Monex & CFTC's $290 Million Lawsuit

On September 6th, 2017 the US Commodity Futures Trading Commission (CFTC) accused a Newport Beach precious metals investment firm, Monex, of defrauding thousands of US customers. The CFTC charges Monex of fraud over $290 million by pulling off an illegal scheme. This scheme involves high-pressure sales tactics-- leaving many senior clients without their life savings.

When it comes to buying precious metals, it’s essential to do business with a trustworthy and reputable bullion dealer. 

Unfortunately, not all dealers provide secure and legal services. This recent CFTC law enforcement case highlights what to avoid when making precious metal investments.

CFTC Lawsuit Against Monex

The Federal regulator filed the civil lawsuit against California’s Monex in the U.S. District Court for the Northern District of Illinois on Wednesday, September 6. In its complaint announcement, it states the alleged fraud is “one of the largest precious metals” cases it has ever filed. This is since it involves over 12,000 accounts and holders and a time frame from July 2011 until March 2017. CFTC claims that Monex deceptively pitched leveraged trading through its so-called Atlas trading platform. Louis and Michael Carabini own Monex. (Father and son). CFTC further states the company made profits while customer losses were all but inevitable. The complaint cites several cases of elderly clients who lost over $100,000 each.

The commission’s complaint

The commission's complaint focuses on off-exchange leveraged trades. These trades include silver, gold, platinum, and palladium. Monex clients had to borrow money to do this trade using money through its Atlas platform. Although the alleged purpose of this trading platform was to allow retail customers to make investments, CFTC claims that Monex made most of its revenue by controlling the prices.  The price difference (spread) between the underlying price on tracked spot markets and the price which Monex set was about 3%. This means, according to the cases cited in the complaint, it would cost the company’s clients $2,550 to trade 5,000 oz. of silver. This compares to a $25 cost to enter into a similar futures contract on a regulated exchange. CFTC alleged Monex for charging “outsized price spreads, commissions, interest on loans, and administrative fees.”

Forceful TV Campaigns and Telephone Sales

Moreover, to boost its sales, Monex also deployed forceful TV campaigns and telephone sales. These include promises that its Atlas trading program was a secure and safe method of protecting customers’ wealth against inflation. Its employees involved in campaigns and sales were training using scripts that had the investment’s “profit potential and security.” In other words, “If gold were to increase in value by $100 per ounce in the next year, and you had a 30% to 40% net gain, you’d feel pretty good, wouldn’t you?” Nonetheless, over 90% of all leveraged Atlas accounts and customers lost big. CFTC believes Monex intentionally hid this information from its prospects. Besides, the Commission alleges that Monex’s gave bonuses and commissions to its sales agents on the number of accounts which they opened. It was by their transaction volumes and not by the client’s earnings.

Fraudulent Activity

CFTC also accuses the company’s owners, Louis Carabini (father) and Michael Carabini (son) of committing fraudulent activity. They were operating an illegal leveraged commodity platform. This platform needed to register with the commission. It did not. The federal regulator also asked a judge to stop Monex from continuing to offer its Atlas platform trades to clients. It seeks to have full restitution to harmed customers as well as disgorge any ill-gotten gains. On the other side, Monex issued a statement through which it denies any fraud allegations. They state that the terms of its Atlas trading program were public. The company also declared that it will vigorously defend the commission’s unwarranted action. It disputes whether the federal regulator had any jurisdiction over the firm.

Not the First Time

However, this is not the first time the Carabiniers or Monex have faced legal troubles. A class-action lawsuit came In 2004 against Monex. The lawsuit alleged the company misleads its clients. $150,000 was given to class members. In 1974, Louis Carabini was accused by the Securities and Exchange Commission of obtaining $1 billion through deceptive sales of silver coins on margin.

Always Perform Due Diligence

Seemingly, there may be other similar precious metals companies or telemarketing firms which offer deceptive services. Or, make forceful sales through home shopping TV shows. In most cases, they manage to convince the customers, mostly elderly clients, to make "highly profitable" investments. In reality, ripping them off.   A previous eloquent and similar example is CFTC’s 2015 civil enforcement action filed against Andrew Kurzbard. Its telemarketing company Guardian Asset Group, LLC accused them of engaging in illegal, off-exchange precious metals transactions. The lawsuit ended with a consent order in May 2017. The now-defunct company and its owner were forced to pay restitution of $434,413.54. As well as a $651,620.31 civil monetary penalty. Finally, they were given permanent trading and registration bans. Guardian and Kurzbard agreed to pay the civil penalty without denying or admitting the allegations.

Choosing a Reputable Precious Metals Dealer

Therefore, selecting a reliable precious metal dealer is not easy. Yet it’s a critical decision. Either you already are an expert investor or a new one. Luckily, the above lawsuits teach us about key signs that warn us about a potential illegal bullion business:

• High-pressure sales and aggressive TV campaigns
• Precious metal trading based on in-house loans
• Unclear and confusing shipping policies, terms and conditions, etc.
• Expensive and ambiguous costs, fees, commissions, etc.
• Unallocated precious metals storage
• Partial ownership in the form of “gold units” or “shares.”

Disclaimer: This post was written based on the official CFTC Press Release pr7609-17.