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CFTC Charges Monex with Massive Fraud, $290M Loss



[Summary: Monex sued by CFTC for a massive $290M+ fraud]
[News: CoinWeek, Los Angeles Times, my article at CoinWeek]
[See also: Bullion Dealer Data]

Atlas Data

September 24, 2017 7:50PM EST
Here are some stats regarding the Monex Atlas program. "Avg. Loan" is the average customer loan balance for the year, "Liquidations" is forced liquidations (when an account got below 7% equity), "Loan Losses" is the amount that Monex lost (e.g. if the customer owed $7,000, but the metal is sold for less than $7,000), and "Commissions" is the estimated commissions that Monex received from the forced sales.

YearAvg. LoanLiquidationsLoan LossesCommissions
1987$87,647,500.00$23,299,251.00$14,602.00$291,241.00
1988$81,672,500.00$7,006,660.00$18,953.00$87,583.00
1989$75,384,600.00$8,166,390.00$1,352.00$102,080.00
1990$80,153,400.00$25,127,127.00$15,261.00$314,089.00
1991$55,201,000.00$7,569,478.00$9,505.00$94,618.00
1992$48,484,800.00$6,080,765.00$1,613.00$76,010.00
1993$41,170,600.00$8,584,061.00$246.00$107,301.00
1994$42,521,800.00$6,655,684.00$109.00$83,196.00
1995$42,316,200.00$6,237,469.00$902.00$77,968.00
1996$50,512,400.00$5,562,700.00$50.00$69,534.00
1997$45,026,600.00$39,104,218.00$8,335.00$488,803.00
1998$44,686,000.00$25,150,124.00$28,366.00$314,377.00
1999$73,035,800.00$6,467,368.00$56.00$80,842.00
2000$84,794,600.00$4,706,330.00$835.00$58,829.00
2001$49,863,000.00$6,212,240.00$111.00$77,653.00
2002$51,385,600.00$5,410,993.00$0.00$67,637.00
2003$62,127,000.00$4,228,687.00$0.00$52,859.00
2004$83,577,000.00$11,493,240.00$1,723.00$143,665.00
2005$101,703,114.00$1,802,341.00$0.00$22,529.00
2006$162,079,155.00$45,801,333.00$1,177.00$572,517.00
2007$164,759,970.00$12,385,697.00$0.00$154,821.00
2008$187,308,113.00$94,718,790.00$20,516.00$1,183,985.00
2009$103,429,482.00$528,004.00-$13.00$6,600.00
2010$119,779,485.00$7,324,379.00$3,163.00$91,555.00
2011$200,431,278.00$18,419,912.81$0.00 
2012$231,415,600.00$1,129,398.47$0.00 
2013$180,998,985.00$51,995,620.64$0.00 
2014$146,123,861.00   

About the Old $378M IRS Lawsuit Against Monex

September 24, 2017 4:55PM EST
In June, 2008, the IRS filed a lawsuit against 7 Monex companies (see my 'Monex Companies and Ownership' page). This was for $133M of taxes from 1980-1984 (plus accrued interest), an assessment that the IRS entered against Monex International, Ltd. in 1998. In 2008, the IRS took Monex to court, requesting a judgment of $378M (which includes accrued interest). The IRS felt that the new companies constituted a "Monex enterprise" with "New Monex Entities" that were alter-egos, successors and fraudulent transferees of Monex International, Ltd. (the company the tax was assessed against), and therefore should be responsible for the taxes.

By August, 2011, a stipulation was filed, and the judge ended up ordering a judgment of $378,237,162.42 against Private Civil Corps Enterprise, Inc. (the renamed PCCE, Inc.). From the outcome, it looks like the IRS was unable to file a judgment against any entity except Private Civil Corps Enterprise, Inc. (which was renamed from PCCE, Inc. a/k/a Pacific Coast Coin Exchange, which had been renamed from Monex Corporation, which acquired Monex International, Inc.). I am guessing that the name was changed from "PCCE" to "Private Civil Corps Enterprise" to match the initials, while not being associated with PCCE, Inc. or Pacific Coast Rare Coins.

The IRS claimed that from 1980 to 1985, Monex International engaged in an abusive tax shelter. The Tax Court had previously (in 1995) entered judgment for deficiencies for the 1974 and 1978 tax years (about $6M). Forbes refers to the IRS disallowing a 1980s tax shelter involving London Metal Exchange straddles. It is unclear if that is the same as the tax shelter that Monex used with Merit Securities, Inc. (a subsidiary of Leema Enterprises, Inc.). Monex was actually the only clients of Merit using T-bill options from 1983-1988. Monex founder Louis Carabini and his family also used Merit for a tax shelter in 1981-1982 through an offshore entity. These shelters were apparently designed to defer as much income as desired from one tax year to another.

