Proposed NFA Capital Requirement

I'll keep em coming Halifax. And as you said many of the frauds being run now by these little fdms are just variations of old time fraud schemes...

Queue up the Queen music. The NFA has slapped another padlock on the front door of another teetering, undercapitalized forex firm. And the winner is... Cal Financial Corporation.
http://www.nfa.futures.org/basicnet/...04&contrib=NFA

Who? Well, to be honest Cal Financial wasn't exactly a dead forex firm walking (if only they were that lucky). Cal was more like a vegetable on life support- and the NFA finally decided to pull the plug. But with net capital of only $790,000 you wonder how they managed to even stay comatose all these years?

We pick up the story in the summer of 2004. Ah remember those days? A confident John Kerry was introducing a beaming John Edwards to the world and proclaiming the glory of having "good hair." England was eliminated from the Euro Cup in heartbreaking fashion to Portugal. Usher was at the top of the pop charts and Catwoman was bombing at the box office. And in Thousand Oaks, California John Indelicato had a dream: to conquer mainland China and get rich gloriously.

Cal's goal was "to develop its forex business overseas, and based on the level of success, determine whether it should take on U.S. customer accounts." To that end Cal had two principals located in China where they recruited customers under the name of the "Shanghai Carewell Financial Planning Company." But the going was tough. In a 2006 NFA audit Cal was cited for not collecting any proof of employment information for SCFP accounts. Cal responded that Chinese customers did not like to give out this kind of information so Cal instituted a don't ask, don't tell policy. Needless to say the NFA was not amused and to Cal's credit they voluntary liquidated the accounts.

But in the end it wouldn't matter anyway. On March 1, 2007, the NFA issued a complaint against Cal citing it for a variety of accounting violations that essentially finished them off.
http://www.nfa.futures.org/basicnet/...px?seqnum=1069

But what stands out in the complaint are the NFA's accusations about the shoddiness of Cal's bookkeeping. The NFA charges that Cal:

a) failed to maintain, at all times, a record of customer deposits and withdrawals
b) include approximately $92,000 of its customer accounts balance in its ledger, resulting in an understatement of the amount of customer funds on deposit
c) maintain an equity run and/or similar report aggregating all balances for the firm's forex customers, including cash, open positions, and realized profit/loss

What's my point in listing all of this? It's simple: running a forex broker dealer is not easy. It requires talented, trained professionals with accounting, compliance and administrative backgrounds. It can't be done by Willie Loman alone. And the simple fact is if you are a small firm, with limited resources and limited capital on hand you just aren't going to invest your money in these things when you also have to pay for servers, sales staff, office space, etc... So you try to do the administrative stuff on the cheap. Well, you can't. John Indelicato couldn't. And the NFA by raising its capital requirements is making it clear it doesn't think anyone under $5 million can, else it wouldn't be making this proposal in the first place.

In all fairness to Indelicato, he is no fraudster. By his own account he has been in the futures business for 35 years. He's just not very good at it...

After reading through the first Forward Forex complaint it appears there is much I left out. The material is just too good to pass up so for those who want a second helping of forward forex follies, keep reading.

It appears that Forward Forex's lightening quick CEO, Onelio Murias, is so slippery he evaded the NFA's audit team the first time around because he isn't even listed in the original complaint. The first complaint was issued on June 4th, 2007, and the charges then were leveled solely against Forward Forex and Marshall Wertheim (you'll remember that Wertheim was the sad sack that got left holding the bag after Murias flew the coop in July.)
http://www.nfa.futures.org/BasicNet/...px?seqnum=1192

In any case the original complaint has some hair raising adventures. Nobody commits fraud like the folks at forward forex! Let's skip to page two of the NFA complaint...

"Forward Forex is located in Hollywood, Florida. It has been an NFA Member since January 2006 and began conducting customer business the following month. (Marshall) Wertheim is Forward Forex's President and its only AP. (Curious statement from the NFA considering Murias is listed as being a principal of the firm dating back to 2005.)

4. Forward Forex employed an unregistered entity named F8 Real Estate, Inc. ("F8") to purportedly manage its finances and pay expenses. Forward Forex's association with F8 is, at the very least, suspicious.

