Which Options Customers Will Profit from Any Such Price Increase
22. Both steps of Lexus' infomercial solicitation, set forth in paragraphs 9-11 above, are false, misleading and deceptive. The first representation, that the price of the advertised commodity is about to increase, is false, deceptive and misleading because, among other things:
i) such a price increase is not assured, as promised by the advertisement;
ii) the infomercials fail to disclose that even when the average price of the underlying 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; and
iii) the representations as to profit potential detailed in the infomercials are based on historical movements of the underlying commodities prices rather than the options marketed by Lexus.
23.The second representation in Lexus' infomercials, that the strike price is the price of the commodity at the time of the investment and that an options customer will profit from the commodity price increase to the same extent as if he had purchased the commodity itself or a futures contract on that commodity, 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 even move at all;
ii) the strike price of the options purchased by Lexus customers is not the commodity price at the time the option is purchased; and
iii) the infomercials 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. Similarly, during the course of their telephone solicitations with prospects and customers, Lexus APs, including Luger and Singer, virtually guarantee commodity price increases and overstate the extent to which an options customer will profit from any such price increase, including, but not limited to, the following:
(i) that "in the past eight to ten years, heating oil prices always went up in the winter months because the demand increased dramatically," or words to that effect;
(ii) that "investors purchasing heating oil options in the fall and early winter months made money every year" and that it was that "time of year to make annual profits on heating oil," or words to that effect;
(iii) that unleaded gasoline "always moved upward because of the increased demand in the summer months due to additional driving," or words to that effect;
(iv) that a customer "couldn't go wrong" in "buying unleaded gas options in the winter and selling them in the summer," or words to that effect;
(v) that "every one cent incremental increase in the price of heating oil . . . would make $420 in the value of each of [the customer's] options," or words to that effect;
(vi) that "with a one cent move, [a customer] would make $2,100 if [he] purchased five unleaded gas options [and] with a ten cent move, [the customer] would make $21,000," or words to that effect;
(vii) failing to distinguish between in-the-money and out-of-the money options;
(viii) failing to disclose that different options are available at different strike prices and premiums; and
(ix) failing to disclose that the profitability of an option will depend in part on the strike price, the commission rate, and when the option is purchased and when it is liquidated. b. Misrepresentations and Omissions that
Exaggerate the Likelihood of Profit
25. Lexus APs, including Luger and Singer, misrepresent to prospects and customers the likelihood of profit from trading commodity options, falsely assuring them of large and virtually certain profits in a short period of time, including, but not limited to, the following:
(i) that realizing profits was "a sure thing," or words to that effect;
(ii) that a customer would make "huge profits," or words to that effect;
(iii) that a customer "would make 'big money' because heating oil options turned a profit every year," or words to that effect;
(iv) that a customer was "practically guaranteed to make a great profit," or words to that effect;
(v) that a customer would "most likely double or triple [his] investment" as "heating oil options had made profits of 100%, 200% and 300% for the past 17 years," or words to that effect;
(vi) that a customer "could make six times [his] investment with this trade in a few short weeks, or words to that effect;
(vii) that a customer "had a 75% likelihood of making a profit," or words to that effect; and
(viii) failing to disclose that Lexus' commission charge is $200 per option, not a flat $200 regardless of the number of options that are purchased in a single transaction.
c.Misrepresentations and Omissions
that Minimize the Risk of Loss
26. Lexus APs, including Luger, mention to prospects and customers, but routinely fail to disclose adequately, the risk of loss inherent in trading commodity options. References to risk are nullified by the APs' high-pressure sales tactics and by their misrepresentations and omissions which falsely convey that while losses on commodity options are theoretically possible, purchasing commodity options with Lexus is virtually risk-free. Such misrepresentations and omissions include, but are not limited to, the following:
(i) that there was "no way to lose," or words to that effect;
(ii) that an investment in commodity options is "safer than [leaving money] in the bank," or words to that effect;
(iii) that a customer "would do no worse than breaking even," or words to that effect;
(iv) that a particular trade "couldn't miss," or words to that effect;
(v) that "there was no way to lose with heating oil," or words to that effect; and
(vi) that the prospect or customer "did not have to worry" because the AP would "keep a daily watch on the market, and call [the customer] often about [the] account, or words to that effect.
