Binary Options Marketer and CFTC Investigation
Video File
Purpose
Educate business owners and business leaders on the importance of understanding risks associated with fraudulent business practices and how to properly train employees to comply with federal laws.
Situation
This case study profiles disbanded international corporate finance conglomerate Banc De Binary, Ltd. (BDB), two former executives of BDB, Peter Szatmari and David Sechovicz, (collectively referred to as the defendants), and the impact of their illegal business activities.
The defendants routinely flouted federal laws in the United States related to commodity trading and sales of securities. The Commodity and Futures Trading Commission (CFTC) filed a lawsuit against BDB, Szatmari and Sechoviz for misconduct. The defendants’ decisions led to the business failing and hefty civil monetary penalties for those executives.
The information in this case study comes from numerous sources: several CFTC press releases concerning the Szatmari case, one CFTC complaint against Szatmari, three CFTC press releases on the Banc De Binary case, and several newspaper articles on violations by BDB and Sechovitz.
State of the Industry
Binary options are a kind of option contracts traded on public exchanges in the United States (and elsewhere) where the investor bets on the outcome of a Yes / No question. The Yes / No question hinges on whether the price of the underlying asset will finish the trading day above or below an agreed-upon amount.
The binary options marketplace can be a highly speculative place to risk hard-earned dollars. According to federal regulators, the binary options exchanges do not comply with applicable United States federal regulatory requirements. In the United States, the Commodity Futures Trading Commission and the Securities and Exchange Commission began to crack down on these bad behaviors.
Background and Analysis
As a brief tutorial, the binary options industry operates through an internet-based trading platform. Investors try to predict whether the price of a certain commodity (think gold, oil, or stocks) will go up or down in an agreed-upon time frame. Binary options trade by the minute, hour, day, week, month, or years.
CASE AGAINST BANC DE BINARY, LTD.
Banc De Binary, Ltd., the now-defunct international financial services company, sold binary options on numerous domestic and foreign exchanges. BDB had a history of regulatory violations across three continents. In 2017, the company closed all its worldwide offices, including those in the United States, due to negative press coverage and its damaged reputation. The CFTC and the Securities and Exchange Commission (SEC) charged BDB with several federal offenses, including, inter alia, violating the Commodity Exchange Act’s ban on marketing, trading, or selling off-exchange commodity option contracts to customers located in the United States. BDB eventually agreed to pay $11 million in fines and restitution and settle the charges against it. The fines BDB agreed to pay have been broken down as follows: $7.1 million in restitution, $2 million in civil penalties payable to the CFTC, and $1.95 million in civil penalties payable to the SEC.
CASE AGAINST PETER SZATMARI
According to the CFTC, while Szatmari worked at BDB, he specialized in “affiliate marketing.” Szatmari’s role in the company involved the promotion of third-party products and services, especially binary options trading. In this role, the CFTC alleges Szatmari intentionally misrepresented, or intentionally omitted important information related to his marketing practices at BDB. The CFTC indicated these marketing efforts sought to locate new investors and for those investors to open and fund binary option trading accounts with BDB’s recommended brokers.
These marketing practices amounted to violations of the Commodity Exchange Act. More specifically, federal investigators have alleged the fraud took place from 2013 through July 2017. Szatmari’s fraudulent marketing practices attracted their victims by sending misrepresentations about the trading platforms, also paying video producers to make fraudulent testimonials promoting the trading systems. Further, Szatmari’s illicit marketing practices pushed customers into opening and funding binary option accounts operated by unregistered, off-exchange brokers.
In the end, the CFTC filed a civil lawsuit against Szatmari, demanding compensation for the illegal marketing activities used by Szatmari on BDB. Szatmari never responded to the CFTC’s lawsuit and never appeared for any court dates. This event led the CFTC to obtain a default judgment against Szatmari.
A default judgment occurs when a defendant to a lawsuit fails to file a response to the lawsuit with the court. If the person suing the defendant has asked the court for a specific amount of money and the defendant does not respond, the court can decide the case in favor of the plaintiff. In entering a default judgment against the defendant, the court will consider the amount of money demanded by the plaintiff, the allegations by the plaintiff and can then issue judgment. Here, Szatmari broke the law through his binary options’ marketing practices. The CFTC alleged he received over $13.8 million in gains because of these illegal actions. Hence, since Szatmari never responded to the lawsuit, the court entered a default judgment against him for the $13.8 million.
CASE AGAINST DAVID SECHOVICZ
According to the CFTC’s federal investigators, Sechovicz deliberately caused unsuspecting investors to open and fund binary options accounts with options brokers with whom they have a special relationship. Allegedly, these relationships will lead to the free use of automated trading software, which will bring huge profits to investors, and it will not bring investors the risk of loss. According to federal investigators at the CFTC, Sechovicz’s illegal marketing practices included numerous false or misleading statements, including:
- Misrepresentations of binary options trading can generate considerable profits, and even guarantee profits, while minimizing or eliminating any risks.
- The option trading company claims that the automated trading software can work and generate profits, but in fact it is not real, cannot operate as required, and does not exist in some cases.
- Having actors pretend they are the actual owners and users of the automated trading software without revealing that they are not the actual users of the software.
- Describe the results of virtual transactions as real.
The CFTC also alleged Sechovich failed to disclose referral fees from binary options brokers for every new account opened and funded directly because of BDB’s marketing. The CFTC and Sechovich resolved the allegations of fraud against him in 2019. Sekovic received fines and restitution, totaling $2.8 million. The order requires payment of $1.8 million to defrauded customers and a civil fine of $949,000. As part of the settlement, Sechovich also agreed to cease and desist from engaging in future violations of the Commodity Exchange Act and CFTC regulations.
Recommendations
According to all reports, BDB and its employees repeatedly violated the federal commodity trading and securities laws of the United States. This group of bad actors and the repercussions that befell them are, however, instructive. Corporate executives, business owners, and business leaders should set the standard of conduct for their employees to follow. Awareness of industry-specific laws should be the first step in any effort to comply with federal laws. Following awareness, compliance with the laws is essential. Nevertheless, poor leadership can lead to low morale of employees and poor behavior of subordinate employees.
A strong, written internal compliance plan and employee training program are essential for any business. At a minimum, executive management must clearly spell out what types of behaviors are acceptable, and what types of behaviors are unacceptable. There must be a compliance plan and mandatory employee participation in ongoing compliance training. By providing employees with clear guidance on appropriate behavior and inappropriate behavior, companies better guard against fraud and protect the company from investigation and prosecution. These efforts demonstrate that a business takes compliance with the law seriously. It also shows any federal prosecutors efforts in place to follow the law in the event someone violates the law, unwittingly putting the business at risk of prosecution.