(CN) - A Miami broker that fraudulently sold gold and other precious metals it did not actually own violated the Commodities Exchange Act, a federal judge ruled.
The Feb. 19 summary judgment order for the U.S. Commodity Futures Trading Commission comes about a year after the court in West Palm Beach enjoined Wise Commodities LLC from offering and executing allegedly illegal retail transactions involving gold, silver, platinum, palladium, copper and other precious metals.
Futures regulators alleged that Hunter Wise and its principals, Harold Martin Jr. and Fred Jager, defrauded customers by claiming to sell them metals, loaning money to them so they could complete the purchases, and supposedly arranging with suppliers to store the metals in independent depositories.
"After completing a purchase, retail customers received a 'Transfer of Commodity' notice from defendants, which purported to allow the retail customers to take possession of the 'purchased commodities' at their election," the ruling states.
But the CFTC claimed that the defendants never had actual possession of or title to the metals they offered for sale. "
Therefore the retail customers could not take possession of the precious metals at their election," according to the ruling. "Instead, defendants used their retail customers' funds to make trades on the open market while charging the consumers inflated commissions, a price spread, interest on the purported loan, and other fees."
U.S. District Judge Donald Middlebrooks concluded that Hunter Wise's margin trading accounts held with their suppliers never resulted in the transfer or delivery of any commodities, and that "defendants Jager and Martin failed to show how they could transfer title to the metals to the retail customers when the Hunter Wise Defendants neither had possession not title to the metals."
The agreements with the suppliers also failed to "specify the segregation or allocation status of the medals; the identity of the commodities were unascertainable," according to the ruling.
"Defendants never possessed, owned or held title to the commodities detailed in the transfer of commodity document," Middlebrooks wrote. "Therefore, titles could not have passed from them to the retail customers, even though documents stated otherwise."
Though defendants argued they had received confirmation that they purchased enough metals to match their liabilities, Middlebrooks said that third-party confirmation of the assets and liabilities of the defendants on paper "does not mean that the Hunter Wise Defendants actually held the title to or possession of the metals they claimed."
"An agreement or promise to pay a supplier at a future date for title and identification of the commodities is not the same as holding title to those commodities," he said. "The parties agree that the agreements Defendants entered into for the commodities transactions purported to confirm actual deliver[y]. Defendants Jager and Martin, however, fail to rebut the CFTC's supported arguments that defendants' precious metals transactions with retail customers did not result in actual delivery as required by Section 4(a) once these retail commodities transactions are reviewed closely."
After finding the individual defendants control the defendant businesses engaged in these transactions, and that the businesses operated as "a common enterprise" as the scheme was carried out, Middlebrooks concluded that the failure to register with the CFTC as futures commission merchants to engage in the transactions constituted a violation of Section 4(d) of the Commodity Exchange Act.
Middlebrooks also declined to void a section of Title 7 for vagueness.
"The statute defined to whom and to what types of transactions this sections applies and, therefore, over whom and over what the CFTC has jurisdiction," he wrote. "Furthermore, the act provides the CFTC with the conditions that must be present before it can enforce Section 2(c)(2)(D). Men of common intelligence would understand the statute's meaning and would not differ as to its application. Therefore, I find Section 2(c)(2)(D)(iii) is not facially vague."