UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION
| ___________________________________________________ | ||
| ) | ||
| In the Matter of: | ) | CFTC Docket No. 00-11 |
| ) | ||
| � JOHN B. REILY, | ) | ORDER INSTITUTING PROCEEDINGS |
|
Respondents. |
) | PURSUANT TO SECTIONS 6(c) AND 6(d) |
| ) | OF THE COMMODITY EXCHANGE ACT, | |
| ) | AS AMENDED, MAKING FINDINGS AND | |
| ) | IMPOSING REMEDIAL SANCTIONS | |
| ___________________________________________________ | ) |
I.
The Commodity Futures Trading Commission (the "Commission") has reason to believe that John B. Reily ("Reily") has violated Sections 4b(a)(i) and (iii), 4c(b) and 4o(1) of the Commodity Exchange Act, as amended (the "Act"), 7 U.S.C �� 6b(a)(i) and (iii), 6c(b) and 6o(1) (1994), and Commission Regulations ("Regulation") 4.41(a) and 33.10 (a) and (c), 17 C.F.R. �� 4.41(a) and 33.10(a) and (c) (1999). Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted to determine whether Reily has engaged in violations set forth in this Order and to determine whether any order should be issued imposing remedial sanctions.
II.
In anticipation of the institution of this administrative proceeding, Reily has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Without admitting or denying the findings of fact or conclusions of law in this Order, and prior to any adjudication on the merits, Reily acknowledges service of this Order. Reily consents to the use of the findings in this Order in this proceeding and in any other proceeding brought by the Commission, or to which the Commission is a party.1
III.
The Commission finds the following:
A. SUMMARY
From at least 1998 to January 2000, Reily, while acting as a commodity trading advisor ("CTA"), defrauded and deceived clients and prospective clients by making material misrepresentations and omissions on his website, in violation of Sections 4b(a)(i) and (iii), 4c(b) and 4o(1) of the Act and Regulations 4.41(a) and 33.10 (a) and (c). Reily's website, www.bonds2000.com , advertised "System 2000," a commodity futures and options trading course and system which provides specific trading recommendations for trading commodity futures contracts and options on commodity futures contracts. Reily fraudulently represented on his website that he had traded successfully using his trading system for the last 8 years, and provided on his website his purported actual trading results for a portion of that time. Reily failed to disclose that the representations and trading results were based on hypothetical trading and that Reily had lost money when he actually traded using System 2000.2
B. RESPONDENT
John B. Reily resides at 1284 Kyndal Way, Gardnerville, Nevada 89410. Reily is the sole proprietor of System 2000. Reily never has been registered with the Commission in any capacity.
C. FACTS
From at least 1998 to January 2000, Reily's website, www.bonds2000.com , advertised "System 2000," a commodity futures trading course and system which generates trading signals for buying and selling commodity futures contracts, as well as buying options on commodity futures contracts. The trading course and system sells for $495.00.
Reily provided on his website purported futures trading results. For example, on December 14, 1999, the website stated as follows: (a) "S&P (Gross Profit Year To Date: $100,150)" and (b) "T-BONDS (Gross Profit Year To Date: $18,812)." Reily, however, did not disclose that these trading results were hypothetical.
In addition, Reily represented on his website that System 2000 has been "Trading Profitably Since 1968, A Time Tested Trading System," and that Reily "traded successfully with System 2000 for the last 8 years." These representations were false and misleading. Reily did not disclose that these claims were based on hypothetical trading results and that between 1995 and 1999, Reily did not trade successfully for himself but instead lost approximately $11,500 trading, using System 2000, in his commodity futures trading account.
