NFA Forex Dealer Dead Pool

[forex scholar]

I hate to say I told you so, but, I told you so. Nations LLC has posted on their website that they are officially bankrupt and that “it does not appear likely that there will be sufficient funds to pay all claims of creditors and customers in full.” This is precisely what I have been warning about. When you trade with a poorly capitalized firm you are at much greater risk of losing your money because in the forex industry poorly capitalized firms have a terrible track record (this year alone over a dozen have gone out of business.) This is precisely why the NFA has raised capital requirements to $5 million. And as with One World Capital I put out a warning on Nations well before they started taking customer funds hostage.

Here is what I said on July 19, 2007:

“The order holds Labell and WWF (Worldwide Forex) jointly and severally liable to pay WWF's customers restitution in the following amounts: WWF $3.1 million and Labell $1.5 million. The order also imposes civil monetary penalties of $126,000 against Labell and $3.1 million against WWF. Finally, the order permanently prohibits defendants from engaging, directly or indirectly, in any commodity-related activity.”
http://www.cftc.gov/opa/enf07/opa5341-07.htm

End of story right? Not in the domestic retail forex industry where the shysters rise from the grave like the flesh eating zombies from 28 days later. Nope, what really makes this story juicy is the fact that refugees from Worldwide apparently migrated over to another firm, a dead forex firm walking, by the name of Nations Investments LLC. ($1,699,000 in net capital).
BASIC Details

In fact, Nations even has the same address as did Worldwide!
1700 NW 64TH ST. SUITE 100
FT. LAUDERDALE, FL 33309

Anyone want to make odds on how long it will be before Nations gets shuttered? Perhaps the folks over at Intrade can add a dead forex firms expiration date contract to their prediction market. If so, I’m going long on Nations going under. And I ain’t worried about a margin call…

Then on July 24, 2007 the NFA closed Nations:

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...

On September 6, 2007 the CFTC then Dropped the Hammer on Nations:

In July I put out an alert to the FX Community about Dead Pool Member Nations Investments, LLC. Well, shortly there after the NFA went in and closed them down. Now it appears the CFTC has stepped in to collect their pound of flesh. Nations was hauled into court by the scruff of their neck by the Feds and a court receiver has now taken over the defunct firm. Have customers lost money? I'll keep everyone informed.
http://www.cftc.gov/newsroom/enforce...pr5380-07.html

U.S. Commodity Futures Trading Commission Files Action Against Futures Commission Merchant Nations Investments, LLC, for Failure to Maintain the Minimum Amount of Net Capital Required by Federal Law
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today the filing of a complaint in the U.S. District Court for the Southern District of Florida against Nations Investments, LLC (Nations) of Fort Lauderdale, Florida, a futures commission merchant (FCM) registered with the CFTC.

The complaint alleges violations of the minimum net capital requirements of the Commodity Exchange Act and Commission regulations. More specifically, according to the CFTC complaint, as of July 21, 2007, and perhaps earlier, Nations’ net capitalization was below the adjusted net capital required by the Act and a Commission regulation. As of July 20, 2007, the complaint charges, Nations’ adjusted net capitalization remained below the required adjusted net capital with Nations’ total liabilities equaling $5 million while its assets were less than $2 million.

This week this statement appeared on Nations Website
Nations Investments

Notice to Customers and Creditors of Nations Investments, LLC

On July 24, 2007, the National Futures Association ('NFA') issued a Member Responsibility Action against Nations Investments, LLC ('Nations' or the 'Company'), which among other things, directed the Company to close all open positions of forex account customers by July 25, 2007 at 5:00 p.m. (EDT). At the same time, the NFA authorized the bulk transfer by the Company of all the accounts of its on-exchange customers to Open E Cry, LLC, another Futures Commission Merchant. Accordingly, this Notice (and the administration of the receivership) is primarily for the benefit of the former Nations forex customers. (Former Nations on-exchange commodities account customers may contact Emily Stephens concerning their account at Open E Cry, LLC, telephone: (800) 920-5808.)

On July 30, 2007, the Commodity Futures Trading Commission ('CFTC') filed a Complaint against Nations in the United States District Court for the Southern District of Florida (the 'Court'). On August 7, 2007, the Court entered an Order pursuant to which the Court appointed Bruce H. Matson as Receiver for the Company and its assets. A copy of the Order can be viewed on this website.

