Commodity Futures Fraud Prosecutions
1. CFTC v. Refco, Inc. (2005)
Jurisdiction: Federal Court, New York
Facts: Refco, a large brokerage, concealed $430 million in bad debts from clients and auditors. Traders in commodity futures were misled about the firm’s financial health.
Legal Issue: Fraud, misrepresentation, and violations of Commodity Exchange Act Sections 4b and 6c.
Outcome: Refco’s CEO Phillip Bennett was sentenced to 16 years in federal prison, fined $12 million, and the firm filed for bankruptcy.
Significance: One of the largest commodity futures frauds in history, emphasizing the need for transparency and full disclosure to clients.
2. CFTC v. Louis F. Lewis & Associates (2011)
Jurisdiction: Federal Court, Illinois
Facts: Lewis misappropriated client funds invested in commodity futures, providing false account statements to clients and promising guaranteed profits.
Legal Issue: Commodity pool fraud, misappropriation, and false reporting under the Commodity Exchange Act (CEA §6(c)).
Outcome: Lewis was sentenced to 8 years in federal prison and ordered to pay $25 million in restitution.
Significance: Showed that individual advisors or firms managing commodity pools can face severe penalties for client fund misappropriation.
3. United States v. Brian Hunter (2013)
Jurisdiction: Federal Court, New York
Facts: Hunter, a trader at Amaranth Advisors, manipulated natural gas futures prices using false trades to inflate profits. This contributed to $6 billion in client losses.
Legal Issue: Market manipulation, fraud, and misrepresentation under the Commodity Exchange Act.
Outcome: Hunter was banned from trading in commodities, fined $30 million, and faced civil penalties. Criminal charges were considered but settled via civil enforcement.
Significance: Demonstrated that manipulation of commodity futures for personal or firm gain is a federal offense.
4. CFTC v. GFT Commodity Services (2010)
Jurisdiction: Federal Court, Texas
Facts: GFT sold off-exchange commodity futures to retail investors, promising guaranteed profits and providing misleading account statements.
Legal Issue: Fraudulent solicitations, misrepresentation, and violation of CFTC regulations.
Outcome: The company was ordered to pay $14 million in restitution, and executives faced trading bans and fines.
Significance: Highlighted risks to retail investors in off-exchange commodity trading schemes.
5. United States v. Michael Coscia (2015)
Jurisdiction: Federal Court, Chicago
Facts: Coscia used automated trading algorithms to engage in spoofing, placing large orders he had no intention of executing to manipulate commodity futures prices.
Legal Issue: Spoofing under CEA Section 4c(a)(5), which prohibits manipulative trading practices.
Outcome: Coscia was sentenced to 3 years in federal prison, fined $1 million, and banned from commodity trading.
Significance: Landmark case establishing criminal liability for algorithmic trading manipulation in commodities.
6. CFTC v. Peregrine Financial Group (2012)
Jurisdiction: Federal Court, Illinois
Facts: Peregrine’s founder, Russell Wasendorf Sr., misappropriated $215 million in customer funds invested in futures accounts and falsified bank records.
Legal Issue: Commodity fraud, misappropriation, and false reporting under the CEA.
Outcome: Wasendorf was sentenced to 50 years in federal prison, and the firm declared bankruptcy.
Significance: One of the largest Ponzi-like schemes in U.S. commodity futures history.
7. United States v. David Gelbaum & Clean Energy Investments (2016)
Jurisdiction: Federal Court, California
Facts: Gelbaum misrepresented returns on commodity-based energy futures investments, providing falsified statements to investors.
Legal Issue: Fraud and misrepresentation in commodity futures investments.
Outcome: Civil penalties and disgorgement exceeding $10 million; criminal prosecution considered for certain executives.
Significance: Showed that even commodities tied to alternative assets are subject to federal enforcement.
Key Takeaways from Commodity Futures Fraud Cases:
Legal Basis: Prosecutions often rely on Commodity Exchange Act Sections 4b, 4c, and 6(c), plus wire fraud and misappropriation statutes.
Types of Fraud: Common schemes include misappropriation of funds, spoofing/manipulation, false account statements, and Ponzi-like structures.
Severe Penalties: Prison sentences can range from 3 years (for algorithmic trading manipulation) to 50 years (for large-scale Ponzi schemes), with millions in restitution and fines.
Civil and Criminal Enforcement: CFTC frequently pursues civil penalties, but egregious cases also lead to criminal prosecution by DOJ.
Retail Investor Protection: Many cases focus on fraud against retail clients, highlighting regulatory emphasis on disclosure and transparency.
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