Injunctions under the Commodity Exchange Act (part 2)

(Blog written by: Jay Lewis)

In Simmons, a Complaint for Injunctive Relief and a Motion for a Statutory Restraining Order were brought under Section 6c(a) of the Commodity Exchange Act (the “Act”), 7 U.S.C. §6c(a) (2006).  The Act allows U.S. district courts to grant ex parte restraining orders, to freeze assets, and prohibit any person from destroying records. (7 U.S.C. §13a-1 (2006)).  Under the Act, restraining orders may be issued whenever it appears that any person has engaged in a practice constituting a violation of the Act.  (Memorandum p 25, citing CFTC v Clothier, 788 F. Supp. 490, 492-3 (D. Kan. 1992)).  A prima facie case of illegality is sufficient under the Act eliminating the need for proof of irreparable injury or inadequacy of other remedies otherwise required in private actions seeking injunctions. (Memorandum p 27, citing NRLB v Aerovox Corp., 389 F. 2d 475, 477 (4th Cir. 1967). Additionally, a preliminary injunction pursuant to the Act may be granted without bond. (7 U.S.C. §13a-1(b) (2006)).

 

On February 11, 2011, Chief U.S. District Judge Robert Conrad signed an Order finding that:

·        The Court has jurisdiction over the parties and subject matter pursuant to Section 6c of the Act and venue is proper under 6c(e).

·        The Court found good cause to believe that the named Defendants engaged in acts that violated the Act.

·        The named Relief Defendants received assets as a result of Defendants’ acts and have been unjustly enriched.

·        Immediate and irreparable damage to the Court’s ability to grant effective final relief in the form of monetary redress will occur unless the Defendants and Relief Defendants are immediately restrained and enjoined.

·        The Court found good cause to freeze assets controlled by Defendants and Relief Defendants.

·        The Court found good case to prohibit Defendants from denying Commission representatives access to books and records.

·        The Court found good cause to order repatriation of assets controlled by Defendants and Relief Defendants.

·        The Court found good cause for expedited discovery.

·        The Court also weighed the equities and considered the Commission’s likelihood of success in its claims, and as a result, found that it is in the public’s interest to issue a restraining order.

 

As a result of the findings above, the Judge ordered the following:

·        The Defendants were ordered not to transfer, dissipate, or dispose of assets.

·        The Judge ordered any financial or brokerage institutions, business entity, or others controlling the Defendants’ assets to prohibit the Defendants from removing any such assets and to deny Defendants access to safe deposit boxes.

·        Judge Conrad also required businesses to provide expedited discovery to the CFTC in the form of account numbers, account balances, account dates, and safe deposit box numbers.

·        The Judge ordered Defendants to provide full accounting for all accounts inside and outside the United States within 10 days of the Order.

·        The Defendants are also ordered to transfer all assets from outside the United States to inside the United States.

·        The Judge ordered that any and all of the Defendants’ business records may not be destroyed.

·        CFTC is allowed to inspect and copy all of Defendants’ books and records.

·        CFTC is allowed to conduct expedited discovery- they may take depositions with only 5 days notice.

·        Pursuant to the Act, CFTC is not required to post a bond.

 

As of February 23, 2011, discovery in this case has been stayed pending the Keith F. Simmons criminal case.

 

Injunctions under the Commodity Exchange Act (part 1)

(Blog written by: Jay Lewis)

 

In United States Commodity Futures Trading Commission (“CFTC”) v. Simmons et. al., (Case Number 3:11-cv-00023 W.D.N.C.), CFTC filed a Motion for Preliminary Injunction against a plethora of defendants including Keith F. Simmons and Black Diamond Capital Solutions, L.L.C. for their roles in an alleged Ponzi scheme.  The Complaint was filed on January 13, 2011.

 

CFTC alleges that starting in April 2007 until Simmons’ arrest in December 2009 $35 million was fraudulently solicited from more than 240 individuals and businesses. (Complaint, ¶ 2).  The Defendants in Simmons obtained investments with promises of remarkable returns using a forex trading system. (Complaint, ¶ 4).  Forex is short-hand for foreign exchange market, an over-the-counter market used to exchange one national currency for another.  The forex was created to assist corporations transacting business overseas to pay each other in their respective currencies, but is now dominated by speculators.  Mark Levinson, Guide to Financial Markets pp 14-36 (4th ed., The Economist 2006).

 

In Simmons, the Defendants persuaded investors they had developed an advanced computerized trading system created by a group of software developers.  (Plaintiff’s Memorandum in Support of its Motion for a Statutory Restraining Order, p 10).  They enticed investors with promotional materials claiming a track record of exceptional returns. (Memorandum p 11).  But according to the CFTC allegations no such system ever existed, and the Defendants never traded a dime of investors’ money in the forex market.  (Memorandum pp 9-16).  Instead, CFTC alleges the investments went to pay for the Defendants’ real estate purchases, cars and lavish trips. (Memorandum pp 14-15). 

 

However, once investors started demanding their returns on investment or attempted to withdraw principal, the whole system crumbles and the schemers are left making excuses.  CFTC alleges that starting in March of 2009 the Defendants created fanciful reasons as to why the investors were unable to receive any payments. (Complaint ¶¶ 8-9)  To keep investors placated, they altered existing bank statements by fraudulently multiplying actual assets ten-fold.  (Memorandum p 20).  CFTC alleges the Defendants claimed agencies froze Black Diamond’s accounts to conduct investigations, that banking restrictions limited the payouts, and that “a non-existent German liquidity provider by the name of Klaus” was planning to buy out Black Diamond.  (Complaint ¶ 9).  Allegedly these frauds were still perpetuated even as the Defendants failed to pay their own employees.  (Memorandum pp 18-24).  By December of 2009 it was obvious to the investors they had been scammed and the FBI arrested Keith F. Simmons for his role in the fraud.