Forex Currency Fraud

On August 29, 2005, in San Diego, CA, William McCray was sentenced to 211 months in prison, followed by three years supervised release and ordered to pay $11,680,886 in restitution. McCray was convicted on November 14, 2003, of mail fraud, wire fraud, perjury, money laundering, and tax fraud, for his leadership of the fraudulent operation of International Forex of California ("IFL") and Earthwise International ("EWI") -- two La Jolla-based entities that solicited the public to invest in "managed currency accounts" that purportedly traded in foreign currencies. According to the evidence presented at trial, McCray, along with co-defendant Paul Yates, (Yates was sentenced to 78 months' imprisonment on April 28, 2004, for his role in this case), used International Forex and Earthwise International to fraudulently obtain more than $30 million from members of the public by falsely representing, among other things, that the companies had achieved annual returns for their managed currency accounts from1992 through 1998 between 52% -79%; that investor funds were held in trust with the Bank of New York; that investor funds were insured; and that individual investors' accounts were earning substantial positive returns. The defendant's scheme ended up costing investors more than $11 million.

 

COMMISSION ADVISORY

BEWARE OF

FOREIGN CURRENCY TRADING FRAUDS

• Have you been solicited to trade foreign currency contracts (also known as "forex")?

• If so, you need to know how to spot foreign currency trading frauds.

The United States Commodity Futures Trading Commission (CFTC), the federal agency that regulates commodity futures and options markets in the United States, warns consumers to take special care to protect themselves from the various kinds of frauds being perpetrated in today's financial markets, including those involving so-called "foreign currency trading."

A new federal law, the Commodity Futures Modernization Act of 2000, makes clear that the CFTC has the jurisdiction and authority to investigate and take legal action to close down a wide assortment of unregulated firms offering or selling foreign currency futures and options contracts to the general public. In addition, the CFTC has jurisdiction to investigate and prosecute foreign currency fraud occurring in its registered firms and their affiliates.

The CFTC has witnessed the increasing numbers and growing complexity of financial investment opportunities in recent years, including a sharp rise in foreign currency trading scams. While much foreign currency trading is legitimate, various forms of foreign currency trading have been touted in recent years to defraud members of the public.

Currency trading scams often attract customers through advertisements in local newspapers, radio promotions or attractive Internet sites. These advertisements may tout high-return, low-risk investment opportunities in foreign currency trading, or even highly-paid currency-trading employment opportunities. The CFTC urges you to be skeptical when promoters of foreign currency trading claim that their services or account management will earn high profits with minimal risks, or that employment as a currency trader will make you wealthy quickly.

Understanding Legitimate Foreign Currency Operations

Generally speaking, foreign currency futures and options contracts may be traded legally on an exchange or board of trade that has been approved by the CFTC.

Even where currency trading does not occur on a Commission-approved exchange or board of trade, the trading can be conducted legally where, generally speaking, one or both parties to the trading is (or is a regulated affiliate of) a bank, insurance company, registered securities broker-dealer, futures commission merchant or other financial institution, or is an individual or entity with a high net worth.

Where forex firms do not fall into the categories of regulated entities outlined above and engage in foreign currency futures and options transactions with or for retail customers who do not have high net worths, the CFTC has jurisdiction over those firms and their transactions.

Warning Signs of Fraud

If you are solicited by a company that claims to trade foreign currencies and asks you to commit funds for those purposes, you should be very careful. Watch for the warning signs listed below, and take the following precautions before placing your funds with any currency trading company.

1. Stay Away From Opportunities That Sound Too Good to Be True

Get-rich-quick schemes, including those involving foreign currency trading, tend to be frauds.

Always remember that there is no such thing as a "free lunch." Be especially cautious if you have acquired a large sum of cash recently and are looking for a safe investment vehicle. 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.

2. Avoid Any Company that Predicts or Guarantees Large Profits

Be extremely wary of companies that guarantee profits, or that tout extremely high performance. In many cases, those claims are false.

The following are examples of statements that either are or most likely are fraudulent:

• "Whether the market moves up or down, in the currency market you will make a profit."

• "Make $1000 per week, every week"

• "We are out-performing 90% of domestic investments."

• "The main advantage of the forex markets is that there is no bear market."

• "We guarantee you will make at least a 30-40% rate of return within two months."

3. Stay Away From Companies That Promise Little or No Financial Risk

Be suspicious of companies that downplay risks or state that written risk disclosure statements are routine formalities imposed by the government.

The currency futures and options markets are volatile and contain substantial risks for unsophisticated customers. The currency futures and options markets are not the place to put any funds that you cannot afford to lose. For example, retirement funds should not be used for currency trading. You can lose most or all of those funds very quickly trading foreign currency futures or options contracts. Therefore, beware of companies that make the following types of statements:

• "With a $10,000 deposit, the maximum you can lose is $200 to $250 per day."

• "We promise to recover any losses you have."

• "Your investment is secure."

4. Don't Trade on Margin Unless You Understand What It Means

Margin trading can make you responsible for losses that greatly exceed the dollar amount you deposited.

Many currency traders ask customers to give them money, which they sometimes refer to as "margin," often sums in the range of $1,000 to $5,000. However, those amounts, which are relatively small in the currency markets, actually control far larger dollar amounts of trading, a fact that often is poorly explained to customers.

Don't trade on margin unless you fully understand what you are doing and are prepared to accept losses that exceed the margin amounts you paid.