The Receiver currently is attempting to determine the extent of the customer account balances and the other liabilities of the Company. He has taken possession and control of the assets and records of the Company. The Receiver also is attempting to identify what additional assets may be available to make payment to customers and creditors. The goal of this process is to (i) identify accurately all of the unpaid account balances of the Company's customers as of July 25, 2007, (ii) identify all other creditor claims, (iii) identify and collect any and all assets of the Company (including the possibility of asset recovery actions against third parties), (iv) distribute monies recovered pro rata to customers and creditors; and (v) provide the Court with a final accounting of the Receiver's activities. The Receiver is making every effort to seek cost efficient avenues to recover assets for the receivership and complete the claims process. The claims process, however, requires the identification of customers (and other creditors) and a determination of the validity and amount of their claims. This process is likely to take a number of months. If appropriate the Receiver will consider making an interim distribution to customers and other creditors. Customers also should be advised that, at the present time, it does not appear likely that there will be sufficient funds to pay all claims of creditors and customers in full. The CFTC complaint states that there are in excess of $5 million of customer liabilities and less than $2 million of cash assets remaining. Although it is much too early to predict, the recovery for customers may well be less than fifty percent (50%) of account balances as of July 25, 2007.

The Court directed the Receiver to file a report sixty (60) days from entry of the Order, the first to be filed by October 8, 2007. At that time, the Receiver will provide access to that report on this website. Finally, customers and creditors should refer back to this website from time to time for any updates.
Specific inquiries should be directed to the Receiver, Bruce H. Matson at LeClair Ryan at (804) 343-4090 or to Katherine M. Mueller at (804) 916-7117.

Real people have lost real money, not because they took trading losses but because they invested their money in a firm that was poorly capitalized. Don’t make the same mistake they did. Don’t trade with a poorly capitalized firm.

[forex scholar]

The National Futures Association appears to be chucking a couple final spears into the bloated carcasses of two former dead pool brokers (Trend Commodities Limited Partnership and the Bacera Corporation.)

Trend Commodities has been permanently shut down and banned from NFA membership (http://www.nfa.futures.org/basicnet/Case.aspx?entityid=0358048&case=07BCC00033&contrib =NFA) while the Bacera Corporation was fined $50,000.

Of interest in the Bacera case was this statement, "The Committee found that Bacera failed to maintain required adjusted net capital, failed to give required notice of being below its minimum net capital requirement, and failed to take required capital charges and maintain accurate records." (http://www.nfa.futures.org/news/newsRel.asp?ArticleID=1960)

Again, it's all about capitalization. Firms that have adequate capital don't run into these kinds of problems. Firms that are poorly capitalized continually run into these kinds of problems and often times go out of business, in some cases taking customers down to the bottom of the ocean with them. It's that simple.

[tobs]

Is Finex is the same boat as the other unregulated swiss brokers? I can't seem to find that info... Thanks in advance

[forexgold]

Please confirm pfgbest if they are also undercapitalised

[forex scholar]

I'm not familiar with Finex but PFG is over the $5 million number

[forex scholar]

At last the customers of RefcoFX are getting their money back. Reports coming in over the wires indicate that customers are getting back roughly 40 cents on the dollar of their original investment. While that's still a very heavy loss to take at least the customers are getting something after two years of watching creditors loot their accounts. Phil Bennett and the rest of the board at Refco should know that there are some rather toasty seats in hell waiting for them upon their arrival.

The end of the RefcoFX nightmare brings with it a clear lesson to always trade with a regulated firm. If a firm isn't licensed, then stay away from it. Far, far away from it. And also be sure the firm you are trading with is well capitalized. The case of Nations, which was an undercapitalized broker on the dead pool is further evidence of that. And sadly enough, now Nations begins the journey that RefcoFX just ended.

[forex scholar]

Well, Tradex Swiss AG isn't the only Swiss Broker out there swindling customers of their money. The CFTC just busted another Swiss firm by the name of INH-Interholding SA and its principal Joerg Heierle. The Story is below. As a reminder the following Swiss firms ARE NOT REGULATED and should be avoided:

Unregulated Swiss Brokers
WestCapFX
ACM
MIG
DukasCopy
GFX Group (Forex.CH)
Crown Forex

Florida Federal Court Issues Order Freezing Assets of Miami Beach Resident Joerg Heierle and Swiss Corporation INH-Interholding SA

CFTC Charges Heierle and INH with Fraudulent Solicitation of at Least $4.4 Million to Trade Commodity Futures and Options and Concealment of Trading Losses

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today that a federal court in Miami entered an order freezing assets under the control of, and prohibiting the destruction of documents by, defendants Joerg Heierle, of Miami Beach, Florida, and INH-Interholding SA (INH), of Switzerland and Miami Beach, Florida.

The order arises out a complaint filed by the CFTC on September 12, 2007, in the United States District Court for the Southern District of Florida, charging defendants with fraudulently soliciting at least $4.4 million in a commodity futures and options pool fraud scheme. The complaint also charges Heierle and INH with concealing trading losses by issuing false statements to pool participants regarding the profitability of their INH investments. The CFTC also names Futures Trading Academy, Inc., of Bay Harbour, Florida, as a relief defendant due to its alleged receipt of pool participants’ funds.

