UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION
| ___________________________________________________ | ||
| ) | ||
| In the Matter of: | ) | CFTC Docket No. 00-13 |
| ) | ||
| � PAUL B. JUDD and | ) | ORDER INSTITUTING PROCEEDINGS |
| � PAUL JUDD INTERNATIONAL | ) | PURSUANT TO SECTIONS 6(c) AND 6(d) |
| �� CORPORATION, | ) | OF THE COMMODITY EXCHANGE ACT, |
|
Respondents. |
) | AS AMENDED, MAKING FINDINGS AND |
| ) | IMPOSING REMEDIAL SANCTIONS | |
| ___________________________________________________ | ) |
I.
The Commodity Futures Trading Commission (the "Commission") has reason to believe that Paul B. Judd ("Judd") and the Paul Judd International Corporation ("PJIC") have violated Sections 4c(b) and 4o(1) of the Commodity Exchange Act, as amended ("Act"), 7 U.S.C. �� 6c(b) and 6o(1) (1994), and Commission Regulations ("Regulations") 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 Judd and PJIC 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, Judd and PJIC have 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, Judd and PJIC acknowledge service of this Order. Judd and PJIC consent 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 1997 to February 2000, Judd and PJIC, while acting as commodity trading advisors ("CTAs"), defrauded and deceived clients and prospective clients by making material misrepresentations and omissions on their website, in violation of Sections 4c(b) and 4o(1) of the Act and Regulations 4.41(a) and 33.10(a) and (c). Judd and PJIC solicited the public on the Internet to purchase a commodity options trading course and a fax advisory service. These solicitations included fraudulent representations by Judd that he personally consistently made substantial profits by using his trading methods.2
B. RESPONDENTS
Paul B. Judd resides at 275 Casitas Blvd., Los Gatos, California 95030. Judd is the president and sole shareholder of PJIC. Judd has never been registered with the Commission in any capacity.
Paul Judd International Corporation is a California corporation, whose business address is 275 Casitas Blvd., Los Gatos, California 95030. PJIC has never been registered with the Commission in any capacity.
C. FACTS
From 1997 to February 2000, Judd's homepage advertised Judd's commodity options trading course and fax advisory service for trading options on commodity futures contracts. The trading course cost $199 and the fax service cost $250 per month. Judd and PJIC represented on the website that Judd had made substantial trading profits using his system, including the following claims: 1) "In my course, I decided to disclose little-known tactics that I have used to make 300%, 500%, even 1000% returns on my investments;" and 2) "I decided to start investing. I made tons of money very quickly."
These representations were false because (1) Judd never made "tons of money;" (2) Judd did not generate significant rates of return over any period of time; and (3) although Judd made money trading during certain limited periods of time between September 1995 and February 1999, Judd suffered net losses of approximately $175,000 in his commodity options trading account during that period, which losses Judd and PJIC never disclosed on the website.
D. LEGAL DISCUSSION
1. Judd and PJIC 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).
Judd's and PJIC's knowing misrepresentations on their website that Judd personally made tremendous levels of profits in trading commodity options using his trading methods constitute fraud.
2. Judd and PJIC 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 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.3 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."4 Judd and PJIC gave commodity options trading advice for compensation or profit and, therefore, are CTAs. 5
The same conduct by Judd and PJIC that violated Section 4c(b) and Regulation 33.10(a) and (c) also violated Section 4o(1) of the Act and Regulation 4.41(a) because Judd and PJIC engaged in that conduct as CTAs. R&W Technical Services, Ltd, 1999 WL 152619 at 23. CFTC v. Skorupskas, 605 F. Supp. 923, 932-33 (E.D. Mich. 1985) (the same conduct that violates the anti-fraud provisions of the Act can violate Section 4o(1)); Hirk v. Agri-Research Council, Inc., 561 F.2d 96, 103-4 (7th Cir. 1977); First Nat. Monetary Corp. v. Weinberger, 819 F.2d 1334, 1340 (6th Cir 1987); see also In re Armstrong, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) � 26,332 at 42,611-12 (CFTC March 1995), aff'd, 77 F.3d 461(3d Cir. 1966) (unregistered CTA found to have violated both Section 4o and Regulation 4.41).
IV. FINDINGS OF VIOLATIONS
Based on the foregoing, the Commission finds that Judd and PJIC violated Sections 4c(b) and 4o(1) of the Act and Regulations 4.41(a) and 33.10(a) and (c).
V. OFFER OF SETTLEMENT
Judd and PJIC have submitted an Offer of Settlement in which, without admitting or denying the findings of fact herein, they:
A. Admit the jurisdiction of the Commission with respect to all matters set forth in the Order;
B. Acknowledge service of the Order;
C. Waive:
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 they 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. Stipulate that the record basis on which this Order is entered consists solely of this Order and its findings to which they have consented in the Offer, which are incorporated in this Order; and
E. Consent, solely of the basis of the Offer, to the Commission's issuance of this Order, which makes findings and:
1. orders Judd and PJIC to cease and desist from violating Sections 4c(b) and 4o(1) of the Act and Regulations 4.41(a) and 33.10(a) and (c);
2. orders Judd and PJIC to pay jointly a civil penalty in an amount of Ten Thousand Dollars ($10,000) within five (5) days of the date of the Order, such payment to be made by U.S. postal money order, certified check, bank cashier's check or bank money order, made payable to the Commodity Futures Trading Commission, and sent to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, under cover of a letter that identifies Judd and PJIC and the name and docket number of the proceeding; Judd and PJIC shall simultaneously transmit a copy of the cover letter and of the form of payment to Phyllis J. Cela, Acting Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W. Washington, D.C. 20581; and
3. orders Judd and PJIC to comply with their undertakings as set forth below.
VI. ORDER
Accordingly, IT IS HEREBY ORDERED THAT:
A. Judd and PJIC shall cease and desist from violating Sections 4c(b) and 4o(1) of the Act and Regulations 4.41(a) and 33.10(a) and (c);
B. Judd and PJIC shall pay jointly a civil penalty in an amount of Ten Thousand Dollars ($10,000) within five (5) days of the date of the Order, such payment to be made by U.S. postal money order, certified check, bank cashier's check or bank money order, made payable to the Commodity Futures Trading Commission, and sent to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, under cover of a letter that identifies Judd and PJIC and the name and docket number of the proceeding; Judd and PJIC shall simultaneously transmit a copy of the cover letter and of the form of payment to Phyllis J. Cela, Acting Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W. Washington, D.C. 20581; and
C. Judd and PJIC shall comply with the following undertakings:
1. they shall not misrepresent, expressly or by implication:
a. the performance, profits or results achieved by, or the results that can be achieved by, users, including themselves, of any commodity futures or options trading system or advisory service; and
b. the risks associated with trading pursuant to any commodity futures or options trading system or advisory service;
2. they 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, Judd and PJIC shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results;
3. they 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;
4. they shall not represent, expressly or by implication:
a. the performance, profits or results achieved by, or the results that can be achieved by, users, including themselves, of any commodity futures or options trading system or advisory service;
b. the risks associated with trading using any commodity futures or options trading system or advisory service;
c. 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: (i) they possess and rely upon a reasonable basis substantiating the representation at the time it is made; and (ii) for two (2) years after the last date of the dissemination of any such representation, they maintain 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 make such materials immediately available to the Division of Enforcement for inspection and copying upon request; and
5. neither they nor any of their agents or employees under their 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 Judd's and PJIC'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. Judd and PJIC will undertake all steps necessary to assure that all of his agents and employees under their 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 Judd and PJIC do 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 their Offer or this Order, or the findings consented to in their 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 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).
4 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.
5 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).