5. F8 appears to be owned by Silvia Stambler, who has no registration history in the industry. However, her husband, Andrew Stern ("Stern"), has been for many years affiliated with a number of South Florida brokerage firms and has been named in three disciplinary Complaints issued by this Committee and two Commodity Futures Trading Commission ("CFTC") enforcement actions."

So the starting lineup for Forward Forex is now set. At quarterback we have the fleet footed Onelio Murias. Behind him carrying the rock is tailback Andrew Stern with his wife Silvia Stambler leading the way at fullback. Snapping the ball to Murias is Wertheim. Surrounding Wertheim and blocking up front would be the rest of the employees at Forward Forex. Finally, rounding out this team of criminal all-stars is the receiving corps. You know, the guys who catch all those accounts? And for this position Murias chose to go into the free agency market and sign up a gang of crooked pirates even the old Oakland Raiders would never have employed. They went by the name of the Hamlin Mercer Financial Group. And this gang of high flying, free agents wreaked more havoc on the field then Ted Hendricks, Jack Tatum and Lyle Alzado combined. Here is what the NFA flagged them for:

1) Sold junk options with commissions and spreads so high that 94% of all customers lost their money. The average loss was $21,000 although ten customers lost more than $100,000. Meanwhile the firm was making millions.

2) Used unregistered solicitors who said to one customer that they "had access to information from the government about currency movements that only the biggest banks knew and that Herickoff (customer) had to act immediately if he wanted to have any chance of profiting from this information. Blauch (Solicitor) Also told Herickoff that his account for them was far to small to waste his time on and thus had to add another $25,000 to his account. Also told him his account was making a false return."

3) Used unregistered solicitors who said to one customer that they "never lost money and promised Willingham (customer) large profits. After Willingham invested, Blauch assured him that his account was doing well and had quickly turned a profit. At the account's peak, Blauch told him that it was worth $800,000 and said that they would cash out as high as $1.25 million, after which Blauch would just day trade the remaining profits. Contrary to Blauch's rosy reports, Willingham was actually suffering ruinous losses."

4) Customer Colley attempted to get in touch with Cohen (Solicitor) but was told that Cohen was out of the office with medical problems. Colley reach an individual named Michael Ewan at IMF, who told Colley that his account's value had appreciated to $15,000. Based on Ewan's representation, Colley decided to liquidate his positions and take his profit. However, Colley could not reach anyone at IMF to liquidate his positions, after making repeated calls to IMF. By the time Colley was able to through to someone at IMF, his account had a value of $25.

And on and on it goes. Customers are pressured into sending in their 401k money or to take out second mortgages, which are then promptly flushed down the drain in worthless options contracts. Sales agents are described as harassing, berating and screaming at customers to send in money. One "Customer Service" representative tells a distraught customer who is losing his shirt that their sales agent (who else but the notorious Blauch) can't be reached because he has "had a heart attack" and then finishes the conversation by saying "sorry, but this is the chance you took." And my personal favorite, sales agents throwing chairs across the room in fits of rage.

After reading through this does anyone seriously doubt the NFA is going to raise capital requirements? This is what the NFA has been dealing with on a day to day basis. This is how the forex industry is perceived by many in the financial world. The only way to change that is to flush the bottom feeders, which is precisely what the NFA is about to do. Good riddance.

Amazing. Do any of these guys ever go to jail?

Developing...

The National Futures Association has closed another Dead Forex Firm Walking. Only a few days ago you'll remember I spoke of going short Nations LLC at Intrade. I only wish there were such a contract because the firm has officially gone belly up and I could have made a killing. The NFA on its website today stated the firm has been shuttered:

http://www.nfa.futures.org/basicnet/...10&contrib=NFA

The firm was a whopping $3.5 million under its capital requirement. One of the important points I probably have not stressed enough is that in additional to the minimum $5 million a firm is going to need to meet its initial cap requirement, firms also need to set aside 10% of their customers assets in addition to meeting various CFTC outstanding position requirements. That means most firms will probably need $10 million just to stay in business when the new cap requirement passes. Just think if dead forex firms walking aren't even meeting their capital requirements now how on Earth will they be able to meet them when they get raised dramatically in the future? It looks like the The Forward Forex Follies is going to be just the tip of the iceberg in the months to come...

