Misrepresentations in Sales of Securities or Commodity Futures & Options (SEC & CFTC)

A fertile area for financial fraud is in the representations made to potential investors in securities and commodity futures. Certain misrepresentations can amount to violations of laws and regulations, including Section 17(a)(2) of the Securities Act of 1933, which prohibits obtaining money or property through material misstatements and omissions in the offer or sale of securities.

Similarly, the Commodities Exchange Act (Section 4o) generally prohibits fraud or deceit in connection with commodities sales (or futures contracts involving commodities). Misrepresentations that lead to significant actual or potential investor harm attract the attention of the SEC (Securities and Exchange Commission) and, in the case of futures trading, the CFTC (Commodity Futures Exchange Commission).

The government is concerned about deception of investors in both public and non-public (pre-IPO or private) companies and transactions. Some misrepresentation schemes might be appropriate to report to the SEC or CFTC under their respective whistleblower programs.

Misrepresentations in Securities

Investors can be misled by any number of misrepresentations in areas governed by the SEC, including:

  • Material misstatements about a fund’s investment strategy, historical performance, profitability, use of investor funds, or the magnitude of actual losses
  • False inflation of a private or public company’s value with deceptive statements about the performance of a key product or service, or actual value of a key asset(s)
  • Unlawful Ponzi schemes and pyramid schemes
  • Hidden dealer markups in offering prices
  • Misuse of the EB-5 immigrant investor program whereby foreign investors are falsely told their substantial investment in U.S. enterprises would create new jobs, impact the local economy, and give investors an opportunity for future U.S. residency, when.in fact, offerors either pocket the money or divert it to other projects.
  • Misleading statements and/or omissions in offerings to retail investors for complex financial products, such as structured notes
  • High-frequency trading schemes
  • Selective disclosures of “dark pool” order types made only to certain customers, creating a non-level playing field

Misrepresentations in Futures Trading of Commodities and Options Contracts

The CFTC is concerned about misrepresentations in an array of areas and by a number of actors, including options contract markets, derivatives clearing organizations, futures commission merchants, commodity pool operators, and swap facilities/repositories/dealers.

Fraud in commodities futures markets traditionally involves agricultural commodities such as cotton, wheat, grains, oats, and corn, but such markets also include contracts on energy (oils, gasoline), metals (copper, gold, and silver), and financial products (interest rates, stock indexes, foreign currency or “Forex,” and swaps). Deception in these complex and often risky markets can fool any type of consumer, including sophisticated investors such as municipalities, pension funds, farmers and ranchers, and commercial companies.

CFTC enforcement actions show widely varied fraud involving misrepresentations, including:

  • Unauthorized trading, including unauthorized swaps trading
  • Misrepresentations as to profitability, “guaranteed” returns, or losses
  • Misrepresentations in the sale of foreign currency (Forex) futures contracts and trading pools
  • Ponzi schemes involving Forex, commodity pools
  • Manipulation or false reporting of benchmark rates such as the LIBOR and TIBOR
  • Manipulation of U.S. Dollar International Swaps and Derivatives Association Fix
  • Spoofing—i.e., bidding or offering with the intent to cancel before execution—in futures trading
  • Deceptive schemes in precious metals futures, including spoofing
  • Misappropriation of investor funds
  • Trading by non-registered merchants and operators, including off-exchange (or over-the-counter/OTC) transactions by those who are not registered futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs).
  • Fraudulently soliciting customers for illegal, off-exchange (OTC) transactions involving, for example, foreign currency, precious metals, financed commodity transactions in bitcoin/cryptocurrencies, binary options
  • Inaccurate reporting of positions in futures

To find out more about whether a particular type of fraud is actionable under Dodd-Frank, contact us today.