D. LEGAL DISCUSSION
1. Reily Violated Section 4b(a) (i) and (iii) of the Act
Sections 4b(a)(i) and (iii) of the Act provide that it shall be unlawful, in or in connection with any order to make or the making of a futures contract, for or on behalf of any other person, (i) to cheat or defraud, or attempt to cheat or defraud, such other person, ... or (iii) willfully to deceive or attempt to deceive such other person by any means whatsoever in regard to any such order or contract or the disposition or execution of any such order or contract, or in regard to any act of agency performed with respect to such order or contract for such person. Misrepresentations and omissions of material facts made with scienter regarding futures transactions constitute fraud under Section 4b(a) of the Act.3 Additionally, Sections 4b(a)(i) and (iii) require that the material misrepresentations and omissions of material facts be made "in connection" with futures transactions.4
Reily's knowing misrepresentations on his website that that System 2000 had generated significant actual profits, while at the same time failing to disclose that he had lost money trading, constitute fraud. Similarly, Reily's failure to disclose on his website that the trading results advertised were based on hypothetical trading constitutes fraud. " Because simulated results inherently overstate the reliability and validity of an investment system, and because extravagant claims understate the inherent risks in commodities trading, a reasonable investor would find [such] fraudulent misrepresentations to be material." R&W Technical Svcs., 2000 WL at *3]. See also CFTC v. Skorupskas, 605 F. Supp. 923, 933 (E.D. Mich. 1985) (misrepresenting performance tables as being actual trading results violated Section 4b of the Act).
2. Reily Violated Section 4c(b) of the Act and Section 33.10(a) and (c) of the Regulations
Section 4c(b) of the Act prohibits any person from offering to enter into, entering into, or confirming the execution of any transaction involving commodity options contrary to any regulation promulgated by the Commission. Section 33.10 of the Regulations makes it illegal for any person to (a) cheat or defraud or attempt to cheat or defraud any other person, ... or (c) deceive or attempt to deceive any other person by any means whatsoever, in connection with an offer to enter into. . .any commodity option transaction. To be liable for violating section 33.10 a person charged with solicitation fraud must have acted with scienter. In re Staryk, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,206, 45,810 (CFTC Dec, 18, 1997).
The same conduct by Reily that violated Section 4b(a)(i) and (iii) of the Act also violated Section 4c(b) of the Act and Regulation 33.10(a) and (c) because Reily's fraudulent conduct was in connection with his trading course and system, which gave trading advice concerning options on futures contracts as well as commodity futures contracts. The language of Regulation 33.10 parallels that of Section 4b of the Act, thus, most of the case law interpreting Section 4b applies to Regulation 33.10. See In re Staryk, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) � 26,701 at 43,923-24 n.60 (ALJ June 5, 1996) aff'd in part, vacated and remn'd in part, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) � 27,206 (CFTC Dec. 18, 1997); on remand, 1998 WL 834656 (CFTC) (Dec. 4, 1998).
3. Reily Violated Section 4o(1) of the Act and Section 4.41(a) of the Regulations
Section 4o(1) of the Act prohibits CTAs from (a) employing any device, scheme or artifice to defraud any client or participant or prospective client or participant, or (b) engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant. Section 4.41(a) of the Regulations prohibits a CTA or principal thereof from advertising in a fraudulent or misleading manner.
In order to establish a violation of Section 4o(1) of the Act and Section 4.41(a) of the Regulations, the Division must prove that the respondent was (i) a CTA or, with respect to Section 4.41(a) of the Regulations, a principal thereof, and (ii) either (a) employed any device, scheme, or artifice to defraud any client or prospective client, or (b) engaged in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. Section 4o(1) of the Act, which also requires the use of the mails or any means or instrumentality of interstate commerce, prohibits both registered and unregistered CTAs from defrauding their clients.5 Section 4.41(a) of the Regulations also applies to all CTAs, regardless of whether those CTAs are required to be registered.
Under Section 1a(5) of the Act, in order to establish that someone is a CTA, it must be shown that the person (i) advised another about the value or advisability of trading in futures contracts, (ii) "either directly or through publications, writings or electronic media," (iii) for compensation or profit, unless that person is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" if such publisher's or producer's provision of commodity futures trading advice is "solely incidental to the conduct of [its] business or profession."6 Reily gave commodity futures trading advice for compensation or profit and, therefore, is a CTA. 7
The same conduct by Reily that violated Sections 4b(a)(i) and (iii), 4c(b) of the Act and Regulation 33.10(a) and (c) also violated Section 4o(1) of the Act and Regulation 4.41(a) because Reily engaged in that conduct in his capacity as a CTA. Skorupskas, 605 F.Supp. at 932-33 (the same conduct that violates Section 4b can violate Section 4o(1)); Hirk, 561 F.2d at 103-04 (7th Cir. 1977).
