September 26, 2014

CFTC Charges Delaware Depository Services Company with Confirming the Execution of Off-Exchange Precious Metals Transactions

Order Requires Metals Depository to Pay $500,000 to Hunter Wise Receivership

WASHINGTON, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Delaware Depository Services Company, LLC (DDSC) for confirming the execution of off-exchange precious metals transactions relating to Hunter Wise Commodities LLC (Hunter Wise) in violation of Section 4(a) of the Commodity Exchange Act. DDSC is a precious metals depository located in Wilmington, Delaware, and has never been registered with the CFTC.

In litigation earlier this year against Hunter Wise and its principals, Fred Jager and Edward Martin, the Honorable Judge Donald M. Middlebrooks of the U.S. District Court for the Southern District of Florida found that the Hunter Wise transactions were retail commodity transactions subject to the Commodity Exchange Act, and were therefore required to be executed on or subject to the rules of a board of trade. Subsequently, following a bench trial, the Court entered an Order against Hunter Wise, Martin and Jager ordering them to pay more than $108 million in restitution and penalties (see CFTC Press Release 6935-14, May 22, 2014).

The CFTC Order against DDSC requires DDSC to make a payment of $500,000 to the court-appointed receiver for Hunter Wise to be used to pay for the costs of administering the Court’s award to the victims of the Hunter Wise scheme, with any remaining funds to be used for the benefit of those victims.

The CFTC Order against DDSC finds that DDSC entered into an agreement with Hunter Wise to issue Position Reconciliation and Transfer Notices (Notices) to retail customers of Hunter Wise. According to the Order, for a five-week period from September 14, 2011 through October 13, 2011, DDSC, in reliance on representations of Hunter Wise and documentation Hunter Wise provided relating to its trading accounts, sent notices to certain of Hunter Wise’s customers that confirmed the execution of their retail commodity transactions with Hunter Wise. Among other things, the Order finds that the Notices confirmed the transaction date, type of commodity traded, and the quantity of metals involved in the trade. The Order finds that the Notices also informed customers that a “transfer of commodities” had been made for the customer’s account. The Order further finds that DDSC reviewed the total balance of metals reflected on statements provided by Hunter Wise that were perceived by DDSC to reflect metals holdings of Hunter Wise, and compared that balance to Hunter Wise’s obligations to its retail customers. If the total metal balance reflected on the statements provided by Hunter Wise equaled or exceeded the total obligation Hunter Wise owed to its retail customers, DDSC would send Hunter Wise customers a Notice. The Notices did not pertain to any metals stored by DDSC.

The CFTC Order also finds that DDSC voluntarily ceased sending the Notices and terminated its agreement with Hunter Wise after an internal review prompted by an inquiry into the nature of the Notices by CFTC staff. The Order also notes that DDSC took additional voluntary measures, including substantial enhancements to its compliance program. Additionally, the Order finds that DDSC did not receive any commissions, fees or other form of compensation with respect to its activities involved in sending the Notices.

CFTC Division of Enforcement staff members responsible for this case are Carlin Metzger, Heather Dasso, Joseph Konizeski, Scott Williamson, and Rosemary Hollinger.

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Dennis Holden
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Last Updated: September 26, 2014