Sample Customer Trade Acknowledgement

September 18, 2017 4:40PM EST
All Monex accounts are self-directed: customers agree that "You are solely responsible for all purchasing, selling and borrowing decisions for your account.". Monex tells account reps that "An Account Representative may not place any order for a customer which the customer has not specifically directed the Account Representative to place. This practice is against the law". Despite this, some customers have claimed that their account reps made trades that the customer did not understand or did not realize they were placing (typically quantities that exceeded the customers' cash, generating a loan, or taking short positions). Monex is careful to get a signed agreement from each customer, a recorded verbal disclosure, and a recorded verbal acknowledgement of every order.

I thought it would be interesting to see exactly what a trade confirmation looks like. Fortunately, the CFTC provided a transcript of what a customer claims is a recording of a phone call with her account rep. Note that the "inaudible" portions could be due either to the quality of the phone connection or the recording of it. Here is the portion where an order is placed:

SpeakerAddressingStatement
Account RepCustomer... So I'll -- I will call this in now but the (inaudible).
Account RepTradingCoordinate (inaudible) two (inaudible) I'm going to be (inaudible) 17759 instruction code K (inaudible) code 23624330 transaction number 413144.
Account RepCustomerCan you confirm, [Customer first name]?
CustomerAccount RepYes
TradingAccount Rep(Inaudible) SBB at 17759 (inaudible) 12:29.
[NOTE: 'SBB' is likely actually 'SBV' - the Monex code for 1,000oz silver bars]
Account RepTrading12:29. And actually we also wish to place a purchase limit, purchase limit for the same position. This time it's going to be at 16975.
Account RepCustomerCan you confirm please, [Customer first name]?
CustomerAccount RepYes.
TradingBothThank you. Confirming (inaudible) 16975 (inaudible) K 12:29.
Account RepTrading12:29. And then we would make a final one, SPX at 16527, instruction code M4DJW.
Account RepCustomerCould you confirm, [Customer first name]?
CustomerAccount RepYes.
TradingAccount RepAnd it's in the (inaudible)?
Account RepTradingYes.
TradingAccount RepThank you. Just confirming the last (inaudible) 16527 extension code (inaudible). Time is 12:29, (inaudible) number 432122.
Account RepTradingThank you.
TradingAccount RepThank you.

"Instruction code K" is the Monex code for a 'commodity loan return'. In other words, she had shorted 2,000 ounces of silver 9 days earlier, and today is closing out the position. This transaction resulted in the following on her statement:

06/24/16  |  413144  |  PURCHASED/R  |  2  |  1000 OUNCES SILVER 06/13/16   |  (36,228.00)  |
          |          |               |     |    LOSS $1,646.00              |               |
          |          |               |     |    TRANSFER PROCEEDS           |   34,582.00   |   (34,582.00)
...

06/22/16  |  423122  |  LMT-ORD PUR  |  1  |  1000 OUNCES SILVER            |              |
It appears that the "17759" in the first instruction is $17.759/oz, which works out to $35,518 plus a 2% commission ($710.36) is $36,228, the amount she paid for the metal. It looks like the spot price (per Kitco) was about $17.32 at the time the trade was made.

CFTC's 'Actual Delivery' 2013 Interpretation

September 14, 2017 4:00PM EST
Much of the CFTC's case against Monex rests on whether Monex "actually delivered" metal to Atlas customers within 28 days. If Monex did, they are likely exempt from regulation by the CFTC, which would otherwise be required by the Dodd-Frank Act of 2010.

In December 2011, the CFTC issued an interpretation of what "actual delivery" means. They requested comments, and filed an updated interpretation in 2013.

With Monex, an Atlas customer purchasing leveraged metal will pay for part of the metal and take out a loan for the rest. All the metal will be deposited at one of Monex's depositories. Monex will let the depository know that the metal belongs to the customer, and the depository will print out a "CTTN" (Commodity Title Transfer Notice) and send it to the customer. The metal will be titled in the name of the customer.

The catch, however, is that there is very little the customer can actual do with the metal. Monex maintains possession, control, and security interest of the metal. The customer cannot hold it, they cannot move it, they cannot loan it out. And while the customer has title, Monex has the right to liquidate it without notice (typically only if the equity goes below 7%, when the metal will automatically be sold). Customers cannot sell or transfer the metal to anyone except Monex. However, if the customer wishes physical delivery, they can pay off the loan and have metal shipped to them.

Class Actions Contemplated

September 14, 2017 3:40PM EST
There are now at least 2 law firms investigating Monex and considering class action lawsuits: Kessler Topaz Meltzer & Check, LLP and Girard Gibbs, LLP.

To be clear, law firms routinely investigate large matters like this. The fact that the law firms are investigating simply means they are looking for business, and does not indicate that any wrongdoing occurred. However, if you are or were a customer of Monex, and feel that you were defrauded, you may want to consider contact them.

Tips Wanted

September 14, 2017 8:30AM EST
I always am looking for more information about the companies that I follow.

If you have any information, I would be happy to receive it. You can use the anonymous tips page. The anonymous tips page also has an E-mail address you can use if you are comfortable sending the information via E-mail, and the ability to upload files.

Monex: Corporate History and Ownership

September 13, 2017 2:40PM EST
I have gone through lots of documents, and compiled a page on Monex companies and ownership.

