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U.S. Commodity Futures Trading Commission v. OTC Investments LLC

United States District Court, W.D. North Carolina, Asheville Division

January 19, 2018

U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
OTC INVESTMENTS LLC, FOREX CURRENCY TRADE ADVISORS, LLC, and BARRY C. TAYLOR, Defendants.

          ORDER

          Martin Reidinger United States District Judge

         THIS MATTER is before the Court on the Motion for Final Judgment by Default Against Defendants OTC Investments and Forex Currency Trade Advisors (“Motion for Default Judgment”) [Doc. 63] filed by Plaintiff U.S. Commodities Futures Trading Commission (“CFTC” or “Commission”).

         Having considered the Commission's well-pleaded Complaint and the Memorandum in Support of the Motion for Default Judgment, including the supporting materials cited therein, the Commission's Motion for Default Judgment is granted. The Court finds that there is good cause for the entry of this Order and that there is no just reason for delay. The Court therefore directs the entry of the following Findings of Fact, Conclusions of Law, Permanent Injunctive Relief, Civil Monetary Penalties, and Other Miscellaneous Provisions pursuant to Section 6c of the Commodity Exchange Act (the “Act”), 7 U.S.C. § 13a-1 (2012), as set forth herein.

         I. RELEVANT PROCEDURAL HISTORY

         1. On April 21, 2015, the Commission filed this action against Defendant Barry C. Taylor (“Taylor”) and Defendants OTC Investments LLC (“OTC”) and Forex Currency Trade Advisors, LLC (“FCTA”). The Commission alleges that Defendants violated core anti-fraud provisions of the Act, 7 U.S.C. §§ 1 et seq. (2012), and the Commission Regulations promulgated thereunder (the “Regulations”), 17 C.F.R. §§ 1 et seq. (2014), by fraudulently soliciting at least $2.4 million from participants in an unregistered commodity pool Defendants operated, by misappropriating at least $529, 000 of those funds, and by issuing false or misleading accounts statements and other communications to pool participants to conceal their fraud. [Complaint, Doc. 1].

         2. The Commission properly served Defendants OTC and FCTA with the Complaint and summons through their registered agent, Taylor, on April 29, 2015. [Docs. 15, 16]. The Commission also properly served Taylor through personal service on the same date. [Doc. 14]. Taylor filed an Answer to the Complaint on June 9, 2015 [Doc. 33] and summary judgment is being entered against him contemporaneously herewith. Neither OTC nor FCTA appeared or answered the Complaint within the time permitted by Federal Rule of Civil Procedure 12(a)(1). On June 10, 2015, an Entry of Default was entered against OTC and FCTA. [Doc. 34]. As such, this Court finds that the well-pleaded allegations of the Complaint concerning the Defendants' liability are admitted and shall be taken as true. Fed.R.Civ.P. 8(b)(6) (allegations other than those relating to damages are admitted if a responsive pleading is required and the allegations are not denied). Federal Rule of Civil Procedure 55(b) authorizes this Court to enter a default judgment against a properly-served defendant who fails to timely file a responsive pleading, and this Court finds that the well-pleaded allegations of the Complaint support the relief sought.

         II. FINDINGS OF FACT

         A. The Parties

         3. Plaintiff U.S. Commodity Futures Trading Commission is an independent federal regulatory agency charged by Congress with administering and enforcing the Act, 7 U.S.C. §§ 1 et seq., and Commission Regulations, 17 C.F.R. §§ 1.1 et seq.

         4. Defendant OTC is a Nevada limited liability company formed by Taylor on or around July 18, 2005. Defendant FCTA is a North Carolina limited liability company formed by Taylor on or around December 3, 2007. OTC and FCTA were located in Franklin, North Carolina. Taylor was the principal and held himself out to the public as the managing partner of OTC and FCTA.[1] Taylor also maintained the records for these entities. Neither OTC nor FCTA has ever been registered with the Commission in any capacity.

         B. The Forex Pool and Solicitation of Pool Participants.

         5. OTC and FCTA engaged in the business of operating an investment pool for the purpose of soliciting and accepting funds from pool participants for entering into margined or leveraged agreements, contracts, or transactions in the foreign exchange market on behalf of OTC's and FCTA's pool participants. The foreign exchange market (“Forex”) is a global decentralized market for the trading of currencies. Taylor maintained and controlled two bank accounts at United Community Bank (“UCB”), one in the name of OTC from April 2007 until April 2015 and one in the name of FCTA from January 2013 until April 2015 (collectively, the “UCB accounts”). Both accounts are now closed.

         6. From August 1, 2011 through April 21, 2015 (the “Relevant Period”), Taylor solicited eighteen (18) members of the public (“pool participants”) to participate in the Forex commodity pool. As a result of these solicitations, pool participants deposited an aggregate of approximately $2.5 million in the UCB accounts. Most of the pool participants resided in North Carolina.

         7. Taylor represented himself to these participants as an expert in Forex trading and claimed he had created a computer software program that could track the Forex market and enable him to make investments that generated a very high rate of return.

