Monex CFTC Complaint Is SECOND MAJOR Lawsuit Since Early 2000’s

Gold and silver precious metals dealer Monex is facing a legal suit filed by the CFTC last week, but there have been legal problems before, for both the company and the founder…

The CFTC Lawsuit against Monex demonstrates how important it is for investors to do their due diligence before investing in gold or silver.

Details of the case as reported by the Los Angeles Times highlights the extent of the fraud and deception charged against the precious metals dealer:

The complaint alleges that the firm, owned by the father and son duo of Louis and Michael Carabini, made most of its revenue by controlling the price at which its customers bought and sold gold, silver and other precious metals.

The difference, or spread, between the price set by the firm and the underlying price on tracked spot markets was generally about 3%, the commission said. That means, according to an example cited in the complaint, it would cost a Monex customer $2,550 to trade 5,000 ounces of silver, versus $25 to enter into a substantially similar futures contract on one regulated exchange.

To boost its sales, Monex ran television campaigns and deployed a telephone sales force that promised its Atlas program was a safe and secure way to shield customers’ wealth from inflation, the complaint alleged.

The company trained its sales force using scripts that minimize risk and emphasized the “profit potential and security” of the investment, the complaint said.

“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?” was one phrase the complaint said employees were encouraged to use.

But customers in the Atlas program lost big, a fact Monex shielded from prospective clients, the commission said. About 90% of all leveraged Atlas accounts lost money from July 2011 through the end of March, according to the complaint.

Sales representatives were paid commissions and bonuses based on the number of accounts they opened and the size of the transactions in the accounts, not by how much clients earned, the commission alleged.

In addition to the company, the commission accused Monex owners Louis Carabini and his son Michael of committing fraud and operating an unlawful leveraged commodity platform that was not registered with the commission.

The commission has asked a judge to stop the company from continuing to offer the leveraged commodities trades to retail clients. It is also seeking to have Monex provide full restitution to harmed customers and to disgorge any ill-gotten gains.

The CFTC filing is not the first bout of legal trouble brought against Monex. Here’s the LA Times reporting on past legal troubles:

 The company faced a 2004 class-action lawsuit that alleged Monex misled its customers and resulted in a $150,000 payment to class members. And in 1974 the Securities and Exchange Commission alleged that Louis Carabini obtained $1 billion through deceptive sales of silver coins on margin.

Below is the full press release from the CFTC regarding action taken against California gold dealer Monex:

CFTC alleges that defendants deceived thousands of retail customers who lost hundreds of millions of dollars in connection with illegal, off-exchange leveraged precious metals transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced that on September 6, 2017, it filed a civil injunctive enforcement action in the U.S. District Court for the Northern District of Illinois against three affiliated companies located in Newport Beach, California, Monex Deposit CompanyMonex Credit Company, and Newport Services Corporation(collectively, Monex), and Monex’s principals Louis Carabini and Michael Carabini. The CFTC Complaint charges the Defendants, among other claims, with defrauding thousands of retail customers nationwide out of hundreds of millions of dollars, while executing thousands of illegal, off-exchange leveraged commodity transactions.

James McDonald, the CFTC’s Director of Enforcement stated: “Today, we announce the filing of one of the largest precious metals fraud cases in the history of the Commission. As alleged, the Defendants defrauded thousands of retail customers—many of whom are elderly—out of hundreds of millions of dollars as part of a multi-year scheme. Fraud in our markets, like that alleged here, undermines confidence, reduces transparency, and harms competition. As this investigation shows, we’ll work tirelessly to detect and prosecute fraud of the sort that’s alleged here.”

CFTC Commissioner Sharon Bowen commented: “I am proud to support this enforcement action.  The kind of massive fraud alleged here goes to the heart of our core mission as an agency, and mine as a Commissioner. I came to the Commission committed to investor protection. And I leave with that commitment unshaken.”

According to the Complaint, Monex offers leveraged trading in gold, silver, platinum and palladium to retail customers through its “Atlas” program. Monex deceptively pitches leveraged trading through the Atlas program as a safe, secure and profitable way to invest in precious metals, the Complaint alleges. In reality, however, nearly everyone who placed leveraged trades in an Atlas account between July of 2011 and March of 2017 lost money, the Complaint alleges. According to the Complaint, over 12,000 trading accounts were used to place leveraged precious metals trades resulting in more than $290 million in customer losses between July 16, 2011 and March 31, 2017. The Complaint alleges that in order to push customers into the Atlas program and to generate trades, the Defendants employed high-pressure sales tactics, systematically downplayed the risks associated with the Atlas program, and falsely promised customers that Monex would act as the customers’ fiduciary and would always act in those customers’ best interests. As a result of Defendants’ conduct, many customers lost their life savings, while Monex and its owners pocketed millions of dollars, the Complaint alleges.

The Complaint further alleges that Defendants’ leveraged commodity transactions are unlawful because they were not, and are not, executed on or subject to the rules of a regulated exchange, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, effective July 16, 2011.

The Complaint also alleges that the Defendants were required to register as Futures Commission Merchants (FCMs) but failed to do so in violation of the Commodity Exchange Act. Individual Defendants Louis and Michael Carabini are charged directly with the offering of the unlawful leveraged commodity transactions and charged with the fraud and registration violations as controlling persons of Monex who knowingly induced the underlying violations or failed to act in good faith.

The CFTC is seeking preliminary injunctive relief to enjoin Monex from continuing to market the Atlas program to retail customers, and appointment of a monitor over Monex for the Atlas trading accounts. The requested preliminary injunction Order would prohibit the Defendants from trading, soliciting orders, committing fraud, or engaging in business activity related to contracts or transactions regulated by the CFTC until there is a final decision on the merits. In its continuing litigation, the CFTC seeks disgorgement of ill-gotten gains, restitution for the benefit of defrauded pool participants, civil monetary penalties, permanent registration and trading bans, and a permanent injunction from future violations of federal commodities laws, as charged.

The CFTC Division of Enforcement staff members responsible for this action are Carlin Metzger, Michael Frisch, Eric Schleef, Brigitte Weyls, Joseph Konizeski, Jeffrey Gomberg, Scott Williamson, and Rosemary Hollinger. The CFTC Division of Enforcement also thanks the Division of Market Oversight Surveillance Staff for its assistance.