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United States Commodity Futures Trading Commission v. Forex Liquidity LLC

July 23, 2009

UNITED STATES COMMODITY FUTURES TRADING COMMISSION PLAINTIFF,
v.
FOREX LIQUIDITY LLC, DEFENDANT.



The opinion of the court was delivered by: Cormac J. Carney United States District Judge

I. INTRODUCTION

ORDER HOLDING ROBERT GRAY IN CIVIL CONTEMPT

Seeking to safeguard customers and creditors, Plaintiff United States Commodities Futures Trading Commission (the "Commission") initiated this action on December 13, 2007 against Defendant Forex Liquidity LLC ("Forex"). The Commission alleged that Forex failed to meet minimum capital requirements and failed to keep adequate records to reflect its financial status. On December 14, 2007, the Court appointed a Receiver to take control of Forex and take custody of its assets by issuing a Statutory Restraining Order ("SRO"). On January 25, 2005, the Court issued a Consent Order for Preliminary Injunction ("PI") that continued the SRO until the Court deemed otherwise. These orders (collectively the "Receivership Orders") froze Forex's assets and enjoined Forex's agents from transferring or otherwise dealing with any of Forex's assets, except by the Court's approval. The Receivership Orders also directed Forex and its agents to turn over all of Forex's assets to the Receiver.

Despite the Receivership Orders, Mr. Robert Gray, CEO and majority shareholder of Forex, has refused to turn over approximately $7.12 million that has repeatedly been listed as a Forex asset (the "Pro Fi Funds"). The Pro Fi Funds are held offshore by a San Marino company called Pro Fi. Mr. Gray owns 95 percent of Pro Fi, and has repeatedly represented that he controls the Pro Fi Funds as assets of Forex. Because Mr. Gray has failed to transfer these funds to Forex despite the Receivership Orders and the Receiver's requests, the Receiver moved the Court to hold Mr. Gray in contempt of court. On July 14, 2009, the Court commenced a twoday evidentiary hearing to determine whether Mr. Gray violated the Receivership Orders. Over the course of that hearing, the Receiver showed, by clear and convincing evidence, that the Pro Fi Funds are Forex's assets, that Mr. Gray controls the Pro Fi Funds, and that Mr. Gray has refused to transfer the Pro Fi Funds back to Forex in clear violation of the Court's Receivership Orders. Accordingly, the Court now finds Mr. Gray in civil contempt.

II. FACTUAL BACKGROUND

Forex is an Orange County, California, futures commission merchant. Forex's business facilitated its customers' speculation in foreign exchange futures contracts. Simply put, Forex's customers made investments betting that certain currencies would increase or decrease in value relative to other currencies. ("Hr'g Tr. ("Tr.") 2-6.) Forex would hold accounts for customers, facilitate these currency trades, and act as counterparty to their customers' trades, taking positions opposite their customers. (Tr. 2-7.) Forex was registered with the Commodities Futures Trading Commission and was a member of the National Futures Association (the "NFA"). (Tr. 2-3, 7-9.) To maintain its membership and remain in good standing, a firm like Forex must meet minimum capitalization requirements, submit weekly and monthly reports of its finances, and submit to outside audits every 9 to 18 months. (Tr. 8:25.) The NFA and CTFC require futures commission merchants to maintain adequate capital to protect customers in case of market fluctuations that could otherwise cause a firm to go out of business. (Tr. 19:15-20.)

The NFA's compliance activities uncovered irregularities in Forex's accounting. (Ex. 9.) Forex represented to the NFA that it held, as one of its assets, a bond and $6.5 million in cash at a company called Malory Investments ("Malory"). (Id.) However, the NFA discovered that the bond and the cash were not being held in Forex's account at Malory, but were instead purportedly being held in an account at Swiss Imperial Trust, A.G. (Id.) In a November 29, 2007 letter to Mr. Gray, the NFA's Director of Compliance Jennifer Sunu wrote that these facts raised concerns over whether Forex exercised sufficient control over the bond and the cash to consider them Forex's assets. (Id.) Accordingly, Ms. Sunu ordered Mr. Gray to transfer those assets into a regulated United States financial institution. (Id.) On December 1, 2007, Mr. Gray represented to Ms. Sunu in an email message that the assets had been transferred to an account at Commonwealth Financial Network. (Ex. 11; Tr. 23:9-14.) Ms. Sunu contacted Commonwealth Financial Network and found that there was no account number matching the one Mr. Gray provided to Ms. Sunu. (Tr. 23:16-20.) In fact, Commonwealth Financial Network had no records of accounts in the names of Forex or Mr. Gray whatsoever. (Id.)

In response to regulatory concerns over the assets that were supposed to be at Commonwealth Financial Network, Forex attempted to convince Ms. Sunu that it met its minimum capital requirements without those assets. (Ex. 13; Tr. 27:8.) Statements sent by Forex to Ms. Sunu purport to show that Forex could meet requirements with, or without, the assets that Forex claimed were in the Commonwealth Financial Account. (Ex. 13.) These statements also showed that Forex had $11.2 million in funds in an account at Malory. (Ex. 13.) Ms. Sunu was dissatisfied with the statements Forex submitted. (Tr. 28:6.) For example, Forex claimed its total liabilities reported in December were "substantially less" than the liabilities Forex reported just a month before then. (Tr. 28:21.) Forex did this by accounting only for the liabilities it owed to retail customers, and by not accounting for the liabilities owed to institutional counterparties. (TR. 29:23-25.)