         8. In a “Fee Schedule” he distributed to pool participants and prospective pool participants, Taylor guaranteed that participants would receive a minimum net return of 2% per month. He also assured existing and prospective pool participants that he would only receive “administrative fees and commissions” from “any profits remaining after the Applicant has received a minimum of 2% net return monthly on their account balance.” In the Fee Schedule, Taylor guaranteed that “the maximum loss to be sustained, at which time all trading shall cease, is fifteen per cent (15%) of original principal.”

         C. The Forex Trading Accounts and Trading Losses

         9. In February 2013, Taylor opened a Forex Capital Markets (FXCM) trading account in the name of OTC. In May 2013 and March 2014, respectively, Taylor opened two Forex trading accounts at Retail Foreign Exchange Dealer (RFED) Gain Capital Group, LLC (“Gain”), in the name of FCTA.[2] Taylor was authorized to execute trades on behalf of each of these three accounts.

         10. None of the Forex trading accounts were ever registered as a commodity pool operator (“CPO”) as required by federal regulations. Federal regulations require that Forex CPOs register with the CFTC, unless every participant in the pool individually qualifies as an “eligible contract participant”[3] (“ECP”). None of Taylor's investors qualified as ECPs. Taylor frequently moved funds between the UCB accounts and used funds from the UCB accounts to fund the Forex trading accounts.

         11. Contrary to Taylor's promises of steady profits, with commissions and fees to be limited to periods of profitable trading in excess of 2% per month, Taylor traded only a portion of pool participants' funds in Forex. Between February 1, 2013 and April 30, 2015, Taylor made deposits totaling approximately $1, 486, 000 (of the approximately $2.5 million in funds he solicited) into the Forex trading accounts. During that same time period, however, of that amount he withdrew more than half of the pool participants' money from the Forex trading accounts, approximately $834, 000.

         12. Taylor traded in the Forex trading accounts during each of the twenty-seven months he was operating them. While Taylor managed a small profit the first month of trading, significant trading losses were suffered thereafter. The total realized losses between February 2013 and April 2015 were over $660, 000 due to trading losses, fees and commissions to FXCM and Gain. For the remaining twenty-six months, the accumulated monthly trade balance was negative, and, for most of this period, Taylor maintained accumulated trading losses in the hundreds of thousands of dollars.

         13. Taylor knew there were no profits (except for the first month) to distribute to pool participants. Because there were continuous and substantial overall trading losses, all funds that Taylor used for his personal use and any payments to pool participants came from deposits of other pool participants, not from any trading profits, in the nature of a Ponzi scheme.

         As of April 30, 2015, the Forex trading accounts collectively contained only $26, 278 and the UCB accounts only $3, 016.22.

         D. The Issuance of False Statements and Misappropriation of Pool Participant Funds

         14. Not only did Taylor fail to cease trading when the “maximum loss” of 15% of principal was reached, as promised by the Fee Schedule, but he also failed to report losses to the pool participants.

         15. During the time he was losing money in the Forex markets, Taylor sent the pool participants false monthly statements, usually by email, which fraudulently represented that their principal was intact and that they were realizing the promised profits. When pool participants asked to withdraw their profits, Taylor drew from the principal invested by others to make the Ponzi-style payments. Taylor did this to disguise his trading losses and to cause the participants to leave their remaining balances in his control.

         16. Taylor also convinced some of the participants to reinvest their “commissions” rather than accepting profit payments. Furthermore, contrary to the express terms of the Fee Schedule, Taylor admitted withdrawing approximately $100, 000 per year as a “salary.”

         17. In addition, Taylor sent fraudulent communications, typically by email, to the pool participants with false statements regarding his investment activities. These emails were designed to mislead the victims about the loss of their principal investments so they would not seek to withdraw their money.

         18. For example, in January 2015, Taylor sent pool participants emails claiming that he had halted Forex trading “due to the events of January 15th with the Swiss National Bank[4] and the subsequent moves in the foreign exchange market and defaults by several of the brokerage firms.” In fact, the OTC account at FXCM had been closed months earlier, Taylor actively traded in the two Gain accounts during this time, and the events in Switzerland had no relationship to any of Taylor's Forex losses. Taylor admitted he perpetrated this artifice because he knew he needed to begin informing participants of the losses and seized on the Swiss news event as an excuse.

         19. By way of additional fraudulent email communications, Taylor created a fictitious person he named “Anthony Scaderia, ” in an attempt to calm investors, telling them that “Scaderia” was responsible for trading losses and falsely claimed he was going to sue “Scaderia.” Taylor even solicited additional money from some of the pool participants to purportedly use to hire lawyers to pursue this imaginary lawsuit.

         20. Despite Taylor's promises to participants that he would not claim any commissions or fees for himself until after the promised profits were realized, Taylor nevertheless misappropriated participant's money from the UCB accounts for his own use.

         21. During the Relevant Period, Taylor withdrew at least $16, 000 from these accounts in the form of ATM withdrawals and at least $155, 000 in the form of checks made out to “Cash.” Taylor used the debit cards associated with these accounts for over $270, 000 in personal expenditures and made over $88, 000 in electronic payments for personal expenses. In total, Taylor used over $529, 000 in pool participant funds for cash withdrawals and personal expenditures.

         III. CONCLUSIONS OF LAW

         A. ...


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