Commodity Futures Trad. v. Wall Street Underground

• Decision Date: 18 July 2003
• Docket Number: No. CIV. A. 03-2193-CM.,CIV. A. 03-2193-CM.
• Citation: 281 F.Supp.2d 1260
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. WALL STREET UNDERGROUND, INC., et al., Defendants.
• Court: U.S. District Court — District of Kansas

281 F.Supp.2d 1260

COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. WALL STREET UNDERGROUND, INC., et al., Defendants.

No. CIV. A. 03-2193-CM.

United States District Court, D. Kansas.

July 18, 2003.

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Melanie D. Caro, Office of United States Attorney, Kansas City, KS, Rocell J. Cyrus, Clifford C. Histed, Rosemary Hollinger, Commodity Futures Trading Commission, Chicago, IL, for Plaintiff.

Anthony J. Durone, Nick Joseph Kurt, David L. Marcus, Berkowitz Stanton Brandt Williams & Shaw, LLP-KC, Kansas City, MO, for Defendants.

MEMORANDUM AND ORDER

MURGUIA, District Judge.

This matter is before the court on plaintiff Commodities and Futures Trading Commission's Motion for a Preliminary Injunction (Doc. 15) against the defendants to enjoin alleged violations of the Commodities Trading Act (the "Act"). For the reasons set forth below, plaintiff's motion is granted.

I. BACKGROUND

On April 22, 2003, the Commodity Futures Trading Commission filed a Complaint and a Motion for Preliminary Injunction. Plaintiff's complaint alleged that defendants Web Fulfillment Centre, Inc. and Frank Asaro, together with the other defendants, violated sections 4o (1)(A) and 4o (1)(B) of the Commodity Exchange Act, 7 U.S.C. § 6o (1)(A) and 6o (1)(B). On April 23, 2003, this court entered an Ex Parte Statutory Restraining Order ("SRO").

The court held a hearing on June 26, 2003, to examine evidence regarding plaintiff's Motion for a Preliminary Injunction. After hearing the testimony and arguments from counsel for all parties, the court took this matter under advisement. The court makes the following findings of fact and conclusions of law.

II. FINDINGS OF FACT¹

A. The Parties

Defendant Wall Street Underground, Inc. (WSU) is a Delaware corporation. WSU has never been registered with plaintiff in any capacity. Defendant Web is a Delaware corporation. Defendant Web is located at 9003 W. 51st Street in Merriam, Kansas. Defendant Web acts as a customer service center for defendants Nicholas Guarino and WSU's customers; defendant WSU is defendant Web's sole client. Defendant Web has never been registered with plaintiff in any capacity.

Defendant Guarino resides in an unknown location. He was registered with plaintiff as a commodity trading advisor ("CTA") in 1985 and 1986. Defendant Guarino was also registered from 1984 to 1987 as an associated person through a gold and silver commodities firm of which he was the president and owner. Defendant Guarino is not currently registered with plaintiff in any capacity. In 1992, defendant Guarino was convicted of mail and wire fraud in connection with a scheme to sell gold and silver to the public. As a result, defendant Guarino was sentenced to 24 months imprisonment and was ordered to pay $1,250,678 in restitution to the clients whose funds he had commingled and misappropriated. To date, defendant Guarino has not satisfied the restitution order.

Defendant Asaro resides in Kansas City, Kansas, and has never been registered with plaintiff in any capacity. Defendant Asaro is the president and owner of defendant Web and, at one time, he was responsible for defendant Web's day-to-day operations. Defendant Asaro met defendant Guarino while they were bunkmates in prison.

Defendant Derek Abrahams previously resided in the Grand Cayman Islands and now resides in an unknown location. Defendant Abrahams has never been registered with plaintiff in any capacity. Defendant Abrahams is responsible for all financial operations of defendants WSU and Web.

B. Trading Systems and Promotional Materials

From at least January 1999 and continuing through the present ("the relevant time period"), defendants Abrahams, Guarino, and WSU have promoted and sold to the public several systems to be used for trading commodity futures and commodity options. They have overstated the profit potential of their trading systems, failed to warn of the risks inherent in trading commodity futures and commodity options, omitted facts about Guarino's criminal background and history of fraudulent conduct, and made false money-back guarantees. In addition, defendants WSU, Abrahams, Web, Guarino, and Asaro have participated in business practices that worked to deny customers the rebates to which they were entitled.

