No registration required! (Why?)

Loophole allows forex scams to flourish

Good story in chicago tribune about forex scams:

Loophole allows forex scams to flourish
Tighter rules urged to tame `Wild West'

When federal agents armed with search warrants descended on the South Barrington home of Puthankote Aboobacker, they discovered just how profitable the new wave of forex trading scams could be.

The luxurious suburban house, full of new furniture, with a late-model Lamborghini and Bentley Arnage in the drive, represented only a fraction of the booty obtained by an entrepreneur who the Feds describe as one of Chicago's most prolific foreign-exchange swindlers.

The 42-year-old Aboobacker is accused of siphoning off $53 million since 1999 from a pair of trading firms set up in Arlington Heights with the help of a former Chicago Mercantile Exchange governor, Richard Kapsch.

The alleged victims hailed from the Middle East and Asia, lured by the promise of riches in the markets for euros, yen, dollars and pounds. Instead, their losses became Aboobacker's gain through a complex money-laundering racket, federal authorities allege in court documents tied to a civil lawsuit.

The operation is said to be among dozens across the country taking advantage of a controversial loophole in market regulations that has inspired a free-for-all of forex trading rip-offs.

"You have unlicensed, unregulated, over-the-phone speculation with unbelievable amounts of money involved," said Chicago commodity lawyer James McGurk. "It's the Wild West."

Although Congress is slated to take up the matter this fall when it considers reauthorizing the Commodity Futures Trading Commission, lawmakers have come under pressure to leave the loophole as is, industry observers say.

The Chicago case involving Aboobacker is still developing, and no criminal charges have been filed. Aboobacker's lawyer, Edward Genson, said his client never committed fraud.

An informant who provided information about him is seeking a whistle-blower award and investors who complained are merely voicing sour grapes, Genson said. "They talk about misrepresentations being made. When you have a bunch of people who lost money, they will say that."

Thomas Breen, attorney for Kapsch, said he disagreed with the government's "interpretation" of the facts. "All I can say is I have found him to be a man of great moral character, and I would be very surprised if he is found to have done anything wrong."

Kapsch declined to comment, and Aboobacker could not be reached for comment. He and another defendant in the case are out of the country, said Kapsch, who was a longtime Merc member.

The allegations about shady business dealings at the Currency International and Chicago Currency trading firms came to light last month when federal prosecutors brought a civil forfeiture action--a year and a half after the initial raids on Aboobacker's home and offices.

The June 22 lawsuit resulted in the seizure of a half-dozen properties, two dozen bank accounts, a 2003 Lincoln Navigator and an Aero 50 motorcycle--all said to be the proceeds of massive fraud.

The Bentley, Lamborghini and several other luxury vehicles that Aboobacker purchased in recent years may have been shipped out of the country, the lawsuit said.

Federal investigators started probing the firms in March 2002, when a former partner of Aboobacker's approached Internal Revenue Service agents with details of the operation.

The informant, whose name is not revealed in the litigation, accused Aboobacker, Kapsch and others of defrauding customers in the foreign-exchange markets by guaranteeing fat returns, minimizing the risks and lying about how customer funds would be traded.

The targets were investors from outside the U.S., often recruited through offices in their native countries. The federal lawsuit said clients supplied records from as early as 1993 through late 2004 revealing "unauthorized trades, false statements regarding the trades and a consistent pattern of losses."

One group of Kuwaiti investors said they were told their profits were guaranteed, that Aboobacker's firms were "huge companies" and that their trades would be executed on an exchange. They lost $750,000.

According to the court documents, customer funds were never traded in financial markets or major banks, but instead through companies and accounts secretly controlled by Aboobacker and his associates. Once diverted to insiders, the funds were laundered through wire transfers so that Aboobacker and others could evade income tax on the profits, federal authorities allege.

Genson, Aboobacker's attorney, says the lawsuit contains insufficient evidence that any fraud occurred.

Three months after the informant contacted the IRS, he surreptitiously recorded conversations with Aboobaker in the southwest Indian language of Malayayam. Among the recorded statements, Aboobacker is accused of warning the informant not to leave a trail for tax authorities to follow: "If we show profits, we'll be doomed." He also allegedly referred to his use of relatives and employees to hold profit-making accounts: "All account holders are our own people," he said, according to a government translation of the tapes.

In November 2003, federal agents executed search warrants and interviewed the operation's principals. Kapsch is accused of lying to investigators about whether a company he ran is affiliated with Chicago Forex--an allegation that Genson said conflicts with other facts cited in the government's case. "That is absolutely wrong."

Aboobacker is said to have lied about owning the same firm, first denying it in an interview with federal agents then ultimately acknowledging it. Aboobacker denies lying, Genson said.

In some ways, the allegations against Aboobacker and Kapsch are atypical. It is more common for offshore companies to prey on U.S. investors, not the reverse, commodity-market experts say.

In 2000, the CFTC obtained more jurisdiction over forex fraud, but its powers were sharply limited last year in a ruling by the 7th Circuit Court of Appeals. That case in effect provided guidelines for those seeking to establish forex boiler rooms and bucket shops, critics say.

Unless the loophole is closed, Merc Chairman Terry Duffy told Congress earlier this year, "before long the CFTC's jurisdiction and its retail customer protections may be reduced to irrelevance."

So far, however, newly appointed CFTC Chairman Reuben Jeffery III has taken no position on whether the loophole should be closed. He would not comment for this story.

Opponents of additional regulation, including major banks and Wall Street dealers, say no change is needed--or at most a very limited one.

"I want the CFTC to regulate futures markets, but I don't think the CFTC should be chasing every commodity scam," said John Damgard, who heads a futures industry trade group dominated by large financial firms. "Where there's a demonstrated problem, as there has been in currencies, we have advocated a very narrow additional power for the CFTC."

Investors need to be more cautious, Damgard said.

"You can't prevent crooks from going out there and trying to steal people's money," he said. "It was aluminum siding when I was a kid. These are the same guys, and they just happen to pick out forex scams."

- - -

About the scams

The lure: Foreign-forex trading is often called the world's largest financial market, its turnover dwarfing the activity on the New York, London and Tokyo stock exchanges. Since the 1970s, major currencies have floated freely in relation to one another, enabling a competitive marketplace to determine the relative value of each. A currency is like a stock in the country issuing it, so its value changes with political and economic developments.

The fraud: For years, the global forex market has attracted small investors seeking alternatives to more conventional investments. And for years, foreign exchange has been a favorite of swindlers. Part of its attraction is relatively light regulation. In 2000, the Commodity Futures Trading Commission won expanded jurisdiction over what it called "egregious fraud" affecting small-time forex investors. The agency brought cases against more than 300 companies. Last year, the 7th Circuit Court of Appeals in Chicago ruled against the agency in a case involving an accused scam artist, narrowing its purview.