Gold Trader Accused of Ripping Off Customers

CHICAGO (CN) – The Commodity Futures Trading Commission claims in an enforcement action that precious metals trader Menox has defrauded its customers of hundreds of millions of dollars.

The CFTC, a government agency that regulates futures and option markets, sued the California-based Monex Deposit Co. and its subsidiaries on Wednesday for allegedly defrauding customers while executing illegal, off-exchange commodities transactions.

“Monex deceptively pitches its Atlas program as a safe, secure and profitable way for retail customers to invest in precious metals. It is not,” the 32-page complaint states. “To the contrary, approximately 12,000 leveraged Atlas accounts collectively realized more than $290 million in losses between July 16, 2011 and March 31, 2017 - an average of more than $4 million a month. Approximately 90 percent of leveraged Atlas accounts lost money during this period. Despite touting the benefits of the Atlas program, Monex never discloses to prospective customers the massive and pervasive losses suffered by its customers.”

Monex advertises its Atlas trading program – which allows customers to buy gold, silver, platinum, and palladium – as a way to shield wealth from inflation and as a hedge against stock market uncertainty.

Silver traded at over $40 per ounce in April 2011, but has declined in value for the last five years while stocks have reached record highs. Similarly, gold and platinum have also declined during this long bull market, although palladium currently trades at a high not seen since 2001.

But according to the CFTC, Monex structures the Atlas program such that customer losses are “all but inevitable,” due to large price spreads that can be 100 times larger than price spreads on a regulated exchange, plus commissions.

Using high-pressure sales pitches, the agency claims Monex sales representatives “misrepresent the likelihood of profit, systematically downplay the risks of leveraged Atlas trading, and falsely promise that Monex will serve as customers’ fiduciaries.”

“These sales representatives are paid with commissions and bonuses tied directly to the number of Atlas accounts they open and the volume of transactions in these accounts, rather than customer account performance or rate of return, making clear that Monex prioritizes account opening and trading volume, not account performance,” the lawsuit states.

The CFTC has filed a number of similar lawsuits against unregulated commodities exchanges, and won substantial sums in recent years, ever since the Dodd-Frank Act made it illegal to offer leverage commodities transactions unless they are conducted on a regulated exchange.

In 2015, a California businessman was ordered to pay $5.3 million in fines and restitution for defrauding customers in off-exchange, leveraged trading of precious metals. The year before, a federal judge ruled that a Miami broker that fraudulently sold gold and other precious metals it did not actually own violated the Commodities Exchange Act, or CEA.

The CFTC seeks an injunction against Monex’s allegedly continued fraudulent conduct, plus full restitution to the company’s customers that it says were defrauded. It is represented by in-house lead attorney Carlin Metzger.

Monex, accused of violating the CEA, said in a statement that it "vehemently denies the CFTC’s assertion of jurisdiction and its allegations of customer fraud."

“The average bid/ask spread on a financed Atlas transaction is one of the most competitive in the physical precious metals market with average spreads of less than 2 percent and commissions averaging less than one quarter of a percent during the last five years,” it said. “The company will vigorously defend against the CFTC’s unwarranted action.”

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