The $11.2 million purported to be at Malory were also a source of concern to Ms. Sunu. (Tr. 30:14-21.) Ms. Sunu had been previously unable to confirm the existence of funds at Malory in the past. (Id.) Additionally, the Financial Industry Regulatory Authority had advised Ms. Sunu that it had no indication that Malory possessed any assets approaching $11.2 million on its books. (Id.) Accordingly, Ms. Sunu requested that Forex transfer its assets at Malory to an account at U.S. Bank. (Tr. 31:4-8.) Forex and Mr. Gray were unable to accommodate that simple request. Mr. Gray and Forex's general counsel, Frank Masino, told Ms. Sunu that the Malory funds were actually held by a counterparty. (Tr. 33:2-5, 34:1.) That counterparty was Pro Fi. (Ex. 18.) Throughout this process, letters repeatedly characterized the $11.2 million held at Pro Fi as a Forex asset. (Ex. 18.) In one letter, Mr. Gray ordered Malory to direct Pro Fi to release "approximately $11.2 million" to the U.S. Bank account. (Ex. 19.) A letter from Pro Fi President Antonella Cecere to Mr. Gray states that "the origination of funds was Forex Liquidity LLC and due to the urgency of the request, the balance of $11,127,469.12 will be sent directly to your U.S. Bank account. . ." (Ex. 20.) Forex did not to transfer the funds from Pro Fi to U.S. Bank by the NFA deadline. (Ex. 21 ¶ 19.)

After the failure of Mr. Gray's purported efforts to have the $11.2 million at Pro Fi transferred back to the United States, Ms. Sunu directed the NFA to issue a Member Responsibility Action against Forex for being unable to demonstrate that it was in compliance with capital requirements. (Ex. 21; Tr. 41:7-42:6.) Noncompliance with capital requirements is "a very serious violation" that "requires immediate action because customers could have the potential to be harmed." (Tr. 41:22-23.) Accordingly, the MFA largely shut down Forex's operations, requiring Forex to liquidate its positions and barring Forex from accepting customer funds or trading on customers' behalves. (Ex. 21.) Despite the seriousness of the violation at issue and the penalties levied against Forex, the NFA offered Forex the opportunity to stay the Member Responsibility Action against it, but Forex never petitioned the NFA for a stay. (Ex. 21; Tr. 43:3.)

In the ensuing days, Forex continued to represent that it was attempting to transfer the $11.2 million from Pro Fi to Forex's account in the United States, but was being prevented from doing so by regulatory issues. (Exs. 27-29.) By December 12, 2007, Forex was able to transfer approximately $4 million of the $11.2 million from the Pro Fi account to Forex's accounts in the United States-leaving approximately $7.1 million in the Pro Fi account-the Pro Fi Funds currently at issue. (Ex. 31-33.)

On December 14, 2007 the CTFC filed its action against Forex, and the Court's involvement began. (Ex. 35.) That $7.1 million, the Pro Fi Funds, have not been returned to Forex to date. (Tr. 52:7.)

Throughout this period, Mr. Gray represented to Ms. Sunu and the NFA that Pro Fi had an arm's-length relationship with Forex. The two companies, however, were inextricably linked. Gray owned and operated Pro Fi. Mr. Gray appointed a Forex employee, Mushag Tovmasyan, as president of Pro Fi when Mr. Gray purchased the company in 2006. (Tr. 92:9-21.) Mr. Gray owned 95 percent of Pro Fi, and Mr. Tovmasyan described Mr. Gray as Pro Fi's decision maker. (Tr. 93:6, 95:13.) Mr. Gray decided when money needed to be disbursed from Pro Fi. (Tr. 95:16.) Forex facilitated trades on behalf of Pro Fi customers. (Tr. 95:20.) Mr. Gray told Mr. Tovmasyan that Forex and Pro Fi could not be seen to do business directly with each other because of regulatory issues. (Tr. 96:18-21.) Mr. Gray explained to Mr. Tovmasyan that it was necessary to interpose Malory between Forex and Pro Fi, "because Malory did not have the same regulator and, therefore, it was allowed to do business with Pro Fi. (Tr. 96:19-21.) At the time of Ms. Sunu's investigation into Forex, Mr. Tovmasyan was in San Marino working at Pro Fi, although Mr. Gray had replaced Mr. Tovmasyan as president with Ms. Cecere to that post. (Tr. 97; Ex. 43.) Mr. Gray and Mr. Tovmasyan argued over the appropriate way to transfer funds from Pro Fi to Forex in response to the regulatory actions before the Court became involved in this matter. (Tr. 99:9-13.)

On December 14, 2007, the Court issued a Statutory Restraining Order and Order to Show Cause Regarding Preliminary Injunction. The SRO barred Forex and its agents from "directly or indirectly transferring, selling, alienating, liquidating, encumbering, pledging, leasing, loaning, assigning, concealing, dissipating, converting, withdrawing, or otherwise disposing of any assets. . ." (Ex. 35 ΒΆ 8.) The Court also appointed a Receiver to: (1) assume full control of Forex; (2) take exclusive custody, control, and possession of all the funds, property, mail and other assets of, in the possession of, or under the control of Forex; and (3) preserve, hold and manage all receivership assets, among other duties. (Ex. 35 at 9-10.) Furthermore, the Court ordered anyone served with its order to deliver over to the Receiver: (1) possession and custody of all Forex funds, property, and all other assets; (2) possession and custody of Forex documents, including all financial and accounting records; (3) possession and custody of all funds and other assets belonging to members of the public now held by Forex; and (4) ...


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