Commodity Futures Trading Comm'n v. WorldWideMarkets, Ltd.

• Docket Number: Civ. 21-20715 (KM) (LDW)
• Decision Date: 18 August 2022
• Parties: COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. WORLDWIDEMARKETS, LTD; TAB NETWORKS, INC; THOMAS PLAUT; and ARTHUR DEMBRO, Defendants.
• Court: U.S. District Court — District of New Jersey

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COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. WORLDWIDEMARKETS, LTD; TAB NETWORKS, INC; THOMAS PLAUT; and ARTHUR DEMBRO, Defendants.

Civ. No. 21-20715 (KM) (LDW)

United States District Court, D. New Jersey

August 18, 2022

OPINION

KEVIN MCNULTY, UNITED STATES DISTRICT JUDGE

Plaintiff Commodity Futures Trading Commission (“Commission”) brings the instant action against Defendants WorldWideMarkets, Ltd. (“WWM”), TAB Networks, Inc. (“TAB”), Thomas Plaut (“Plaut”), and Arthur Dembro (“Dembro”) (together, the “Defendants”) seeking civil penalties injunctive, and other equitable relief, for violations of the Commodity Exchange Act (“CEA”), 7 U.S.C. § 1 et seq., and its implementing regulations.

Now before the Court is Dembro's motion (DE 24) to dismiss the Complaint (DE 1) for failure to state a claim pursuant to Fed. R. Civ. P.12(b)(6),^[1] in which WWM, Plaut, and TAB join. (See DE 28, 29.) For the reasons stated herein, Dembro's motion is GRANTED in part and DENIED in part.^[2]

I. SUMMARY

A. Factual Allegations

This action concerns an allegedly fraudulent scheme perpetrated by the Defendants, using WWM as a vehicle to defraud thousands of its customers. The Commission alleges that WWM and TAB, at the direction of Plaut and with the substantial assistance of Dembro, (1) misappropriated over $4 million in WWM customer funds and (2) falsely misrepresented to WWM customers that their funds would be held in segregated accounts.

1. Organization of WWM and TAB

Between May 2011 through at least September 2018 (the “Relevant Period”), WWM, a British Virgin Islands (“BVI”) entity owned by TAB, operated as a retail foreign exchange (“forex”) dealer^[3] in Woodcliff Lake, New Jersey. (Compl. ¶¶ 1, 13, 37.) Specifically, WWM served as the counterparty to leveraged forex transactions with retail customers. (Id. ¶ 37.) WWM executed these transactions on a principal basis, meaning that WWM was the buyer for all customer sales and the seller for all customer purchases. (Id. ¶ 39; see also Opp. at 4.)

The Commission alleges that Plaut, as owner and CEO of WWM and TAB, “controlled all aspects of [the companies'] business activities.” (Compl. at ¶¶ 1, 15, 26.) Dembro served as CFO of WWM and TAB, in which capacity he allegedly (1) “performed accounting and financial reporting functions for the companies” and (2) was “aware of all aspects of the companies' financial dealings.” (Id. ¶¶ 6, 16, 90.)

In January 2011, WWM entered into a technology agreement (the “Technology Agreement”) with its corporate parent, TAB. (Id. ¶ 27.) Pursuant to that Technology Agreement, TAB maintained a public-facing website that included information about WWM's management, regulatory licenses and compliance, and the purported benefits of trading with WWM. (Id. ¶ 40.) The Commission alleges that although WWM and TAB were nominally separate companies, there was minimal functional difference between them, and they operated as a common enterprise. (Id. ¶ 28.) For example:

• WWM and TAB shared an office in Woodcliff Lake, New Jersey;

• TAB employees performed work for WWM's benefit;

• WWM and TAB shared technology resources, such as the same server (located in New Jersey) and software development and IT resources;

• most TAB employees had both “@tabnetworks.com” and “@worldwidemarkets.com” email addresses;

• many individuals on WWM's management team received paychecks from TAB;

• WWM financial accounting records reflected financial information related to TAB;

• WWM routinely transferred funds to TAB's bank account, despite the two companies maintaining separate accounts;

• TAB used funds from WWM bank accounts to pay its operating expenses, employee salaries, vendor invoices, and cash payments to Plaut.

(Id.)

2. WWM's Business Model and Operations

To open an account with WWM, a prospective customer was required to (1) complete a customer account agreement (the “Account Agreement”) from WWM's website and (2) submit it electronically to WWM. (Id. ¶ 41.) The Account Agreement specified the terms between WWM and its customers; and according to the Complaint, did not materially change during the Relevant Period. (Id.)