According to the complaint, Heierle disappeared in April 2007, and pool participants have not been able to access their funds since that time.
The CFTC complaint specifically alleges that, since at least October 2001 through April 2007, Heierle and INH solicited pool participants located throughout the United States and abroad to invest in an INH commodity futures and options pool that Heierle would operate and manage on their behalf. In their solicitations, defendants falsely represented that the INH commodity pools were historically profitable and that Heierle was a successful trader. For example, the INH website (www.interholding.net) claimed that the three INH pools realized returns of 12.1 percent, 17.3 percent and 30.2 percent in 2005.

However, as alleged, there are no trading accounts in the name of INH, and the known trading accounts controlled by Heierle sustained losses during that time period totaling $80,000. Moreover, during the relevant time period, the known trading accounts controlled by Heierle allegedly sustained overall net trading losses of approximately $1,000,000.

The complaint also alleges that defendants issued false account statements to pool participants reflecting that defendants were profitably trading on their behalf. For example, for the period between July 2006 and April 2007, despite having sustained net trading losses of approximately $1.2 million, pool participants’ account summaries reflected returns of up to 10 percent.

[forex scholar]

The President of the National Futures Association, Dan Roth, dropped a 50 megaton bomb on the forex industry yesterday. In testimony before the Congress the NFA CEO requested that the Government increase capital requirements to TWENTY MILLION DOLLARS.

Here is what he is said in his testimony:
National Futures Association | News Center

The second trait that marks the problem firms in retail forex is that most, though not all, have been thinly capitalized. Congress long ago recognized that acting as a dealer involves greater risk than acting as an agent in futures trading, the way a traditional FCM does. That is why Congress in 1978 imposed a $5 million net worth requirement for firms granting dealer options and why the CFTC created a $2.5 million capital requirement for leverage transaction merchants in 1984. Congress should amend Section 2(c) of the Act to require FCMs acting as counterparties to retail forex transactions to maintain minimum capital of at least $20 million. NFA has raised the capital requirements for forex dealers several times but this congressional action could ensure that firms can meet their obligations to their customers and have a significant financial stake in their business.

Wow. If you thought it would be hard for poorly capitalized firms to raise a couple million dollars just wait until they have to raise $20 million. There is simply no way most of these little firms are going to be able to do that. In fact, medium sized firms are going to be hard pressed to do that.
It is starting to become crystal clear that the only firms that are going to survive the coming NFA purge are the biggest, most well capitalized firms in the business. That is why Oanda went out and got $100 million in funding and Interbank got $30 million. The serious industry players know what's going on. So should the trading public. If ever there were a time to beware investing in poorly capitalized firms now is the time.

After all, if the NFA has no confidence in the stability of "thinly capitalized" firms why should the trading public?

[forex scholar]

Only days after the President of the NFA told the Congress he wanted them to raise the minimum capital requirement to $20 million the CFTC signed off on the NFA's current capital requirement increase to $5 million. And they are not waiting around till 2008. Firms need to have the money in the bank by DECEMBER. That's right around the corner.

With the forex industry rapidly changing before our very eyes I wanted to put together a much more comprehensive list of the industry's financial status. Therefore, I have included every single registered Forex Dealer member and listed their Adjusted Net Capital. Since I first started posting about the NFA proposal over a dozen firms have gone out of business. Two others have merged and several others are staring death in the face. It is astonishing that firms like Hamilton Williams (Velocity FX) can operate only $4,000 above the minimum needed to stay in business. How on earth can such a firm survive a few months from now when they're practically pushing up the daisies already? Here is the direct link for the CFTC capital reports: http://www.cftc.gov/marketreports/financialdataforfcms/

Firms Under $5 Million
All these firms are reporting adjusted net capital below the $5 million mark as of the latest CFTC report. Some should be able to raise the necessary capital. Others clearly will not. Which ones can and can't will be anybody's guess. Already one of these firms, One World Capital, is not allowing customers to withdraw money.

Hamilton Williams ($1,004,000)
IG Financial Markets ($1,010,000)
Advanced Markets ($1,042,000)
One World Capital ($1,078,000)
Direct Forex ($1,117,000)
SNC Investments ($1,130,000)
Wall Street Derivatives ($1,220,000)
I Trade FX LLC ($1,801,000)
Solid Gold Financial ($1,955,000)
CMC Markets ($2,330,000)
MB Trading ($2,393,000)
GFS Futures & Forex ($3,259,000)
E FX Options ($3,342,000)
Forex Club ($3,715,000)
Easy Forex ($4,731,000)

Firms Under $20 Million
These firms all meet the coming minimum adjusted net capital requirement. However, there are other capital requirements that as market makers these firms (HotSpot excepted in some cases) will need to meet in addition to the minimum $5 million. Most firms will likely need $10 million to be in compliance with the NFA's rules. Clearly firms like Money Garden are not in the clear just yet.