5. Question Firms That Claim To Trade in the "Interbank Market"

Be wary of firms that claim that you can or should trade in the "interbank market," or that they will do so on your behalf.

Unregulated, fraudulent currency trading firms often tell retail customers that their funds are traded in the "interbank market," where good prices can be obtained. Firms that trade currencies in the interbank market, however, are most likely to be banks, investment banks and large corporations, since the term "interbank market" refers simply to a loose network of currency transactions negotiated between financial institutions and other large companies.

6. Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise

Be especially alert to the dangers of trading on-line; it is very easy to transfer funds on-line, but often can be impossible to get a refund.

It costs an Internet advertiser just pennies per day to reach a potential audience of millions of persons, and phony currency trading firms have seized upon the Internet as an inexpensive and effective way of reaching a large pool of potential customers.

Many companies offering currency trading on-line are not located within the United States and may not display an address or any other information identifying their nationality on their Web site. Be aware that if you transfer funds to those foreign firms, it may be very difficult or impossible to recover your funds.

7. Currency Scams Often Target Members of Ethnic Minorities

Some currency trading scams target potential customers in ethnic communities, particularly persons in the Russian, Chinese and Indian immigrant communities, through advertisements in ethnic newspapers and television "infomercials."

Sometimes those advertisements offer so-called "job opportunities" for "account executives" to trade foreign currencies. Be aware that "account executives" that are hired might be expected to use their own money for currency trading, as well as to recruit their family and friends to do likewise. What appears to be a promising job opportunity often is another way many of these companies lure customers into parting with their cash.

8. Be Sure You Get the Company's Performance Track Record

Get as much information as possible about the firm's or individual's performance record on behalf of other clients. You should be aware, however, that It may be difficult or impossible to do so, or to verify the information you receive. While firms and individuals are not required to provide this information, you should be wary of any person who is not willing to do so or who provides you with incomplete information. However, keep in mind, even if you do receive a glossy brochure or sophisticated-looking charts, that the information they contain might be false.

9. Don't Deal With Anyone Who Won't Give You Their Background

Plan to do a lot of checking of any information you receive to be sure that the company is and does exactly what it says.

Get the background of the persons running or promoting the company, if possible. Do not rely solely on oral statements or promises from the firm's employees. Ask for all information in written form.

If you cannot satisfy yourself that the persons with whom you are dealing are completely legitimate and above-board, the wisest course of action is to avoid trading foreign currencies through those companies.

10. Warning Signs Of Commodity "Come-Ons"

If you are solicited by a company to purchase commodities, watch for the warning signs listed below:

• Avoid any company that predicts or guarantees large profits with little or no financial risk.

• Be wary of high-pressure tactics to convince you to send or transfer cash immediately to the firm, via overnight delivery companies, the internet, by mail, or otherwise.

• Be skeptical about unsolicited phone calls about investments from offshore salespersons or companies with which you are unfamiliar.

• Prior to purchasing:

• • Contact the CFTC.
    

  • Visit the CFTC's forex fraud web page.

  • Contact the National Futures Association to see whether the company is registered with the CFTC or is a members of the National Futures Association (NFA)?. You can do this easily by calling the NFA (800-621-3570 or 800-676-4NFA) or by checking the NFA's registration and membership information on its website at www.nfa.futures.org/basicnet/. While registration may not be required, you might want to confirm the status and disciplinary record of a particular company or salesperson.

  • Get in touch with other authorities, including your state's securities commissioner (www.nasaa.org), Attorney General's consumer protection bureau (www.naag.org/), the Better Business Bureau (www.bbb.org) and the National Futures Association (www.nfa.futures.org).
    

  • Be sure you get all information about the company and verify that data, if possible. If you can, check the company's materials with someone whose financial advice you trust.
    

  • Learn all possible information about fees charged, and the basis for each of these charges.
    

  • If in doubt, don't invest. If you can't get solid information about the company, the salesperson, and the investment, you may not want to risk your money.

11. More Information and Contacts

• Questions concerning this advisory may be addressed to the CFTC's Office of Public Affairs at (202) 418-5080.

• The Commodity Futures Modernization Act is available in our Law and Regulation page.
  (requires an Adobe Acrobat reader, which can be downloaded for free from www.adobe.com and numerous other sites on the Internet)

• For other consumer advisories concerning possible fraudulent activity in the commodity futures and options industry, click on the Customer Protection page.

• Contact the National Fraud Information Center (www.fraud.org).

• The CFTC's website also offers general information about trading in the commodity futures and options markets. You may wish to visit our Before You Trade page.

• To find out whether firms or counterparties with whom you plan to trade are registered or regulated institutions or entities that are outside the CFTC's jurisdiction, you can check the lists of regulated institutions on the following websites. Some institutions outside the CFTC's jurisdiction do not appear on any of these lists or in other readily-available places:

• • Federal Reserve Board (www.federalreserve.gov)

  • Federal Financial Institutions Examination Council (www.ffiec.gov)

  • Federal Deposit Insurance Corporation (www.fdic.gov)

  • U.S. Securities and Exchange Commission (www.sec.gov)

  • The Office of the Comptroller of the Currency (www.occ.treas.gov)

  • Office of Thrift Supervision (www.ots.treas.gov)

  • National Credit Union Association (www.ncua.gov)

  • National Association of Securities Dealers Regulation, Inc. (www.nasdr.com)

  • All U.S. Government web sites can be located through links at www.firstgov.gov

  • Your state Attorney General's office and state banking, insurance and securities regulators (which often have their own web sites).