Once successful in opening an account, customers downloaded WWM's “front-end” software application-i.e., trading platform-from WWM's website and installed it on either their computer or a mobile device. (Id. at ¶ 42.) WWM's trading platform allowed customers to view prices circulated by WWM from its New Jersey-based servers, submit orders to WWM, and receive trade confirmations from WWM after the transactions were executed. (Id. at 42, 43.) If a customer wanted to consummate a trade, the customer sent an electronic order to WWM's servers, located in New Jersey (Id. ¶ 44); if the price term of the customer's order was sufficiently close to WWM's current pricing, WWM executed the trade in New Jersey and sent an electronic trade confirmation back to the customer. (Id. ¶ 45.)

3. WWM's Alleged Misappropriation of Customer Funds

WWM's primary source of revenue was “spread” revenue. (Id. ¶ 49.)^[4]Although WWM categorized this spread revenue as trading profit-and-loss (“PnL”), it did not maintain a market-neutral book by engaging in hedging activity; consequently, WWM's PnL included both spread revenue and actual profits and losses related to its customers' trading activity. (Id.) The Commission claims that WWM was never profitable, and that from 2012 through 2016, WWM's expenses exceeded its revenues by over $7 million. (Id. ¶ 50.) In April 2017, WWM stopped allowing customers to withdraw funds from their accounts. (Id. ¶¶ 4, 64, 67.)

According to the Commission, WWM misappropriated customer funds to pay for its operating expenses. During the Relevant Period, WWM purportedly maintained at least five foreign bank accounts located in the Cayman Islands, BVI, Mauritius, and Jersey. (Id. at ¶ 53.) To fund their customer accounts, WWM customers transferred money to one or more of these foreign accounts. (Id. ¶ 54.) The Complaint alleges that every month, beginning in March 2012, WWM transferred customer funds from its foreign bank accounts to TAB's bank account located in the United States.^[5] Between the start of the Relevant Period and December 2012, deposits into TAB's bank account consisted primarily of (1) capital contributions from TAB shareholders and (2) transfers from WWM. (Id. ¶ 56.) After December 2012, however, the Commission alleges that “substantially all deposits into TAB's bank account were composed ... of transfers from WWM's bank accounts.” (Id. ¶ 57.)

In 2015, pursuant to a mandate by the BVI Financial Services Commission (“FSC”), WWM hired an external accounting firm to perform a certified financial audit (the “2015 Audit”). (Id. ¶ 59.)^[6] While the 2015 Audit stated that from January 1, 2012 through December 21, 2015, WWM made over $3 million in “net advances to TAB,” the audit allegedly did not disclose that these “net advances” were made up of WWM customer funds. (Id. ¶¶ 59, 61.) Dembro purportedly served as WWM's point of contact for the external auditor and drafted key portions of the allegedly misleading 2015 Audit. (Id. ¶ 60.)

Finally, in 2014, WWM created an affiliate in the United Kingdom named WorldWide Markets Online Trading (“WWMOT”), which was registered with the United Kingdom's Financial Conduct Authority (“FCA”). (Id. ¶ 72.) WWMOT's sole business was to execute forex transactions with retail customers-albeit on a smaller scale than WWM, having, at most, twenty customers. (Id.) Plaut owned and controlled WWMOT, while Dembro served as the “compliance officer” on the board. (Id.) The Commission claims that after June 2017, WWM customer deposits accounted for over 99% of deposits into WWMOT's bank account. (Id. ¶ 73.) Further, in connection with WWMOT “winding down” its operations in early 2018, Dembro allegedly directed WWMOT's use of WWM customer funds to close out WWMOT customer accounts. (Id. ¶¶ 74-75.)

4. WWM's Alleged Misrepresentations to Customers

The Commission claims that “at all times during the Relevant Period,” WWM represented to customers and introducing brokers (“IBs”) that WWM customer funds were safely held in segregated bank accounts. (Id. ¶ 76.) These statements were made to every WWM customer who opened a forex trading account and appeared in several locations, including:

• WWM's Account Agreement: “We will hold Customer funds on the Customer's behalf in a regulated bank account. This account will be segregated from [WWM's] money and assets, in accordance with [BVI FSC] guidelines”;

• WWM's website: “[WWM] is licensed with and regulated by the [BVI FSC] .... The regulations of the BVI FSC require that customer assets are identified, accounted for, and appropriately segregated”;

• a WWM marketing presentation used to recruit IBs: WWM “ensure[d] the highest level of security for its customers' funds” and represented that WWM was a “[f]ully regulated firm and highly accountable management mean[t] safety of funds”; and

• oral representations by Plaut to WWM employees, IBs, and prospective customers that WWM held customer funds in segregated accounts.

(Id.) Moreover, WWM sales employees allegedly “asked Dembro to provide information concerning the safety of customer funds and the use ... of segregated accounts to hold customer assets.” (Id. ¶ 82.) In response, Dembro allegedly directed these employees to insert language into WWM promotional materials, stating that “customer assets must be kept in segregated accounts, identified to individual customers, on deposit at a BVI regulator approved bank and disclosed to the bank as customer funds.” (Id. ¶¶ 83-84.)

B. Procedural Background

The Commission filed the Complaint (DE 1) against the Defendants on December 27, 2021. Because...