Fraud Advisory from the CFTC: Commodity Pool Fraud

Be cautious of commodity investment opportunities that promise you large profits and little risk, even if you know the people involved.

The CFTC wants to warn you about fraudulent schemes that often involve unregistered commodity pool operators. Commodity pool operators are persons or firms that raise funds and pool them together to trade commodity futures and options. Pool operators often use their reputations or personal relationships to solicit investment money from friends, neighbors, co-workers, church members, or social groups. These investment schemes may be fraudulent and you could lose your entire investment.

The CFTC is the U.S. Federal agency that regulates the trading of commodity futures and options contracts in the United States. The CFTC has brought many enforcement actions against individuals and firms, often unregistered, that offered investments in commodity pools where the invested funds were misappropriated or misused (often spent on improper expenses) and where the pool operators advertised and solicited investors based on false claims of high profits and low risk.

We urge you to be skeptical when someone tells you that their services can earn you large profits with minimal risk. Be skeptical even if a friend or relative recommends these trading opportunities or services. Investors lose millions of dollars every year in phony commodity pools, and fictional “hedge funds” trading commodity futures and options.

Before you invest, find out about the registration status, business background, and disciplinary history of the pool operator. Ask for copies of the account statements that registered trading firms provide to the pool operator. If you have suspicions, report them to the CFTC quickly.

Pool operators often use word of mouth referrals or emails sent among friends and relatives, members of community organizations, churches, or social groups to convince people that they can make money quickly by investing in their commodity pools.

One fraudulent pool operator even solicited investments from members of his cancer support group.

In our experience, many times these pool operators promise quick riches to investors. They might promise that they can double or triple your investment in months with very little risk. Be very careful if the pool operator claims special trading expertise, a unique understanding of market trends, or claims to have a record of profitable trading. These claims by unregistered pool operators often turn out to be false.

Always be skeptical of such sales pitches even if you know the person involved. Ask the same questions and investigate what they tell you just as you would if the person was a total stranger. If you are not satisfied with the information you receive, be safe: don’t invest. If you do invest, invest only the amount of money that you easily can afford to lose.

Individuals and firms fraudulently soliciting funds for commodity futures and options trading usually are not registered with the CFTC. They may operate Ponzi schemes. In a Ponzi scheme, little or none of investors’ money is ever invested in the commodity markets as promised. Instead, the operator of this kind of scam steals the money.

Sometimes such an operator creates the illusion of a successful business by paying phony profits to early investors with some of the money the operator receives from later investors. This tactic can make it appear that the scheme is making money and attract more investors. Be very careful of such payouts if you don’t understand where the money is coming from.

Operators of these scams often do not send account statements to their investors and sometimes the operators send phony account statements which falsely indicate that trading is going on and that the investor has made a profit.

Ponzi schemes are usually discovered when investors decide to withdraw their money and discover that there isn’t enough money to cover their investment.

Investors can find it is expensive and difficult or even impossible to recover money lost in Ponzi schemes.

You should know that certain pool operators are not required to register, including operators of small pools with 15 or fewer investors whose total trading capital equals $400,000 or less, or pool operators who receive no compensation.

These small pool operators are required to notify investors, the CFTC, and NFA that they are operating without registration.

• Ask to see the pool’s disclosure documents and performance history.

• Ask the pool operator to give you account statements that the pool receives from the registered firms through which the pool trades.

• Ask about all fees and commissions charged by the pool operator. Compare these fees and commissions to those of registered pool operators.

Warning Signs
Before You Trade
Report Suspicious Activities