Commodity Pool Fraud

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The Commodity Futures Trading Commission, the U.S. Federal agency that regulates the trading of commodity futures and options contracts in the United States, has issued a warning to investors about fraudulent investment schemes involving unregistered commodity pool operators. [1] Investors lose millions every year in phony commodity pools and fictional "hedge funds" trading commodity futures and options.

Commodity Pool Operators are persons or firms that raise funds and pool them together to trade commodity futures and options. Generally, pool operators are required to be registered, but there are exceptions to this requirement. Operators of small pools with 15 or fewer investors whose total trading capital equals $200,000 or less, or pool operators who receive no compensation, do not have to be registered, but they are required to notify NFA and the CFTC that they are operating without registration.

How the Fraud Works

Pool operators often use their reputations or personal relationships to solicit investment money from friends, neighbors, co-workers, church members, or social groups.

Sometimes these individuals operate Ponzi schemes. In a Ponzi scheme, little or none of investors' money is ever invested in the commodity markets as promised. Instead, the operator of this kind of scam steals the money. Sometimes, the operator creates the illusion of a successful business by paying phony profits to early investors with some of the money the operator receives from later investors. Operators of these scams often don't send account statements and sometimes they send phony statements that indicate that trading is going on and that the investor has made a profit.

The CFTC has brought many enforcement actions against individuals and firms that offer investments in commodity pools where the funds have been misappropriated or misused (often spent on improper expenses) and where the pool operators advertised and solicited investors based on false claims of high profits and low risk.

Before You Invest

The CFTC urges you to be skeptical when someone tells you that their services can earn you large profits with minimal risk, even if you have a personal relationship with the individual.

  • Find out about the registration status, business background and disciplinary history of the pool operator
  • Ask to see the pool's disclosure documents and performance history
  • Ask the pool operator to give you account statements that the pool receives from the registered firms through which the pool trades
  • Ask about fees and commissions charged by the pool operator, and compare these with those of registered pool operators

Remember the Key Warning Signs of Fraud

  • Get-rich-quick schemes that sound too good to be true. There’s never a free lunch. Be very careful if you recently retired or came into money and you’re looking for a safe investment. You could be a very attractive target for a crook. Once your money is gone, it can be impossible to get it back.
  • Predictions or guarantees of large profits. Always get as much information as you can about a firm or individual’s track record and verify that information - even if you know the people involved or they are recommended by friends or relatives. If you can’t get solid information about your investment and the company, don’t invest. Before you invest, always check it out with someone whose financial advice you can trust.
  • Promises of little or no financial risk. Be suspicious if the firm or individual says there is little risk. Be suspicious if someone tells you that a written risk disclosure statement is only a routine formality. Written risk disclosure statements are important to read thoroughly and understand.
  • Claims of trading in the “Interbank Market.” If a firm claims that they will trade foreign currency for you in the interbank market, or that you should trade in the interbank market, be cautious. The term “interbank market” refers to a loose network of currency transactions negotiated between financial institutions, usually banks and investment banks, and other large companies.
  • Unsolicited telephone calls about investing. Be skeptical if someone you don’t know calls you about investment opportunities.
  • Someone asking you to send cash immediately. Be very cautious if someone tries to convince you to send cash or transfer money to them immediately by overnight express, the Internet, mail, or any other method.[2]

References

  1. Fraud Advisory from the CFTC: Commodity Pool Fraud. Commodity Futures Trading Commission.
  2. Fraud Awareness and Protection. U. S. Commodity Futures Trading Commission.