d. Misrepresentations Overstating Performance Record
27.Lexus APs, including Luger, misrepresent and overstate Lexus' performance record to prospects and customers, including, but not limited to, the following:
(i) that Lexus has "an unequalled record on making money for their clients," or words to that effect;
(ii) that Lexus is a "very successful company," or words to that effect;
(iii) that Lexus is a "well-established company with a solid track record" with "plenty of customers who were making money," or words to that effect;
(iv) that Lexus has "been in the business for twenty years" and "made a lot of money for its customers," or words to that effect;
(v) that Lexus has "a high investment return record for all of its clients," or words to that effect;
(vi) that Lexus has "a winning track record," or words to that effect;
(vii) that Lexus has made "lots of money" for its clients, or words to that effect;
(viii) that Lexus has "a large customer base with an almost 100% success rate" and a "'hit-rate' better than anyone else in the commodity business," or words to that effect; and
(ix) that Lexus has a "high success rate" and "three out of four of [Lexus'] trades were successful," or words to that effect.
28. Lexus and its APs, including Luger and Singer, knew that the statements, representations and omissions in the infomercials and sales 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 prospects and customers.
29. The foregoing acts, omissions and failures of Luger, Singer and the Lexus APs occurred within the scope of each such person's employment or office with Lexus, and Lexus is thereby liable for them by operation of Section 2(a)(1)(A) of the Act, 7 U.S.C. 2 (1994), and Section 1.2 of the Commission's Regulations, 17 C.F.R. 1.2 (1996).
30. Luger and Singer 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. Luger and Singer are thereby responsible for these violations by operation of Section 13(a) of the Act.
31. Luger and Singer, directly or indirectly, controlled Lexus 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. Luger and Singer are liable for the violations by operation of Section 13(b) of the Act.
COUNT TWO
VIOLATIONS OF SECTION 166.3 OF THE COMMISSION'S REGULATIONS, 17 C.F.R. 166.3 (1996):
FAILURE TO SUPERVISE DILIGENTLY
32.The allegations contained in paragraphs 1 through 31 above are re-alleged and incorporated herein by reference.
33. Lexus, Luger and Singer have supervisory duties relating to their business as Commission registrants.
34. Lexus, Luger and Singer have failed to exercise diligently their supervisory duties, including, but not limited to, the following:
(i) Failing to supervise diligently the production and content of Lexus' infomercials;
(ii) Failing to supervise diligently the sales practices and the sales solicitations of the Lexus APs;
(iii) Failing to supervise diligently the trading of customer accounts; and
(iv) 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.
35. For all the foregoing reasons, Lexus, Luger and Singer 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.
II.
By reason of the foregoing allegations by the Division, the Commission deems it necessary and appropriate, pursuant to its responsibilities under the Act, to institute administrative proceedings to determine whether the allegations set forth in Section I are true and, if so, whether orders should be entered in accordance with Sections 6(c), 6(d), 8a(3) and 8a(4) of the Act, 7 U.S.C. 9, 13b, 12a(3) and 12a(4) (1994), imposing the following sanctions:
(a)Directing each Respondent to cease and desist from violating the provisions of the Act and Regulations as set forth in Section I above;
(b)Prohibiting each Respondent from trading on or subject to the rules of any contract market and directing that all contract markets refuse each Respondent all trading privileges thereon;
(c)Revoking, suspending or imposing conditions upon each Respondent's registration;
(d)Assessing against each Respondent a civil penalty not to exceed $100,000 or triple the monetary gain to each Respondent, whichever is greater, for each violation of the Act or Regulations as described above; and
(e)Requiring each Respondent to make restitution, including pre-judgment interest, of damages proximately caused by the violations of the Act and Regulations described above.
III.
WHEREFORE, IT IS HEREBY ORDERED that a public hearing for the purpose of taking evidence and hearing arguments on the allegations set forth in Section I 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. (1996), 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 (1996), 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 (1996).
IT IS FURTHER ORDERED that each Respondent shall file an Answer to the allegations against said Respondent 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 (1996), and pursuant to Section 10.12(a) of the Rules of Practice, 17 C.F.R. 10.12(a) (1996), shall serve two copies of such Answer and of any document filed in this proceeding upon Joseph Vargyas, Assistant Director, or Terry Arbit, Trial Attorney, 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 (1996).
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 proceedings held pursuant to notice.
By the Commission.
Jean A. Webb
Secretary to the Commission
Commodity Futures Trading Commission
Date: November 25, 1996