Commodity Futures Trading Comm'n v. Caniff

• Decision Date: 27 February 2020
• Docket Number: Case No. 19-cv-2935
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. WILLIAM THOMAS CANIFF; ARIE BOS; BERKLEY CAPITAL MANAGEMENT, LLC; BBOT 1, LP; and BERKLEY II, L.P., Defendants.
• Court: U.S. District Court — Northern District of Illinois

COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. WILLIAM THOMAS CANIFF; ARIE BOS;BERKLEY CAPITAL MANAGEMENT, LLC; BBOT 1, LP; andBERKLEY II, L.P., Defendants.

Case No. 19-cv-2935

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

February 27, 2020

Judge Robert M. Dow, Jr.

MEMORANDUM OPINION AND ORDER

The Commodity Futures Trading Commission ("CFTC") brings suit against Defendants William Thomas Caniff ("Caniff"), Arie Bos ("Bos"), Berkley Capital Management, LLC ("BCM"), BBOT 1, LP ("BBOT"), and Berkley II, LP ("Berkley II") for alleged violations of the Commodity Exchange Act ("CEA"). Currently before the Court is Defendant Bos's motion to dismiss pursuant to Rules 12(b)(2), 12(b)(5), and 12(b)(6) of the Federal Rules of Civil Procedure [39]. For the following reasons, Bos's motion to dismiss [39] is denied. This case is set for status hearing on March 9, 2020 at 9:30 a.m.

I. Background

The CFTC is an independent federal regulatory agency charged with the administration and enforcement of the CEA and regulations promulgated under the statute. In this suit, the CFTC alleges that Defendants engaged in a scheme to defraud investors in pool accounts to trade "binary options." Binary options involve a variety of underlying assets, including currency pairs (e.g., EUR/USD); commodities such as oil, wheat, coffee, and gold; equity indices (e.g., the Dow Jones Industrial Index); and stocks (e.g., Coke, Google, etc.). Unlike other types of options, a binary option does not give the holder the right to purchase or sell the underlying asset. Instead, binary options are "cash settled." When the binary option expires, if the customer has correctly predicted the asset's movement, the customer is "in the money" and entitled to a payout of a pre-determined amount of money. There are three designated contract markets currently authorized to offer binary options that are commodity options transactions to retail customers in the United States: Cantor Exchange LP, Chicago Mercantile Exchange, Inc., and the North American Derivatives Exchange, Inc. ("NADEX"). This case involves transactions on NADEX, which is located in Chicago, Illinois.

Defendant Caniff is a resident of Ohio. He was convicted of several felony offenses for financial crimes committed in the 1990s. When Caniff opened a binary options trading account with NADEX in June 2016, he falsely represented that he had never been convicted of any felonies, fraudulent conversion, forgery, or theft. Defendant Bos is a resident of the Netherlands.

In January 2016, Caniff and Bos formed an "investment and trading technology firm" called BCM to offer individual participants the opportunity to trade binary options with pools of other participants. [1] at 6. BCM became the general partner of a new investment pool fund called BBOT, which was set up as a limited partnership for this pool of participants. Caniff was the designated trader for the fund and made all financial decisions for BCM, BBOT, and Berkley II. Bos was not a signatory to any of the bank accounts used by the fund; however, Bos had online access to view the BBOT, Berkeley II and BCM bank account statements.

Bos was responsible for soliciting and reporting to participants. Bos initially solicited participants by approaching family members and friends in the Netherlands. Bos distributed an information packet to prospective participants that described Caniff as having trading experiencedating back to 2004 with a "proven track record." [1] at 7. Bos instructed prospective participants to wire their funds to the pools' various bank accounts in the United States. From February 2016 through the present, at least 62 BCM participants, two of whom were U.S. customers, paid more than $4.8 million to fund investments to trade binary options through pools in the names of BBOT or Berkley II.

However, over the life of the account, Caniff sent only two payments to NADEX—$35,000 in June 2016 and $50,000 in June 2017, for a total of $85,000. Caniff allegedly misappropriated the remainder of participant funds by sending approximately $2.3 million to repay other participants and to pay Bos and himself between $1.1 and $1.2 million each in purported fees. At the time the complaint was filed, $2.5 million was owed to fund participants.

Throughout their partnership, Caniff sent Bos emails reflecting his purported daily trading activity at NADEX, some of which included purported screen shots showing the NADEX account balance for the BCM pools. According to the complaint and as detailed below, Caniff's emails reflected "implausible" rates of return and consistently profitable trading. [1] at 9.