IV. FINDINGS OF VIOLATIONS
Based on the foregoing, the Commission finds that Reily violated Sections 4b(i) and (iii), 4c(b) and 4o(1) of the Act and Regulations 4.41(a) and 33.10(a) and (c).
V. OFFER OF SETTLEMENT
Reily has submitted an Offer of Settlement in which, without admitting or denying the findings of fact herein, he:
A. Admits the jurisdiction of the Commission with respect to all matters set forth in the Order;
B. Acknowledges service of this Order;
C. Waives:
1. the filing and service of a Complaint and Notice of Hearing;
2. a hearing;
3. all post-hearing procedures;
4. judicial review by any court;
5. any objection to the staff's participation in the Commission's consideration of its Offer;
6. all claims which he may possess under the Equal Access to Justice Act, 5 U.S.C. � 504 (1994) and 28 U.S.C. � 2412 (1994), as amended by Pub. L. No. 104-121, �� 231-232, 110 Stat. 862-863, and Part 148 of the Regulations, 17 C.F.R. �� 148.1, et seq., relating to, or arising from, this Order; and
7. any claim of Double Jeopardy based upon the institution of this proceeding or the entry of any order imposing a civil monetary penalty or any other relief;
D. Stipulates that the record basis on which this Order is entered consists solely of this Order and its findings to which he has consented in the Offer, which are incorporated in this Order; and
E. Consents, solely on the basis of the Offer, to the Commission's issuance of this Order, which makes findings and:
1. orders Reily to cease and desist from violating Sections 4b(i) and (iii), 4c(b) and 4o(1) of the Act and Regulations 4.41(a) and 33.10(a) and (c); and
2. orders Reily to comply with his undertakings as set forth below.
VI. ORDER
Accordingly, IT IS HEREBY ORDERED THAT:
1. Reily shall cease and desist from violating Sections 4b(i) and (iii), 4c(b) and 4o(1) of the Act and Regulations 4.41(a) and 33.10(a) and (c);
2. The Commission notes the appropriateness of a civil monetary penalty based on Reily's conduct, but waives the assessment of a civil monetary penalty based on sworn financial statements submitted by Reily. Reily has submitted a sworn Financial Disclosure Statement and has provided other evidence regarding his financial condition and has asserted a financial inability to pay a civil monetary penalty. If at any time following entry of this Order, the Division of Enforcement (the "Division") obtains information indicating that Reily's representations concerning his financial condition were fraudulent, misleading, inaccurate or incomplete in any material respect at the time they were made, the Division may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Reily provided accurate and complete financial information at the time such representations were made; (2) determine the amount of civil penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Reily's Offer had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Reily fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil penalty to be imposed, and whether any additional remedies should be imposed. Reily may not, by way of defense to any such petition, contest the validity of, or the findings in, this Order or assert that payment of a civil penalty should not be ordered; and
3. Reily shall comply with the following undertakings:
a. he shall not misrepresent, expressly or by implication:
i. the performance, profits or results achieved by, or the results that can be achieved by, users, including himself, of any commodity futures or options trading system or advisory service; and
ii. the risks associated with trading pursuant to any commodity futures or options trading system or advisory service;
b. he shall not present the performance of any simulated or hypothetical commodity interest account, transaction in a commodity interest or series of transactions in a commodity interest unless such performance is accompanied by the following statement, as required by 17 C.F.R. � 4.41(b):
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
In doing so, Reily shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results;
c. he shall not make any representation of financial benefits associated with any commodity futures or options trading system or advisory service without first disclosing, prominently and conspicuously, that futures trading involves high risks with the potential for substantial losses;
d. he shall not represent, expressly or by implication:
i. the performance, profits or results achieved by, or the results that can be achieved by, users, including himself, of any commodity futures or options trading system or advisory service;
ii. the risks associated with trading using any commodity futures or options trading system or advisory service;
iii. that the experience represented by any user, testimonial or endorsement of the commodity futures or options trading system or advisory service represents the typical or ordinary experience of members of the public who use the system or advisory service; unless: (a) he possesses and relies upon a reasonable basis substantiating the representation at the time it is made; and (b) for two (2) years after the last date of the dissemination of any such representation, he maintains all advertisements and promotional materials containing such representation and all materials that were relied upon or that otherwise substantiated such representation at the time it was made, and makes such materials immediately available to the Division of Enforcement for inspection and copying upon request; and
e. neither he nor any of his agents or employees under his authority or control shall take any action or make any public statement denying, directly or indirectly, any findings or conclusions in this Order or creating, or tending to create, the impression that this Order is without a factual basis; provided, however, that nothing in this provision affects Reily's (1) testimonial obligations; or (2) right to take contrary factual or legal positions in other proceedings to which the Commission is not a party. Reily will undertake all steps necessary to assure that all of his agents and employees under his authority and control understand and comply with this undertaking.