Money Garden ($5,162,000)
HotSpot FX ($5,990,000)
IKon ($7,130,000)
ODL Securities ($10,822,000)
CMS Forex ($11,849,000)
IFX Markets ($12,293,000)
PFG Forex ($12,781,000)
FX Solutions ($15,077,000)

Firms Over $20 Million
These are the most well capitalized firms in the industry and two years from now may very well be the only firms left in the industry if Dan Roth and the NFA have their way and increase cap requirements to $20 million.

Interbank FX ($25,178,000)
Gain Capital (29,061,000)
Forex Liquidity ($39,909,000)
FXCM ($50,465,000)
Oanda ($50,837,000)
GFT Forex ($54,662,000)

Firms No Longer in Business
These are the firms that have gone out of business since I began posting on the forum. That's a quarter of the industry in just a few months. And one of those firms, Nations LLC, has gone into bankruptcy and customers can't get their money back, and may never get their money back.

Bacera Corporation
Cal Financial Corporation
FiniFX
Forward Forex
FX Option1 Inc.
Nations Investments
Performance Capital International
Spencer Financial
Tradex Swiss AG
Trend Commodities
United Global Markets
Worldwide Clearing

Firms that Merged
These are the firms that could not make the new capital requirement on their own and decided to merge with larger players as a result.

American National Trading Corp (Merged with PFG)
Royal Forex Trading (Merging with IKON)

Summary
It is a very turbulenet time in the forex industry. My advice is what it has always been, do not trade with a poorly capitalized firm. And if you must, at least wait until after the December 17, 2007, deadline before putting any money on deposit with any firm that is not meeting the current minimum capital requirement.

[forex scholar]

Two of the biggest FX Brokers are preparing for the coming increase in capital requirements by loading up their balance sheets.

First, Oanda has landed $100 million in funding:
Oanda Gets $100 Million Venture Capital Investment - 2007-09-18 11:22:59 | Venture Capital News

Online currencies information and trading system Oanda Corp has received a $100 million investment from a consortium of firms, the company announced Monday. The consortium is led by New Enterprise Associates and includes Legg Mason (LM), Cascade Investment LLC and T. Rowe Price Group Inc. (TROW). The proportion that each firm is contributing to the investment wasn't disclosed.

Michael Stumm, co-founder of Oanda, told Dow Jones Newswires that the investment wasn't aimed at financing any particular projects. "It's primarily to beef up our balance sheet," he said. "We're a market maker and we're in the financial services industry so the balance sheet plays an important role."

Meanwhile, FXCM has released its own balance sheet to the general public:
FXCM Group Releases Updated Financial Data - Forum - FXstreet.com

Balance Sheet (Unaudited)
AS OF AUGUST 31, 2007
CUSTOMER CASH 296,474,636
OPERATING CASH 96,311,380
OTHER ASSETS 19,666,212
FIXED ASSETS 9,821,211
TOTAL ASSETS 422,273,439
CUSTOMER DEPOSITS 296,474,636
OTHER LIABILITIES 5,662,597
TOTAL LIABILITIES 302,137,233
FXCM CAPITAL 120,136,206
TOTAL LIABILITIES AND FXCM CAPITAL 422,273,439

Drew Niv, CEO of the trading firm, commented: “FXCM is proud of our continued financial discipline and strong balance sheet. We believe clients should have the necessary information to make intelligent choices.”

FXCM also commented on the proposed increase in capital requirements and stated:

Although this new $5 million capital requirement has yet to take affect, NFA’s president and Chief Executive Officer has already testified before congress that capital levels for Forex Dealer Members should be raised to $20 million.
Forex Capital Markets, LLC, an NFA member firm, is the US regulated entity of the FXCM Group. As of August 31, 2007 Forex Capital Markets, LLC had an adjusted net capital of $60,268,390.

According to Niv, “The financial resources for FXCM (Forex Capital Markets, LLC) far exceed both the recently announced increased $5 million capital requirement level as well as the $20 million capital level proposed by NFA’s president and CEO in his recent congressional testimony.”

So what are the smaller firms waiting for? Why haven't we been hearing these kind of reassuring statements from the poorly capitalized firms under $5 million? Are they going to be able to meet the coming $5 million capital requirement due in just two months? Why aren't these firms releasing their own balance sheets? Many of the firms under $5 million claim to have additional resources they are not reporting. So why don't they tell us about these "unreported assets." The silence from the sub-$5 million fx brokers is deafening. And it should be a warning sign for traders to beware doing business with them until it becomes clear that they actually have a future.