Learn how an FTC investigation uncovered deceptive practices in the Online Trading Academy Scam.
My name is Steve Hart, and I am a contributing journalist for Compliance Mitigation. I am a Partner at Conformity 360, a compliance consulting firm, serving as the resident subject matter-expert in buy-side Compliance. Prior to joining Conformity360, I was Chief Compliance Officer (“CCO”) for the prestigious firm Allen & Company, and prior to that, served as the Global Chief Administrative Officer for Compliance at BlackRock, the world’s largest asset management company. I hold an Investment Adviser Core Certification, an M.S. in Banking and Financial Services from Boston University and a B.A. in Political Science from the University of Pennsylvania.
Having worked as the CCO for Registered Investment Advisers (“RIAs”) with the Securities and Exchange Commission (“SEC”), I have been through numerous regulatory audits and examinations. Experience gives me insight into how the regulatory bodies conduct investigations and attempts to obtain enforcement actions, often including jail and prison sentences.
After completing this case study, the participants will be able to:
- Understand what the FTC defines as manipulative and misleading conduct.
- Understand the meaning of unrepresentative testimonials.
- Identify online investment schemes intended to deceive the public.
- Explain what prompts the FTC to bring enforcement actions against online businesses.
- Describe risky behavior to avoid as an online business.
Federal Trade Commission, Business Opportunities Rule, Online Business Trends, Unsubstantiated Testimonials, “Reason to Believe” Standard
The FTC’s Bureau of Consumer Protection deters unfair, deceptive and fraudulent business practices by collecting reports from consumers, conducting investigations, suing companies and people that break the law, developing rules to maintain a fair marketplace, and educating consumers and businesses about their rights and responsibilities. As our nation’s premier agency in charge of consumer protection, the FTC monitors and investigates reports about ongoing scams and businesses that fail to make good on their promises. The FTC’s jurisdiction includes oversight of deceptive and misleading marketing by retailers.
Misleading advertising occurs when, in the promotion of a product or any business interest, a representation is made to the public that is false or materially misleading. If a representation influences consumers to buy the product or service advertised, it is material. To determine whether an advertisement is misleading, the courts consider the “general impression” it conveys, as well as its literal meaning.
The FTC files a complaint when it has “reason to believe” that the named defendants are violating or are about to violate the law and it appears to the Commission that a proceeding is in the public interest. The case will be decided by the court. The Federal Trade Commission works to promote competition and protect and educate consumers.
“The FTC’s Bureau of Consumer Protection stops unfair, deceptive and fraudulent business practices by:
- collecting complaints and conducting investigations.
- suing companies and people that break the law.
- developing rules to maintain a fair marketplace.
- educating consumers and businesses about their rights and responsibilities.”
The FTC collects complaints about hundreds of issues annually from data security and false advertising to identity theft, including companies which engage in such practices online.
Recent studies project that worldwide retail eCommerce sales will reach a new high each coming year for the foreseeable future. Ecommerce businesses have experienced an average 265% growth rate, from $1.3 trillion over the past 6 years. This growth shows a future of steady upward trend with no signs of decline. The Covid 19 pandemic exponentially escalated both the growth of online sales and overall adoption by society.
With increasing online business presence, companies that engage in fraudulent activity and deceptive practices will increase immeasurably, including ones that offer business opportunities. Further, as online opportunities increase, safeguards must now be in place to make sure one has the information needed to evaluate whether a business opportunity online is risky business.
Sellers have responsibilities under the FTC’s Business Opportunity Rule. Under the Rule, sellers who promote online business opportunities have to give a one-page disclosure document to the consumer that offers five key pieces of information. This Rule is a growing best practice for the future. Consumers are increasingly using this information in the disclosure document to fact-check what the seller tells about the opportunity and what the consumers finds out from his or her own research.
The document has to:
- Identify the seller.
- Tell the consumer about certain lawsuits or other legal actions involving the seller or its key personnel.
- Tell the consumer if the seller has a cancellation or refund policy.
- Give the consumer a list of references.
The Rule says that a seller has to give the consumer the disclosure document at least seven days before he or she pays them anything. Questionable business opportunity promoters have been known to name “insiders” who give glowing, but bogus, recommendations. An inconsistency could be a tell-tale sign of a business opportunity “rip-off.”
