(CN) – Equity Financial Group can be held liable for misrepresenting a feeder fund that dumped millions of dollars into a mismanaged commodities trading pool, the 3rd Circuit ruled.
Equity Financial, president Vincent Firth and lawyer Robert Shimer formed Shasta Capital Associates to trade futures contracts. Equity Financial invested $15 million raised through Shasta into a “super fund,” Tech Traders, which pooled the investment with other funds and traded commodities on their behalf.
But Tech Traders and CEO Coyt Murray misappropriated investor money and falsely reported the company’s performance, the ruling states.
Equity Financial, Firth and Shimer participated in the scheme by overstating Shasta’s performance and by pocketing some of the investments for personal use, without telling investors.
Murray and Shimer also had an arrangement where Murray diverted more than $1.3 million in Tech Traders’ profits to Shimer through a trust in the West Indies.
“Some of this money went to pay the earlier investors, some to pay a mortgage for Firth, and some to pay a referral fee to a former associate of Shimer,” Chief Judge Scirica explained.
The district court deemed Equity Financial a commodity pool operator and found it liable for failing to register with the Commodity Futures Trading Commission, and for aiding and abetting Tech Traders’ misconduct. It also blocked the defendants from participating in commodity markets and ordered restitution, disgorgement of profits and civil penalties.
The defendants argued that a person must trade in commodity futures to be a commodity pool operator.
The federal appeals court in Philadelphia disagreed, saying the Commodity Exchange Act “lacks an explicit trading requirement.”
Scirica said the law would have no teeth “if the operator of a fund could avoid the regulatory scheme simply by investing in another pool rather than trading.”
The three-judge panel upheld the finding that Equity Financial, Firth and Shimer failed to register and helped Tech Traders commit fraud.