A federal judge ordered more than $5 million in restitution and disgorgement from a futures firm, including its former CEO, a penalty that comes in ahead of full legal proceedings from federal regulators pressing fraud allegations against the company.
U.S. District Judge Thomas Durkin issued an opinion July 27 granting partial summary judgement to the Commodity Futures Trading Commission on its claims against Long Leaf Trading Group, former CEO James Donelson and employee Jeremy Ruth.
According to court documents, Long Leaf is a so-called "introducing broker," which can’t place orders on a designated contract market, but rather introduces customers to a futures commission merchant. This type of broker earns revenue through commissions on trades with the merchant. However, the CFTC said Long Leaf allegedly instead acted like a commodity trading adviser (CTA), giving paid advice on trading futures, despite never registering as such an entity.
U.S. District Judge Thomas M. Durkin
The CTFC levied two main accusations against Long Leaf. In addition to operating as an unregistered CTA, it said the firm defrauded customers by not telling them nearly all its clients lost money, painting “an inaccurately rosy picture of the likelihood customers would see positive returns on their investments,” Durkin wrote.
From June 2015 through December 2019, the CTFC said, about 80% of Long Leaf customers participated in its Time Means Money program, through which agents provided recommendations via phone or email. Those clients allegedly accepted about 80% of suggestions, resulting in a “disastrous program” through which customers allegedly lost more than $5.7 million, while Long Leaf collected more than $4 million in commission.
The CTFC said Donelson took over in December 2017, while the program had been failing under former CEO Timothy Evans, but nonetheless told customers the firm’s strategies target an annual return of 6 to 12%. It further said he continued Evans’ policy of not letting agents tell clients about past performance and accused him of writing a letter to clients that misstated his professional experience as a trader by obfuscating he only made one trade — in which he lost $30,000 — while working for trading firms.
Ruth allegedly recruited clients using corporate scripts rife with inaccuracies and claimed he didn’t know how to interpret the daily statements showing all his customers losing money. He earned $301,541 working for Long Leaf over 28 months, primarily through commissions.
“The undisputed facts establish that Long Leaf’s trading program was a consistent loser for customers both before and after Donelson took over as CEO,” Durkin wrote. “Donelson was aware of this fact, but Long Leaf’s customers were kept in the dark.”
Durkin further found nothing contradicting the allegation Long Leaf directly advised clients on options trading, despite not being registered as a CTA. The judge said that makes Donelson liable for fraud, as well as failure to register, and makes the firm liable for fraudulent advertising and failing to make requisite disclosures. Donelson said his attorney told him neither he nor the company needed to register as a CTA, but Durkin said a 2002 U.S. Seventh Circuit Court of Appeals opinion, United States. V. Urfer, established “there is no such thing as an ‘advice of counsel’ defense.”
Durkin then ordered restitution of $2.38 million, the amount of client losses while Donelson was CEO, including paid commissions, and disgorgement of Long Leaf’s collected commissions during that same time, a total of $1.24 million.
The same logic supported Durkin’s determination Ruth also made fraudulent omissions. He noted that while Ruth disputed the CFTC’s allegations, his evidence and testimony failed to “create a genuine issue of material fact that would preclude summary judgment.” Durkin also said Ruth’s claims of ignorance were unpersuasive.
“No reasonable jury could conclude that Ruth was unable to determine whether his clients had lost or gained money on their accounts,” Durkin wrote. “And if Ruth was truly incapable of understanding customer account statements, his sales pitches about customer returns were simply hot air.”
Durkin likewise agreed with the CFTC’s position Ruth aided and abetted Long Leaf’s alleged CTA fraud, saying the undisputed facts show the firm operated as such while Ruth was on staff. Durkin order Ruth to repay $301,541, “comprised primarily of ill-gotten commissions.”
Finally, Durkin said Long Leaf must pay $5.77 million in restitution and disgorge another $4 million, with the amount owed in disgorgement offset my money paid toward restitution, and both totals offset by what amount Doneslon pays.
Evans did not file a response or otherwise appear in response to the CFTC’s allegations against him. Another defendant, Andrew Nelson, also never appeared and has been defaulted. The CTFC only moved for partial summary judgment so it could seek an injunction and financial penalties against Evans and Nelson through a separate motion.
Donelson has been represented by attorney Charles Edward McElvenny, of Chicago.
Long Leaf has been represented by attorney James M. Falvey, of Chicago.
The CFTC has been represented by attorney Ashley John Burden and others from its Division of Enforcement.