Appellate Panel Tosses Challenge to CFTC Action After Settlement with Private Regulator

(CN) – The 11th Circuit ruled that an action brought by a self-regulatory commission does not preclude subsequent action by a government regulatory agency after an appeal by Southern Trust Metals Inc., which was found guilty of fraud for misleading customers about metal commodities purchases and charging interest on fraudulent loans.

Unknown to investors, Southern Trust Metals did not deal in metals,  but metal derivatives and only disclosed after  a customer complaint. The complaint sparked an investigation by the National Futures Association, an independent, self-regulatory organization that deals in futures exchange.

Southern Trust Metals was never in the business of physical metal exchange, as their websites and brochures lead the public to believe, according to the ruling.

The NFA’s investigation led to a trial where Southern Trust Metals’ director and CEO Robert  Escobio claimed he did not know that his customers’ money was being put into metal derivatives.

Loreley Overseas Corporation, a British Virgin Islands corporation and named defendant who owns Southern Trust Metals, engaged two foreign brokerages, Berkeley Futures Ltd. and Hantec Markets Ltd., to handle the derivative transactions.

After the trading accounts were set up, Southern Trust Metals sent unsuspecting customers’ money to Loreley which invested those funds into metal derivatives. Meanwhile, Escobio received monthly statements showing the investments were in metal derivatives and not physical metals as promised to customers, according to the ruling.

“Southern Trust never informed its customers that their money was being transferred to Loreley, Berkeley or Hantec,” Judge Ronald Lee Gilman, sitting by designation from the Sixth Circuit, wrote for the three-judge panel. “Nor did it inform customers who wished to invest in metals that their money was instead being used to invest in metal derivatives.”

Southern Trust Metals ended up settling, but at the time, the U.S. Commodity Futures Trading Commission also launched its own investigation. The CFTC claimed the company was involved in two illegal schemes, and “unregistered-futures scheme” and a “metal-derivative scheme.”

The CFTC claimed Southern Trust Metals violated the Commodities Exchange Act when it failed to register as futures commission merchants while promising to invest customers’ money into precious metals but instead invested in “off-exchange margined metal derivatives.”

The investigation also found that Southern Trust Metals was issuing loans to customers who were led to believe they could use them to buy metals. Instead of issuing the loans to the customers, Southern Trust Metals took customers money and continued to invest it in metal derivatives.

“No loans existed, but the Defendants charged loan interest anyway,” the ruling states.

The district court found that Southern Trust Metals had committed fraud after a bench trial and ordered the company to pay fines and restitution in the full amount for the customers’ losses.

Southern Trust Metals brought an appeal to the 11th circuit arguing that their previous settlement with NFA precluded the CFTC’s claim.

The 11th Circuit disagreed, finding that the National Futures Association is a private organization through which the commodities-trading industry regulates itself. A settlement with a private organization does not preclude subsequent claims by government regulators, the panel found.

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