April 29, 2019
Federal Court Orders Binary Options Firm and Principal to Pay More Than $22 Million for Fraudulent Scheme
Court Also Enters Default Judgment Against CIT Investments LLC (Nevada), Brevspand EOOD (Bulgaria), and CIT Investments Ltd. (Anguilla) for Fraud in Connection with Binary Options
Washington, DC – The Commodity Futures Trading Commission (CFTC) today announced that Judge Timothy Corrigan of the U.S. District Court for the Middle District of Florida entered a Consent Order for Permanent Injunction, Civil Monetary Penalty, and Other Equitable Relief (Order) against Dr. Michael Shah and Zilmil, Inc. (Zilmil) (collectively, defendants) of Jacksonville, Florida, who engaged in a large-scale internet fraud scheme from at least June 2013 through July 10, 2017 (the Relevant Period) involving off-exchange binary options.
The Order imposes monetary sanctions totaling $22,854,289.69. It also permanently enjoins the defendants from making fraudulent misrepresentations in the solicitation of binary options, engaging in activities relating to the illegal offering of commodity options, and acting as an unregistered commodity trading adviser in violation of the Commodity Exchange Act and CFTC Regulations.
James McDonald, Director of the CFTC’s Enforcement Division, stated: “Unfortunately, we have seen fraudsters in our markets seek to take advantage of the potential anonymity of the internet or various social media platforms to perpetrate their schemes. This includes so-called ‘affiliate marketers,’ who market these fraudulent schemes to unwitting customers, often over email, social media, or some other internet platform. This case should reaffirm the Commission’s commitment to aggressively prosecuting fraud, and it should serve as a warning to would-be fraudsters of all types—including affiliate marketers—that they cannot hide behind the potential anonymity of the internet to evade detection and prosecution.”
The Order stems from an enforcement action titled CFTC v. Scharf, No. 3:17-cv-00774-TJC-MCR (M.D. Fla.) (see CFTC Press Release 7590-17). The Order finds that the defendants acted as independent marketers, referred to as “affiliate marketers,” who attracted and funneled customers to unregistered binary options trading websites, including by offering so-called binary options autotrading systems with names like “Millionaire Money Machine.” According to the Order, the systems placed trades until the customers’ accounts were depleted.
As found in the Order, Zilmil claimed to be one of the biggest affiliate marketers in the binary option industry. The defendants sent more than 60 million mass emails to more than 1.4 million unique email addresses in just one seven-month period. The emails contained false and misleading statements about the performance of the trading systems – for example, that customers could make “millions” with the systems. During the Relevant Period, the defendants made more than $17.8 million from the sale of its autotrading systems and commissions from the binary options websites.
The Order imposes to a total judgment of $22,854,289.69 on the defendants. The judgment is comprised of a restitution award of $9,300,000 against Dr. Shah, plus a civil monetary penalty of $1 million, and a restitution award of $8,554,289.69 against Zilmil, plus a civil monetary penalty of $4 million. The Order provides for the immediate transfer of ownership of approximately $9.2 million in cash and cash equivalents from the defendants to the Kenneth Murena of Damian & Valori LLP in Miami, the court-appointed equity receiver in this case. Details about the receivership can be found at www.BinaryOptionsReceivership.com.
Separately, the Court entered a default judgment order (Default Judgment) against CIT Investments LLC, Brevspand EOOD, and CIT Investments Ltd. (defaulting defendants) for engaging in fraud and illegal binary options activities. The Default Judgment found that throughout the relevant period the defaulting defendants were part of a single common enterprise that operated an illegal binary options scam. The illegal binary options scam was largely conducted through internet websites, in particular Citrades.com. According to the Default Judgment, Citrades.com claimed to be started by “a group of highly accredited Wall Street brokers” and the website purported to be the “leading platform” for binary options trading. Citrades.com touted its binary options products by claiming that trading through the website was safe and secure, highly profitable, and that traders could make up to 89% profits with as much as 500% returns. The defaulting defendants also offered autotrading systems through Citrades.com and Autotradingbinary.com that promised 100% automated binary options profits. The court found that, contrary to these claims, the customers of the defaulting defendants were subject to substantial risk that they would lose money trading binary options and that their funds would be simply misappropriated.
The Court found that these activities constituted violations of the Commodity Exchange Act, and ordered the Defaulting Defendants to pay $4,480,432.60 in restitution to their victims, as well as a penalty of $13,441,294.80.
The CFTC cautions that orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.
The CFTC thanks the IRS-Criminal Investigation’s Cincinnati Field Office, the Midwest Region of the Federal Trade Commission, and the FBI Jacksonville and Sandusky Field Offices.
The CFTC thanks and acknowledges the assistance of the Anguilla Financial Services Commission, Australian Securities and Investments Commission, Financial Supervision Commission of the Republic of Bulgaria, BVI Financial Services Commission, Cyprus Securities and Exchange Commission, Czech National Bank, Financial Market Authority Liechtenstein, Luxembourg Commission de Surveillance du Secteur Financier, Malta Financial Services Authority, and Financial Services Commission Mauritius.
CFTC Division Enforcement staff members responsible for this case are Ashley J. Burden, Stephanie Reinhart, Allie Passman, Camille Arnold, Joseph Konizeski, Heather Dasso, Melissa Cavers, and Scott Williamson, as well as former staff members Rosemary Hollinger and Eric Schleef (on detail from the Department of Justice).