Release: 5332-07

For Release: May 7, 2007

Regulators Join Forces to Warn Public of Foreign Currency Trading Frauds

Washington, D.C. — The Commodity Futures Trading Commission (CFTC) and the North American Securities Administrators Association (NASAA) today issued a joint investor alert to warn of the dangers facing retail investors who are lured into foreign currency (forex) trading frauds.

The regulators cautioned investors that off-exchange forex trading by retail investors is at best extremely risky, and at worst, plagued by outright fraud. 

“The damage forex fraud has caused the investing public and the victims of forex scams is incalculable. If you have a phone or an Internet connection, you are a potential target of fraudulent forex shops,” says Commissioner Michael V. Dunn, Chair of the CFTC’s Forex Outreach and Education Task Force. “While the CFTC, NASAA and other state and federal regulators are working hard to stop and prevent forex scams from occurring, the first line of defense is an educated consumer and caution in the face of unknown investments.”

“Foreign currency trading isn’t for everyone,” said Joseph P. Borg, Director of the Alabama Securities Commission and President of NASAA, the oldest international organization devoted to investor protection. “While Forex trading can be legitimate for governments and large institutional investors concerned about fluctuations in international currencies, and appropriate for some individual investors, the average investor should be wary when it comes to these complex markets. Remember, if you don’t understand an investment, don’t invest.”

State securities regulators and the CFTC, the federal agency with the primary responsibility for overseeing the commodities markets, have worked together on a number of forex fraud cases in recent years.

For example, in 2005 the CFTC and the California Corporation Commission worked together to break up a forex scam involving approximately $2 million in customer funds. Also in 2005, the CFTC and the Texas State Securities Board launched a successful cooperative enforcement effort to shut down an illegal $11 million forex operation. In 2003, the CFTC and the Oregon Department of Consumer and Business Services stopped a $40 million forex scam. And, in 2002, the CFTC, SEC and the Utah Division of Securities stopped a forex scheme that cost investors nearly $15 million.

Forex contracts involve the right to buy or sell a certain amount of a foreign currency at a fixed price in U.S. dollars. Profits or losses accrue as the exchange rate of that currency fluctuates on the open market. Because of the volatility in the price of foreign currency, losses can accrue very rapidly, wiping out an investor’s down payment in short order, the regulators said. “Even when purchased through the most reputable dealer, forex investments are extremely risky.  If you are tempted to invest, make sure you understand these products and above all, only invest what you can afford to lose,” Dunn cautioned.

Forex scams attract customers with sophisticated-sounding offers advertised in newspapers, radio, television and the Internet. Promoters often lure investors with the concept of leverage: the right to “control” a large amount of foreign currency with an initial payment representing only a fraction of the total cost. Coupled with predictions about supposedly inevitable increases in currency prices, these promotions offer huge returns over a short time, allegedly with little or no downside risk.

“In a typical case, investors may be promised tens of thousands of dollars in profits in just a few weeks or months, with an initial investment of only $5,000. Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted – stolen – for the personal benefit of the con artists,” Borg said.

The CFTC and NASAA have prepared a list of warning signs investors should watch for before investing in a forex opportunity. The warning signs include:

1. Promises that sound too good to be true. Get-rich-quick schemes, including those involving forex trading, tend to be frauds.

2. Unsolicited phone calls offering investments, especially those from out-of-state salespersons or companies that are unfamiliar.

3. High-pressure efforts to convince you to send or transfer cash immediately to the firm, via overnight delivery or the Internet.

The regulators also urged those who have recently acquired or have accumulated large sums of cash to be on guard. In particular, retirees with access to their retirement funds may be attractive targets for fraudulent operators. “Getting your money back once it is gone can be difficult or impossible,” Dunn and Borg said.

Investors should make sure that anyone offering a forex investment is properly licensed and has a reputable business history. The public can obtain information about any firm or individual registered with the CFTC, including any actions taken against a registrant, through the National Futures Association (NFA) Background Affiliation Status Information Center (BASIC), available on the NFA website at: www.nfa.futures.org/basic. You can also find out if someone is registered by calling the National Futures Association at 1-800-676-4632.

The CFTC’s Division of Enforcement has established a toll-free telephone number to assist members of the public in reporting possible violations of the commodities laws: 866-FON-CFTC (866-366-2382). If you think that you have been a victim of a forex scam, you can report it on the CFTC’s website, /enf/enfform.htm, or by mail addressed to the Office of Cooperative Enforcement, CFTC, 1155 21st St., NW, Washington, DC 20581.

Many state securities regulators also have the right under their state laws to take action against illegal commodities investments. Visit NASAA’s website at www.nasaa.org to contact your state or provincial securities regulator.

NASAA Media Contact:
Bob Webster
Director of Communications
202-737-0900

NASAA Staff Contact:
Steve Hall
Deputy General Counsel
202-737-0900

Media Contact
Dennis Holden
202-418-5088

Last Updated: July 22, 2007