Appellate Panel Revives CFTC Claims Against Precious Metal Dealer

(CN) – The Ninth Circuit revived with an enforcement action by the Commodity Future Trading Commission against precious metal dealer Monex Credit Company.

Monex’s precious metals investments fall under under the Commodity Exchange Act, and the CFTC alleges Monex ran an Atlas Program that was an illegal and unregistered commodity transaction market.

The Atlas Program, as claimed by the CFTC, allowed investors to purchase commodities on margin, or leverage, allowing investors to buy Monex’s precious metals by only paying a fraction of the commodities price. The remaining amount is financed through Monex after an investor opens a margin account with the company.

“Once a customer opens an account, she may take open positions in precious metals.  But the trading occurs ‘off exchange’ — that is, it does not happen on a regulated exchange or board of trade,” U.S. Circuit Judge Eugene Siler wrote for the court on July 25, summarizing the CFTC’s claims. “Instead, Monex controls the platform, acts as the counterparty to every transaction, and sets the price for every trade.”

When customers make an account with Monex, they sign over control of the metals under the Atlas account agreement. Though the transaction occurs, Monex does not remit the metals to the investor, nor do they ever physically possess them.

“The CFTC contends that Atlas is a scheme that has violated the CEA since at least July 2011.  Monex tells its customers that leveraged precious metals trading is ‘a safe, secure and profitable way for retail customers to invest’ when, in fact, the program requires that many customers lose money,” the ruling states. “The CFTC alleges, Atlas is designed so that when customers lose, Monex gains: Because Monex is the counterparty for each Atlas transaction, Monex benefits from large price spreads at the customer’s expense.”

The Ninth Circuit panel concluded that the district court incorrectly found that Monex fit within a rule known as the “actual delivery exception,” which applies to leveraged retail commodity sales that “result in ‘actual delivery’ within 28 days.” Because the actual delivery exception requires a “meaningful degree” of possession, the court found the exception did not apply.

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