�
| Dated: May 1, 2000 | BY THE COMMISSION | |
| _________________ | ||
| Jean Webb | ||
| Secretary of the Commission | ||
| Commodity Futures Trading Commission |
NOTES:
1 Reily does not consent to the use of this Order as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of the Order and do not consent to the use of his Offer or this Order, or the findings consented to in his Offer, by any other person or entity in this or any other proceeding. The findings made in this Order are not binding on any other person or entity in any other proceeding.
2 The Internet is a highly beneficial medium that facilitates the dissemination of information, but which also enables potential violators to reach millions of people worldwide quickly and at very low cost. By this and other proceedings, the Commission is addressing fraud committed on the Internet to promote the integrity of promotions made concerning commodity futures and options trading opportunities on the web.
3 In the Matter of R&W Technical Services, Inc., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) �27,582 at 47,740-47,741 (CFTC Mar. 16, 1999), aff'd in relevant part, R&W Technical Svcs., Inc. v. CFTC, 2000 WL 217498 (5th Cir. Feb. 24, 2000). See, e.g., Saxe v. E.F. Hutton, 789 F.2d 105, 110 (2d Cir. 1986); Kelley v. Carr, 442 F. Supp. 346, 351-54 (W.D. Mich. 1977), aff'd in part, rev'd in part, 691 F.2d 800 (6th Cir. 1980); CFTC v. J.S. Love Associates Options, Ltd., 422 F. Supp. 652, 655 (S.D.N.Y. 1976).
4 Fraudulent statements that induce members of the public to purchase software that generates specific buy and sell signals for commodity futures trading satisfy the "in connection with" requirement of Section 4b(a). R&W Technical Svcs., 2000 WL at 217498 . See also Hirk v. Agri-Research Council, Inc., 561 F.2d 96 (7th Cir. 1977) (noting that the "in or in connection with" requirement should be interpreted flexibly to include deceptive conduct that occurs prior to the opening of an actual commodity trading account).
5 CFTC v. Savage, 611 F.2d 270, 281 (9th Cir. 1979) (enforcement action charging defendant with making false reports to customers, engaging in "wash" trades and holding himself out to the public as a CTA without being registered with the Commission).
6 Section 1a(5) of the Act, 7 U.S.C. � 1a(5). Section 4o(1) of the Act and Section 4.41 of the Regulations thus do not apply to a CTA who is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees" whose "furnishing of [advice] ... is solely incidental to the conduct of their business or profession." This exclusion is designed to protect incidental publishers of advice, such as general magazines and newspapers, not publishers who specifically concentrate on commodities advice. R&W Technical Svcs., 2000 WL at *7.
7 See CFTC v. British American Commodity Options Corp., 560 F.2d 135, 141 (2d Cir. 1977), cert. denied, 438 U.S. 905 (1978) (a firm that "offer[ed] opinions and advice, and issued analyses and reports concerning the value of commodities" to customers was a CTA under the Act.); Gaudette v. Panos, 644 F. Supp. 826, 839 (D. Mass. 1986) (defendants who represented their advisory skills to be exemplary, suggested that plaintiffs open a commodity account and then recommended certain futures contracts for investment were CTAs).