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Fraud Advisory from the CFTC: Profits Based on Hurricane Katrina
Beware of claims that the damage caused by Hurricane Katrina will increase the profitability of trading in crude oil, unleaded gasoline, heating oil, natural gas, or other commodity futures or options.
Hurricane Katrina caused extensive damage to regions of this country on the coast of the Gulf of Mexico, including New Orleans and coastal Mississippi and Alabama. Besides causing great hardship among residents of this region, the hurricane caused damage to property, including oil drilling stations and refineries located in and around the Gulf of Mexico.
The public should be advised that whatever effect these events might have on the price of physical commodities, the occurrence of such well-known events do not necessarily increase the likelihood of making profits in commodity futures or options trades that are based on these energy products or limit the risk in such trades.
Any claims made of potential profits from trading in futures or options on energy products or other commodities based on the effects of Hurricane Katrina are probably fraudulent.
The Sales Pitch
Commodity brokerage firms and brokers often use telephone calls, email messages, and mass email or spam, along with Internet advertisements, and television or radio ads, to interest members of the public in trading commodity futures and options. These brokers are prohibited by the Federal commodities laws from overstating the profitability of futures trading, understating risks, and falsifying performance history.
Brokers violate this prohibition by claiming that customers can profit based upon well-known events, such as seasonal changes in climate, natural disasters, or global conflict. Such pitches are misleading because they are meant to suggest that the broker has special information that gives him or her an edge in executing a customer’s trades. That is false. It is true that increases in demand or limitations in supply of a particular commodity might affect the commodity’s price. However, when such changes are already known or anticipated by the market, they will not necessarily affect the value of a futures or option position on those commodities. This is because traders in the markets have already factored this information into the price.
For example, the public, and market professionals in particular, are already aware that Hurricane Katrina has had a significant effect upon the supply of energy products such as crude oil, unleaded gas, and heating oil. These professional traders and investors who pay close attention to global economic and political factors that might affect the price of the futures and options that they trade, quickly take into account new information concerning the possibility that future supplies of these products may be disrupted. As a result, the prices of futures and options already reflect this possibility.
In addition, claims that the risk of purchasing commodity futures and options can be predetermined or fixed are misleading. Purchasers of commodity futures or options contracts can lose every penny given to a broker and, because futures contracts are “leveraged” or “margined,” customers may be liable for losses in excess of their initial deposits.
The CFTC’s Division of Enforcement is on the lookout for Katrina-related commodities scams and will vigorously prosecute those who attempt to take advantage of this tragedy to defraud members of the public.
Investors who believe they may have been targets of such schemes should forward suspicious solicitations to enforcement@cftc.gov. In addition, the CFTC will coordinate with the Department of Justice's Hurricane Katrina Fraud Task Force on any potential prosecutions of such violations.