July 26, 2019

Ninth Circuit Rules in Favor of CFTC in Fraud Case Against Monex Deposit Company and its Principals

Washington, DC – On Thursday, July 25, the U.S. Court of Appeals for the Ninth Circuit reinstated its anti-fraud enforcement action against Monex Deposit Company and its affiliated companies and principals (defendants). The Ninth Circuit held that the district court erred in dismissing the case, and ruled that the CFTC’s charges of fraud and illegal off-exchange commodity trading could proceed. The CFTC complaint charges the defendants with defrauding thousands of retail customers nationwide out of hundreds of millions of dollars, while executing thousands of illegal, off-exchange leveraged commodity transactions.  [See CFTC Press Release No. 7609-17]

The decision reverses a March 2018 ruling by the district court, which dismissed the case based on its holding that the CFTC lacked authority over the alleged fraud because defendants make “actual delivery” of precious metal to customers.  The district court also held that the Commodity Exchange Act (Act) does not prohibit fraud in connection with a contract of sale of a commodity in interstate commerce unless the defendant has also attempted to commit market manipulation. 

The Ninth Circuit reversed both rulings.  A unanimous panel held that the term “actual delivery” under the Act “unambiguously requires the transfer of some degree of possession or control” to customers, and as alleged in the complaint, the defendants’ delivery of metal to its customers “amounts to sham delivery, not actual delivery.”  The Ninth Circuit further ruled that the Act prohibits fraud regardless of whether there has also been market manipulation, and that the Commission can take appropriate enforcement action when such fraud occurs.

“I congratulate our appellate and enforcement teams for their many months of hard work on this case. Not only is this outcome a victory for the victims of this fraudulent scheme—who were in many cases elderly Americans who lost their life savings—it reinforces the broad anti-fraud authority Congress gave our agency under the Dodd-Frank Act,” said CFTC Chairman Heath P. Tarbert.  “The CFTC will continue to stand up for everyday Americans who rely on the financial products we regulate.”

“We are very pleased with the Ninth Circuit’s decision,” said CFTC Deputy General Counsel for Litigation Robert A. Schwartz, who argued the case.  “This is the right result, and it is important for the CFTC’s continuing efforts to protect customers and fight fraud in commodity markets.  We look forward to resuming this enforcement action in the district court.”

In its continuing litigation, the CFTC seeks disgorgement of ill-gotten gains, restitution for the benefit of defrauded customers, civil monetary penalties, permanent registration and trading bans, and a permanent injunction from future violations of federal commodities laws, as charged.

The CFTC Office of General Counsel staff members responsible for the appeal are Robert A. Schwartz and Anne Stukes.  Division of Enforcement staff members responsible for this action are Carlin Metzger, Bridget Weyls, Joseph Konizeski, Jon Kramer, Matthew Rowland, Jeffrey Gomberg, Scott Williamson, and former staff Michael Frisch, Eric Schleef, and Rosemary Hollinger. The CFTC Office of General Counsel also thanks the Division of Market Oversight for its assistance.

* * * * * *

CFTC’s Precious Metals Customer Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Precious Metals Fraud Advisory, which alerts customers to precious metals fraud and lists simple ways to spot precious metals scams.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.