A company that provides education and training in the purchase and sale of publicly traded shares offers courses throughout the United States. The company claims that its “patented” program allows investors to make money regardless of market conditions. The claims, however, prove to be overblown. The legitimacy of testimonials used by the company comes into question as does the credentials of people its uses to teach the coursework. These misrepresentations come to the attention of the FTC.
The Online Trading Academy (“OTA”) launched in 1997 as one of the largest trading floors in the United States, providing managers and high-performing traders with daily coaching sessions on trading with higher consistency and profitability. In 2001, the organization switched its focus to an education model, building a community of over 200,000 investors.
OTA focuses on educating people about investing and trading, offering both on-location and online offerings, giving students the flexibility to maximize learning possibilities in whatever environment suits them best. The company provides a variety of courses, ranging from beginner to advanced, with price tags running as high as $50,000 per course.
OTA claims to have a patented “strategy” that anyone can use to generate substantial income from trading in the financial markets. OTA further asserts that its strategy is designed to generate income in any market, “whether it’s going up, down or sideways.” The company often targets its program at older consumers. Additionally, OTA “instructors”—salespeople on commission who market OTA’s training and strategy to consumers in live events across the county—often hold themselves out as successful traders who have amassed substantial wealth using OTA’s strategy, when oftentimes that’s simply not the case. In fact, several high-profile OTA pitchmen admit they do not make significant money trading.
When receiving complaints or requests for refunds, the OTA uses form contracts to prevent displeased customers from telling the government or other consumers about OTA’s deception.
The FTC brings a lawsuit in February of 2020 alleging that OTA has “collected more than $370 million from consumers nationwide within the last six years” while deceiving them to believe that anyone can make money from trading stocks using its strategy. The FTC alleges that OTA has no evidence that purchasers are likely to realize the advertised profits and that, in fact, the company’s own surveys and third-party trading data show that most purchasers made little to no money.
“OTA pitches a get-rich-quick investment strategy using fake or unrepresentative testimonials, depictions of wealth, and implied promises of profits… OTA has no support for its lavish earnings claims, and that is illegal,” asserts the FTC.
The case settles relatively quickly in September of 2020, a mere 7 months after the FTC initially brought the case. The settlement amount is a staggering monetary judgment of $362 million, which is partially suspended due to the defendants’ inability to pay. The settlement requires the company’s president Eyal Shachar to pay $8.3 million and surrender a number of vehicles to the FTC, including a Cessna 400 airplane, a 2006 Bentley Mulsanne, a luxury motor home, a Cadillac Escalade, and six minivans. Darren Kimoto, a leading instructor at OTA for over 15 years, must pay $736,300 and surrender a 2017 Land Rover, and Samuel R. Seiden, another key tutor, must pay $158,000. The cash and the proceeds of the vehicle sales will purportedly go to providing refunds to affected consumers.
Under the terms of the settlement, the defendants are further prohibited from making claims about potential earnings unless the claims are truthful, and the defendants have written documentation to support them. They are also prohibited from making claims without adequate support about how quickly consumers can become proficient in the defendants’ trading “strategy” or the amount of time or money needed to generate significant income.
In addition, the defendants are prohibited from calling their salespeople “education counselors,” and from misrepresenting that instructors are active or successful traders. The settlement also prohibits the defendants from using contracts that prevent their customers from interacting with law enforcement or posting reviews about the defendants online. It also requires the defendants to notify consumers of their right to post honest reviews and file complaints.
Online companies sprout up all the time as entrepreneurs pursue their dreams. They make claims about their products or services and then seek to fulfill them. Oftentimes, people seeking to develop a company show greater concern to bringing in business then ensuring that the promises and representations made are forthright and honest. That kind of attitude, however, can end up costing a business and its principals gravely in the end.
OTA provided a key service, educating novices in trading on the stock markets. The company would undoubtedly have been profitable without making unsubstantiated claims and misrepresenting their traders’ success. OTA, however, failed to have a compliance department or anyone within the organization playing devil’s advocate. This failure hobbled the entire corporate culture of the organization; from the CEO to the people teaching the courses. In that way, this case truly highlights the importance of compliance within an organization and how the absence of appropriate internal controls can destroy an otherwise thriving business.