NFA Forex Dealer Dead Pool

[forex scholar]

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/Case.aspx?entityid=0342690&case=07BCC00004&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/CaseDocument.aspx?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...

[forex scholar]

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.

[forex scholar]

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/...&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 addition 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...

[forex scholar]

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...

[forex scholar]

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.

[forex scholar]

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
FX market: FX commentary, FX news. Weekly FiX: FX this week

US regulators clamp down on retail FX dealers
FX Week - The Global business of foreign exchange

Subscriptions are required for both but here is the money quote from 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?

[forex scholar]

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.

[forex scholar]

As of August 2, 2007, this is where we stand in regards to the NFA proposal to raise capital requirements to $5 million:

FX Week states, "Following redrafting to include industry feedback, the proposals will be presented to the NFA board in August and then to the CFTC, and are not expected to be effective until the end of the year, the NFA explained."
http://www.fxweek.com/public/showPa...gin2&url=%2Fpublic%2FshowPage.html%3Fpage %3D459830

So if the proposal passes all the firms in the forex dealer dead pool, which from all appearances are currently meeting their capital requirement, will have several months to meet the new one. The big question is should this pass which will meet it and which ones won't? And for those that cannot meet the new requirement what will happen to the firms, and more importantly the customers of these firms? You could have a situation where one of the proprietors of these firms runs off with customer funds in the last hours. You could also see a situation where the NFA goes in to close a firm only to discover they have no money left and the firm then gets forced into bankruptcy.

Now, the likelihood of this happening to firms with $3 or $4 million in capital is a lot less than with firms with only $1.5 million in capital. But the whole point of this thread is to point these dangers out to the trading public and then let them draw their own conclusions.

[Mei_lina999]

When I look at this list, I just can't believe that anyone would be wasting their breath. At the drop of a dime these firms and any other well equitable firm can just take my money with no recourse for me to get it back. Hasn't anyone seen any of these absurd disclosures these firms put out that the NFA forces them to inform customers?!!

• The transactions you are entering into with [Member] are not traded on an exchange. Therefore, under the U.S. Bankruptcy Code, your funds may not receive the same protections as funds used to margin or guarantee exchange-traded futures and options contracts, which receive a priority in bankruptcy. Since that same priority has not been given to funds used for off-exchange forex trading, if [Member] becomes insolvent and you have a claim for amounts deposited or profits earned on transactions with [Member], your claim may not receive a priority. Without a priority, you are a general creditor and your claim will be paid, along with the claims of other general creditors, from any monies still available after priority claims are paid. Even customer funds that [Member] keeps separate from its own operating funds may not be safe from the claims of other general and priority creditors.

Yet still we all blindly put our money into these firms trusting that we won't have REFCO all over again. So I say poo to your dead pool list, b/c in my eyes, all FX firms belong on that list b/c I'm one of the many that have been burned by the cheap promises of REFCO and have yet to see a penny of hopes of investing in FX.

[forex scholar]

Page 42 of the current issue of Currency Trader Magazine (Free Subscription) has an article about the new NFA proposal. It reports on exactly what I have been saying these last few weeks. (Currency Trader Magazine -- July 2007)

Here are some key quotes from the article:

“The NFA wants to raise capital requirements for registered Forex Dealer Members (FDM) to $5 million, plus it wants improved accounting standards.”

“The proposal could potentially wipe out 90 percent of existing forex brokerages, although it’s likely major consolidation would occur if the rule passes.”

“Since 2000, the NFA has authorized Forex Dealing licenses to more than 50 firms. However, many of these firms went out of business because they were undercapitalized, and fraud continues to be a problem in the forex brokerage arena.”

“The NFA estimates the new rules, combined with existing rules, will force firms to have at least $10 million in adjusted net capital to remain in business.”

“The NFA listed four specific reasons for the rule change:
1) Trading Spot Forex, which FDMs do, creates more risk than trading futures and options listed on an exchange.
2) Since spot forex is not a priority under the NFA’s Bankruptcy Code, it’s particularly important for FDMs to have adequate capital.
3) Two of the three bankruptcy proceedings in which the NFA has taken part in the past four years have involved smaller FDMS…
4) The Case of CFG Trader which was shut down by the NFA and forced to liquidate all open positions because it was undercapitalized.”
So this is the third independent media source to confirm what I have been saying.

Again, this doesn’t mean that all the firms in the Dead Pool are going under or that they are not currently meeting their requirements. But they are in a very precarious position. When the media is saying that the proposal “could potentially wipe out 90% percent of existing forex brokerages” then traders should sit up and take notice.