I have received some interesting feedback regarding the regulatory status of FXDD. As you know FXDD is listed in the Dead Forex Firms Walking list with a net capital of $786,000. Where did that figure come from? Well, it came from the futures affiliate (Tradition Securities and Futures Inc) of FXDD's parent company. So why is FXDD listed as a result?

It's a fair question. And the fair answer is that because FXDD is unregulated and because the average forex trader knows absolutely nothing about their financial status FXDD deserves to be judged on the closest data available. Forex traders conducting their due diligance are truly groping in the dark when trying to evaluate FXDD since they are not licensed by the NFA and do not directly report any financial data to the CFTC. That means that no one is checking in on FXDD to look at their books and make sure they are solvent. No one is checking in on their sales and marketing practices (notice that FXDD is one of the only major forex brokers that states on its website that they offer "Commission Free Trading" with no disclaimer about how they make their money on the spread.) Got a complaint about FXDD and want to file a claim or go to arbitration? Good luck. The NFA or CFTC won't hear your case because they have no jurisdiction so you'll pretty much have to rely on Judge Wapner. In the age of forex fraud I can't see how anyone would allow themselves to roll the dice and take a risk by opening an account with a firm that is completely unaccountable to any government regulators. Doesn't anyone remember RefcoFX? RefcoFX was the unregulated arm of Refco and when Refco went under and Refco's creditors looted RefcoFX's customer accounts the NFA and CFTC sat on their hands and stated they could do nothing because RefcoFX was unregulated.

But in the interest of fairness I'm going to relocate FXDD off the Dead Forex Firms walking list and onto a new list. Call it the "Unknown Unknowns" list becaue no one has any idea when or if FXDD might explode. Now I'm not saying FXDD is a bucketshop or that they are in immediate danger of collapse. In all likelihood the NFA capital requirement increase will have no effect on them (although it remains to be seen how it will effect Tradition.) But since they are unregulated and answer to no one how the hell is anyone to know exactly who or what they are?

What exactly happened to Refco? I still don't understand what happened to their fx business.

So what happened at Nations? Why was the NFA forced to take an "emergency Action" and shut them down? Well, because it was basically one of the industry's worst nightmares come true. An undercapitalized firm suffered massive losses and was forced to cover them with customer funds. Here is what the emergency action states:

"On Saturday, July 21, 2007, Nations sent to NFA, via e-mail, notice that it had fallen under the minimum required adjusted net capital."

On Monday, July 23, 2007, NFA sent a letter to Nations notifying the firm that as it was unable to demonstrate compliance with the minimum requirements Nations was to cease doing business. That same day, NFA received another notice from Nations representing that the firm had fallen under the required minimum "due to losses in the forex markets." This letter also indicated that Nations was attempting to raise $5 million "to make customers whole." (YIKES! "make customers whole?!" Who on Earth is going to give Nations $5 million?! While nations has been successful at making a fool of their customers they certainly won't be making them whole.)

Nations also provided NFA with a Form 1-FR as of July 20, 2007, which indicates that Nations owes customers trading in on-exchange futures more than $3 million and customers trading Forex more than $5 million. (Wow. What an implosion. They are $8 million in the hole? What the hell were they doing over there going to Vegas and playing craps with customer funds?)

This looks like another messy court case. With financials like this I expect the creditors will be coming out of the woodwork laying claim to what's left of Nations. If they're lucky they might be able to seize a fax machine or two, but as for customer funds, well, looks like some stripper in Vegas got her hands on that money first...

They were trading against their customers with poor risk management, as deal desks love to do.

Nations Investments LCC is out and all Forex brokerage houses related if they were under NFA or not, because Nations is also acting as a clearing house.

They can be good or bad, NFA is on the way to shut them all down, so only the biggest will stay.
I know few of my friends having accounts there, no bad experiences, they were good ones as they told me.


http://www.nfa.futures.org/basicnet/...&contrib =NFA

http://www.nfa.futures.org/basicnet/...px?seqnum=1278



Narrative for 0358507 - NATIONS INVESTMENTS LLC
**TO VIEW DOCUMENTS, GO TO CASE DOCUMENTS. FOR A COPY OF DOCUMENTS, CONTACT NFA'S INFORMATION CENTER.**

NOTICE OF MEMBER RESPONSIBILITY ACTION:

On July 24, 2007, NFA issued a Member Responsibility Action ("MRA") against Nations Investments LLC whereby:

1. Effective immediately, Nations is prohibited from soliciting or accepting any additional customer accounts or customer funds, except as security deposits for existing positions. The prohibition on solicitation includes, without limitation, ceasing solicitation through the firm's website.