Bos combined the NADEX account value information that he received from Caniff with the information Bos obtained from his online access to the pools' bank accounts to calculate the pools' overall profitability and individual participants' returns. Bos inserted his profit calculations into statements sent to participants and into promotional packets of information that he prepared and distributed to prospective participants without any independent verification of these profits. For example, Bos told prospective participants:

(a) For the period January 2016 through May 2016, BCM reported monthly net return on investments ("ROIs") of 3.9%, 17.3%, 23%, 11.6% and 17.3%;

(b) BCM's fund grew to a size of $5,500,000 by the end of calendar year 2016;

(c) BCM's average monthly ROI for 2016 was 10%;(d) Berkley II had an ROI of 14.4% in April 2018; and

(e) Berkley II had an overall average monthly return on invested capital of 13.9% between August 2017 and April 2018.

[1] at 9-10.

The complaint alleges that all of these representations were false because:

(a) BCM's reported monthly profits for the period from January to May 2016 were false in that BBOT's account at NADEX was not opened and funded until June 29, 2016;

(b) BCM's fund did not have a value of $5,5000,000 by the end of 2016; rather, the BBOT account value combined with balances in BBOT's bank account was $277,961.89 at December 31, 2016;

(c) BCM did not average a 10% ROI for 2016; rather the average ROI for 2016 was a negative, specifically -0.88%;

(d) Berkley II did not have an ROI of 14.4% in April 2018 because BCM never opened an account at NADEX for Berkley II and, thus, there were no profits earned for this pool; and

(e) Berkley II did not have an overall average monthly return on invested capital of 13.9% between August 2017 and April 2018 because BCM never opened an account at NADEX for Berkley II and, thus, there were no profits earned for this pool.

[1] at 10.

The complaint further alleges that Bos sent false account statements to at least one participant. Participant M.Y. is a U.S. citizen who invested $100,000 with BBOT in January 2017. From January 2017 through July 2018, Bos prepared and sent M.Y. multiple "Individual Account Statements" that allegedly falsely reported profits or neglected to report losses incurred in her account at BBOT, and never reported a losing month of trading. For example, an account statement dated August 10, 2018 indicated that participant M.Y.'s $100,000 investment had increased to $146,035.21 by July 31, 2018. In fact, between January 2017 and July 2018, theBBOT pool actually lost a net total of $40,569. Similarly, in the months of August and September 2017, Bos reported a 0% ROI to M.Y. when, in fact, the BBOT pool actually had an ROI for those months of -31.06% and -23.13%.

In early 2017, Bos made several requests for Caniff to distribute funds from the NADEX account, which Caniff claimed contained over $5 million. Caniff informed Bos that he was not able to withdraw funds from NADEX and indicated that NADEX was wrongfully holding the pools' funds. In May 2017, Bos informed M.Y. that BBOT had suspended trading because of problems that had been encountered with NADEX. Although no fees were being earned from trading during this time, Bos knew that funds continued to be withdrawn from the BBOT pool bank account during this period, and that the funds were being used to pay fees to Caniff and himself and to repay some investors. Nonetheless, Bos failed to report those expenses as deductions from the participant's account value and continued to report unchanged balances to M.Y. on her account statement.

In June 2017, Caniff told Bos that he had initiated a lawsuit in Chicago on behalf of BBOT against NADEX's bank claiming that NADEX was illegally withholding BBOT's funds. In reality, Caniff never filed a lawsuit. Rather, Caniff sent Bos fabricated pleadings and forged correspondence from an attorney purportedly representing BBOT in the dispute with NADEX. After being informed of the purported lawsuit, Bos continued to solicit individuals to invest new monies to be sent to NADEX for trading.

More than a year later, in September 2018, Bos contacted NADEX directly and learned that the balance of the trading account was only $6,824.00. Bos eventually told participant M.Y. that Caniff had reported incorrect NADEX trading results and that the total remaining participantfunds were significantly less than participants' overall deposits. Participant M.Y. lost her entire investment of $100,000.

On February 1, 2019, Bos filed suit against Caniff in Illinois state court (Cook County Circuit Court Case No. 2019 CH 01264), alleging that Caniff had engaged in fraud and seeking to prevent a bank's disbursement of $116,153.25 on deposit in accounts it held in the names of BCM, BBOT and Berkley II. On February 11, 2019, the Circuit Court entered a TRO freezing the accounts pending further order of the court. However, on April 24, 2019, the court issued an order vacating the asset freeze.

The complaint alleges that Bos "willfully or recklessly ignored red flags that should have prompted him to seek some corroboration of BCM's incredible pool returns at NADEX," and committed fraud by failing to seek corroboration and by "distributing the absurd profit figures...