It covers most/all of the companies related to Monex, a brief description of what they do, and the ownership of the companies.

The summary is that Monex is almost entirely owned by Michael Carabini (son of founder Louis Carabini), either directly or through trusts.

Monex: Previous Issues

September 6, 2017 8:20PM EST
Court documents show that Monex had previous issues. Forbes said in 2009 that "Monex has a long history of suing and being sued." There are a number of related companies, which I will normally refer to generically as "Monex" (as is done in court documents).

  • In 1974, the SEC filed an enforcement action against Monex International, Ltd. and Louis Carabini, including charges of fraud, prohibiting them from engaging in misleading conduct in connection with leveraged precious metals transactions. The SEC "alleged that Louis Carabini obtained $1 billion through deceptive sales of silver coins on margin" per the Los Angeles Times.
  • In 1974, the State of New York sued Monex International, Ltd. and Louis Carabini. The settlement included a permanent injunction that prohibited, among other things, Monex International, Ltd. and Carabini from defrauding customers in connection with precious metals. The Attorney General called it a "colossal fraud"
  • From 1982 through 1991, Monex Trading Corporation was registered with the CFTC, and was the subject of 37 CFTC reparations cases and 1 NFA arbitration action.
  • Around 1984 there was a CFTC enforcement case against Monex, with allegations of off-exchange futures contracts, that was on appeal as of March 1985.
  • From 1985 through 1991, Monex International, Ltd. was registered with the CFTC, and was the subject of 213 CFTC reparations cases and 1 CFTC enforcement action.
  • In 1992, Louis Carabini and his companies Unimet Trading Corporation and Unimet Credit Corporation were charged with fraud by the FTC. It included a permanent injunction prohibiting them from “misrepresenting, directly or by implication” a number of things, including “the degree of risk associated with an investment in commodities,” and “the likelihood that a consumer would earn a profit on an investment in commodities.”
  • From 1988 to 2005, Monex had 65 cases filed against them relating to customer transactions. 39 were settled for an average of $39,000, 15 were dismissed for various reasons, Monex won 6, Monex lost 1 ($276 in small claims court), and 4 were pending at the time. It appears that 2 of the 65 cases were arbitration.
  • From 1988 to 2012, Monex had 100 cases filed against them relating to customer transactions. 49 were settled for an average of $81,000 (skewed a bit high because of one lawsuit that appears to have been ~$1.5M), 26 were dismissed for various reasons, Monex won 16, and 8 were pending. It appears that 19 of the 35 cases between 2006-2012 were arbitration.
  • In 2004, Monex faced a "class-action lawsuit that alleged Monex misled its customers and resulted in a $150,000 payment to class member", according to the Los Angeles Times
  • In 2008, the IRS filed a $378M lawsuit against Monex, alleging abusive tax shelters, according to the Los Angeles Times.

Monex: From our Reading Room

September 6, 2017 4:45PM EST
This comes from the about.ag Reading Room:

MONEX is a large gold dealer, formed in 1967, located in Newport Beach, CA. One of the few companies to offer leverage to individuals.

September 15, 2017 4:35PM EST: Updated to include more files.

Monex Sued by CFTC for Massive $290M+ Fraud

September 6, 2017 4:25PM EST
Today, the CFTC finally announced that is has charged Monex Deposit Company, its affiliates, and their Principals (Louis Carabini and Michael Carabini) with a massive fraudulent precious metals scheme. I started following Monex (quietly) in 2014, when they refused to provide information to the CFTC.

The charges refer to Monex's "Atlas" program, where customers put down 22%-25% to buy gold or silver, financing the rest at a variable interest rate (5.9% is often mentioned). So you might pay $10,000 to buy $40,000 of metal (losing $1,770 of metal each year in interest). The complaint alleges that there were about 12,000 customers who realized over $290M in losses from July 16, 2011 and March 31, 2017 (averaging over $24,000 in losses per customer), and that about 90% of Atlas accounts lost money. During this time, about 140,000 trades were made.

The CFTC states that the Dodd-Frank Act "made it illegal to offer or enter into leveraged commodity transactions with retail customers, unless the transactions are conducted on a regulated derivatives exchange, among other requirements."

The charges state that if a customers' equity (the value of their portfolio minus what they owe) goes below 7%, the position is automatically liquidated. Of the 12,000 accounts, 3,000 were subject to a margin call, and at least 1,850 had trading positions force-liquidated. The charges also state that Monex imposed a 3% bid-ask spread, and compare that to COMEX: The CFTC says 5,000oz of silver on COMEX would have a spread of about $25, whereas at Monex it would be about $2,550 (at $17 spot).

According to the CFTC, the spread generated about $95M for Monex during the 2012-2017 time period. Interest generated $57M, commissions generated $14M, and service fees generated $6.4M.

In one case, a 77-year-old man invested his life savings of $400,000 in August, 2009, only to be told in 2013 that "things had gone crazy" in the metals market. He did not realize he was trading on margin, and only got back $8,900.



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