2. Effective immediately, Nations is prohibited from accepting or placing trades for any customer accounts except for the liquidation of existing customer positions and Nations is prohibited from acting as a counterparty to any foreign currency ("Forex") transactions.

3. Nations must liquidate all customer and firm Forex positions by 5:00 p.m. (EDT) on Wednesday, July 25, 2007.

4. Nations is required to liquidate all Forex positions held in any account for any Nations' principal or employee by 5:00 p.m. (EDT) on Wednesday, July 25, 2007, and, further, is prohibited from initiating any additional positions in such accounts.

5. Nations is prohibited from distributing, disbursing or transferring any funds, including to existing customers, without the prior approval of NFA.

6. In taking any action under this MRA, Nations must act in the best interests of its customers.

This action is effective immediately and is deemed necessary to protect customers because Nations has failed to demonstrate that it meets the capital requirements of NFA Financial Requirements Sections 1 and 11. Additionally, it appears that Nations does not have sufficient assets to meet its obligations to its customers.

The MRA will remain in effect until such time as Nations has demonstrated to the satisfaction of NFA that it is in complete compliance with all NFA Requirements.

Why did they choose to trade at Nations? Of all the firms they could have picked why Nations?

Why Nations?

Mostly IB rebates. Nations paid alot to their IB's and then allowed their IB's to do basically anything with their spreads. (ie. Nations would charge a 3 pip spread on the GBP and the IB would spread that an addition 2 pips. Earning 3 pips per lot rolled.)

IB's could earn Maybe 1.5 pips at Interbank or other brokerages, vs. 3 pips per lot at Nations.

What about Refco? This is a common refrain I have been hearing from critics of the NFA Forex Dealer Dead Pool. Refco was massive and they went under in record time which proves that being adequately capitalized doesn't matter right? Wrong. While citing Refco is a good sound byte it in no way helps the case of the undercapitalized. Here's why:

First of all Refco was a gigantic octopus of a company that had various affiliates and subsidiaries that were both regulated and unregulated. The two main players in the Refco saga were Refco Capital Markets (the unregulated outfit in Bermuda that was doing all those shady off-exchange trades) and Refco LLC (which was the licensed futures brokerage most traders knew about.) Refco Capital Markets was where the scandal erupted. For years executives at RCM covered up huge trading losses with creative bookkeeping. But when the scandal became public it caused a bank run everywhere at Refco. The bank run occurred even though Refco had adequate capital to handle the huge trading loss RCM had incurred. But that didn't matter because Refco was a publically traded company. As the stock price tanked talk of lawsuits by shareholders accelerated the bank run and that's when Refco's creditors stepped in and pushed the firm into bankruptcy knowing the only assets the firm had were the customer funds on deposit.

Had Refco not been a public company the scandal would have been a one day hiccup and it would have been business as usual precisely because it had a lot of capital reserves. That is a huge distinction that needs to be made. But when undercapitalized firms such as Nations Investments take huge trading losses there is no room for error. It's one and done because they have no capital in reserve. Again, this is why the NFA has issued this proposal. Undercapitalized firms do not have the luxury of taking the kinds of hits that large firms can take. This is also why there hasn't been a single case of a registered forex dealer member with over $10 million ever going bankrupt. So to the critics I say cite Refco all you want but it has no place in this debate unless you want to discuss the perils of being unregulated.

And how'd that decision work for you and your clients?

Looks like the media is starting to pick up on the undercapitalization story. Both FX Week and Euromoney did recent stories on what I have been saying for several weeks now:

Proposed NFA rules seen as catalyst for consolidation in US retail
http://www.euromoneyfix.com/

US regulators clamp down on retail FX dealers
http://www.fxweek.com/public/showPag...Fpage%3D459830

Subscriptions are required for both but here is the money quote from the FX Week:

The NFA said it has been concerned about the lack of protection for FX customers. "From what we've been seeing and the enforcement actions we've been taking recently, for the protection of the customer in the markets, we really need to raise the minimum capital requirement for these firms," said a Chicago-based NFA spokesman.