Throughout the relevant time period, defendants Abrahams, Guarino and WSU ("the Wall Street defendants") have engaged in the business of providing advice to clients as to the value or advisability of trading commodity futures and commodity options. They offer to clients and prospective clients a variety of trading systems under various names, including the Samurai Forecaster, Nick's Guerilla Trading Hotline and the Electronic Wall Street Underground ("eWSU") (collectively, the "trading systems"). In addition to the various trading systems, the Wall Street defendants sell a bi-monthly Wall Street Underground newsletter ("Letter"). The bimonthly Letter sells for approximately $100 per one-year subscription and includes recommendations on trading a variety of financial instruments, including commodity futures and commodity options. The Letter also promotes the sale of the trading systems.

The Letter and trading systems make specific buy and sell recommendations on commodity futures and commodity options, including gold futures, Japanese Yen futures and S & P 500 Index futures. The Wall Street defendants generally sell their trading systems for $5,000 per one-year subscription. Clients who subscribe to the trading systems are notified of the trading signals via beeper or pager, fax, and through the Internet. The Wall Street defendants promote the sale of their trading systems in the Letter, through the U.S. mail to subscribers of the Letter and to others, and over the radio.

Defendant Guarino is the author of the Letter, the designer of the trading systems, and the author of the promotional material for the Letter and trading systems. At certain points during the relevant period, defendant Web acted as the internal sales and customer service department for the Wall Street defendants. At these times, defendant Web distributed the Letter and other promotional materials only when an existing client called the customer service office and requested the materials, and defendant Web's representatives addressed customer service issues and answered phone calls from existing clients.

Throughout the relevant time period, the Wall Street defendants and the WSU promotional materials misrepresented the profit potential that could be realized from the use of their trading systems, failed to adequately warn of the risks inherent in futures trading, and failed to state material facts concerning defendant Guarino's history of fraudulent conduct. For example, some promotions mailed to prospective clients from July 2002 through October 2002 contained the following false claims, among others:

You will need to hire a top-notch tax accountant to help you legally shelter the incredible money you will be making ... Can you see going from trying to figure out how to pay all your bills to figuring out how to spend your millions? ... One million dollars in profits, guaranteed.... I have a strategy to turn every $10,000 invested in gold into $124,000 in just a few months ... My detailed, specific strategies can turn every $10,000 invested in the Dow into $2.5 million in 60-90 days ... My insider Yen trading techniques helped eWSU subscribers turn $5,000 Yen contracts into $3.6 million in just 14 months ... I haven't had a single losing trade recommendation this year. Not One.

(emphasis in original).

No WSU publication, and no employee of any of the defendants, informed prospective customers about defendant Guarino's previous censure for mishandling and commingling customer funds and for using deceptive and misleading promotional materials, nor did any employee inform clients that defendant Guarino had been convicted of mail and wire fraud in connection with his fraudulent offer to sell gold and silver to the public.

C. False Money-Back Guarantees

During the relevant time period, the advertising in the Letter frequently included money-back guarantees, variously promising the return of all, double or a prorated part of the subscription price paid by the prospective clients if they were not fully satisfied with the performance of the trading systems and/or its trading recommendations. The defendants offered these guarantees by making various claims. For example, "A one-year subscription is $5,000. It comes with my full money-back guarantee. Either you make $100,000 in the next twelve months following the recommendations in the Samurai Forecaster or I'll refund your subscription fee ... Either you make a million dollars or you get a cashier's check for $10,000." The money-back guarantees were false because defendants systematically ignored, denied, discouraged or unreasonably delayed honoring clients' requests for refunds. The Wall Street defendants knew the guarantees to be false or had no reasonable basis to believe they would honor the guarantees at the time.

D. Rebate Process and Denials

During the relevant time period, defendant Web was one of the entities responsible for explaining to clients the process for obtaining refunds. Defendant Web was also one of the entities responsible for processing the refund requests and sending the requests to defendant WSU for approval. Defendant Web employees told several clients who contacted defendant Web requesting refunds before their one-year subscription ended to call back after the subscription period ended. When the clients later called back, they were told that their requests were too late. Clients who called defendant Web to inquire about their refunds were routinely rerouted to various extensions until disconnected. Defendants occasionally sent refund checks that were not honored by the bank due to insufficient funds. Defendants also...