Since March, eight FDMs have fallen under the NFA's early warning requirement of $1.5 million, and the regulator's worries have been heightened as the amount of retail customer funds held by FDMs has increased to more than $1 billion as of May 22.

The largest FX dealer firms are well clear of the proposed $5 million requirement, according to the CFTC's May 31 report of adjusted net capital holdings, which showed CMS holding $11,512,421, FXCM $55,668,469, FX Solutions $12,650,227, Gain Capital $18,694,143, GFT $47,681,883, and Oanda $35,361,139.

Once again if regulators are going on the record as saying they don't have any confidence in the manner in which undercapitalized firms operate why should retail fx traders have any?

Are you bummed that they listed your employer second?

It's been close to two months since I started reporting on Dead Forex Firms Walking. Since my first post much has changed and the list is in need of an update. So here it is, Introducing:

NFA Dead Forex Firms Walking, version 2.0: (Adjusted Net Capital as of May, 2007, direct from the CFTC: http://www.cftc.gov/files/tm/fcm/tmfcmdata0705.xls)

Advanced Markets ($1,021,000)
American National Trading Corp ($1,985,000)
Bacera Corporation (Shutdown!)
Cal Finanical Corporation (Shutdown!)
Direct Forex ($1,406,000)
E FX Options ($2,631,000)
Forex Club ($2,873,000)
FiniFX ($1,314,000)
Forward Forex (Shutdown!)
FX Option1 Inc (Shutdown!)
GFS Futures & Forex ($2,223,000)
Hamilton Williams ($1,202,000)
I Trade FX ($3,211,000)
MB Trading ($3,952,000)
Money Garden ($3,627,000)
Nations Investments (Shutdown!)
One World Capital ($1,502,000)
Performance Capital International ($483,000)
Royal Forex Trading ($1,088,000)
SNC Investments ($1,510,000)
Solid Gold Financial ($2,039,000)
Spencer Financial (Shutdown!)
Trend Commodities (Shutdown!)
United Global Markets (Shutdown!)
Worldwide Clearing (Shutdown!)
Wall Street Derivatives ($936,000)

Unregulated Firms (Buyer Beware)
FXDD (?)
GCI (?)
Cletus' Fishing & Forex (?)

So there you have it. A total of NINE licensed forex dealer members have recently been closed by the NFA. Anyone still doubt this new $5 million cap requirement rule will be passed soon? I didn't think so. Certainly more closures await the dead forex firms walking in the days ahead. Hopefully you won't have money in one of them when they go under. In any case, I'll be here to report all the gory details.

That should be "if" they go under. Unless you have a crystal ball and know that every one of those on that list will go under or can't meet a higher cap requirement.

What I want to know is, if the 5 million requirement goes through, and if one of those on your list succeeds in meeting the new requirement, are you going to apologize for having disparaged them?

I'm betting no. I'm thinking you'll simply remove them from your list and crow about what you were right on.

Such cynicism forexfun! First of all I have dispararged no one. Second, I did not say every one of those firms on that list will go under. You said that. I said "more closures await" and that if you have money in one of those firms when "they" close you'll be in trouble. So please spare me the crocodile tears of outrage.

As for an apology, wtf? You want me to apologize for informing the trading public about the risks of trading with an undercapitalized firm? If a firm meets the new requirement I'll take them off the list and say so. But quite frankly these little firms have been causing most of the problems in the forex industry so if anything the apologies should be coming from them.

Furthermore, I have little sympathy for firms that continue to insist being undercapitalized is no big deal as many are still insisting despite the fact that regulators are saying otherwise. The burden of proof is on the dead forex firms walking. It's quite simple: put up or shut up.

ForexSavior,

Did that 5 Million dollar cap law pass? I thought i read on the NFA's website 1 month ago that it did pass and that the deadline was July 31st? Am I wrong? Where can I go to talk to a live person about this? Do u have a link plz?

Thanks
Ghost