Commodity Futures Trading Comm'n v. Long Leaf Trading Grp.
| Docket Number | 20 C 03758 |
| Decision Date | 27 July 2022 |
| Parties | Commodity Futures Trading Commission, Plaintiff, v. Long Leaf Trading Group, Inc., James A Donelson, Timothy M. Evans, Jeremy S. Ruth, and Andrew D. Nelson, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
The Commodity Futures Trading Commission filed suit against Long Leaf Trading Group and several of Long Leaf's principals and employees, alleging multiple counts of fraud and other violations of the Commodity Exchange Act, 7 u.s.C §§ 126, and accompanying Commission regulations, 17 C.F.R. §§ 1-190. Now before the Court are the CFTC's motions for partial summary judgment on its claims against Long Leaf, James Donelson, and Jeremy Ruth.[1] For the reasons set forth below, the CFTC's motions are granted.
Background[2]
The CFTC is an independent federal regulatory agency tasked with administering and enforcing the Commodity Exchange Act and accompanying regulations. Long Leaf is an Illinois corporation registered with the National Futures Association (“NFA”) as an “introducing broker.” R. 96-1 ¶ 3. James Donelson was Long Leaf's CEO for a portion of the relevant time, while Jeremy Ruth was a Long Leaf employee for a separate portion.
An introducing broker, or “IB,” cannot place orders on a designated contract market. Instead, an IB introduces its customers to a futures commission merchant (“FCM”). Customers then open an account for trading on a market. R. 96-1 ¶ 10. One method by which an IB earns revenue is through commissions when a customer places a trade (or when the IB places a trade on the customer's behalf) in an account with the FCM. R. 96-1 ¶ 11. During the relevant time, Long Leaf introduced customers to FCMs and received commissions for orders executed in those customers' accounts in this manner. R 96-1 ¶¶ 13, 21. In contrast to an IB, a commodity trading advisor, or “CTA,” acts as a type of financial advisor for clients, providing advice (for compensation or profit) about the buying or selling of futures contracts or options. A CTA can be a person or an entity. Long Leaf has never been registered as a CTA. R. 96-1 ¶ 3. An individual who acts as a “salesperson” for a firm (be it an IB, a CTA, or other category of industry player), soliciting customers or orders, is known as an “Associated Person” of the firm, or “AP.”
The CFTC's claims addressed in this opinion can be broken into two main categories. The first set of claims concerns alleged fraud perpetrated by the defendants. In general, the CFTC accuses Long Leaf and its agents of defrauding customers with misleading information about profit potential in order to solicit trades and generate commissions for profit. In particular, the CFTC alleges that Long Leaf failed to tell customers that nearly all its clients lost money, and painted an inaccurately rosy picture of the likelihood customers would see positive returns on their investments. The second set of claims is premised on the underlying allegation that while Long Leaf was registered as an IB, it was in fact operating as an unregistered CTA, and that certain Long Leaf employees were themselves acting as CTAs and/or APs in violation of certain applicable regulations governing registration and disclosures to customers.
During the relevant time (June 2015 to December 2019), Long Leaf recommended trades to customers as part of a “trading program” it developed known as the “Time Means Money” or “TMM” program. R. 79-1 ¶ 15; R. 96-1 ¶ 14; R. 97 ¶ 7. Long Leaf typically provided four trade recommendations a month to customers who agreed to participate in TMM. R. 96-1 ¶ 15. At least some of those recommendations involved “out-of-the-money” options on futures contracts.[3] R. 96-1 ¶ 16; R. 97 ¶ 8. The trading structure (meaning the collection of calls and puts traded together) was the same for each customer who received these recommendations, though there could be variance among the numbers of contracts that were recommended. R. 96-1 ¶ 17; R. 97 ¶ 9. For example, customers with greater equity (i.e. money in their accounts) were advised to trade more contracts, while customers with less equity were advised to trade fewer. R. 79-1 ¶ 19.
Long Leaf's APs typically provided recommendations to Long Leaf's TMM customers over the phone or by email. R. 96-1 ¶ 19; R. 97 ¶ 10. Long Leaf APs instructed customers to respond “yes” in a text or email to accept the recommended trades. R. 96-1 ¶ 19; R. 97 ¶ 11. Long Leaf would then forward the customer orders to its FCM, which would place the orders on the exchange for execution. R. 96-1 ¶ 20; R. 97 ¶ 12. Approximately 80% of Long Leaf's customers participated in TMM. R. 961 ¶ 23. Those customers accepted Long Leaf's trading recommendations about 80% of the time. R. 96-1 ¶ 24.
As the CFTC describes things, TMM was a disastrous program for Long Leaf's customers, who lost millions of dollars trading with the firm using the program. From June 2015 to December 2019, substantially all Long Leaf customers participating in TMM lost money. R. 79-1 ¶ 33. TMM participant losses during this period totaled $5,767,145.[4] R. 79-1 ¶ 32. During this same time, Long Leaf received a total of $4,010,994 in commission payments for accounts participating in TMM. R. 79-1 ¶ 34.
Long Leaf's CEO prior to December 2017, Timothy Evans, was aware of customer losses from TMM. He received customer account statements showing losses, as well as complaints from customers about their account performance. R. 79-1 ¶ 35. Other Long Leaf APs received similar information regarding customer losses. R. 791 ¶ 36. However, customers were not informed about these losses. R. 79-1 ¶ 41. Evans advised Long Leaf's AP's that they should not provide information about TMM's track record of performance, and that if customers requested such information, they should tell them firm policy did not allow Long Leaf to provide it. R. 79-1 ¶ 42.
Donelson became Long Leaf's CEO in December 2017. As CEO, he was a principal of Long Leaf and possessed the power to direct its management and policies. R. 96-1 ¶ 4. He first registered as a Long Leaf AP in June 2018, and he remained registered through December 2019. R. 96-1 ¶ 5; R. 79-1 ¶ 6.
Substantially all Long Leaf customers who participated in TMM lost money during Donelson's tenure. R. 96-1 ¶ 27. Those customers' losses while Donelson was CEO totaled $2,376,738. R. 96-1 ¶ 30. During that same period, Long Leaf collected $1,235,413 in commissions from its TMM customers. R. 96-1 ¶ 31.
Donelson began receiving daily customer account statements shortly after starting at Long Leaf. Those statements showed that substantially all TMM customers had been losing money. R. 96-1 ¶ 32. In January 2018, Donelson did a “fivemonth look-back” and found that customers were “consistently losing money.” R. 961 ¶ 33. He also monitored the performance of Long Leaf's recommended trades in real time. R. 96-1 ¶ 35. During his tenure, Donelson received emails and phone calls from customers complaining that their accounts had lost value. R. 96-1 ¶¶ 34, 36.
Long Leaf marketed the TMM program to the public through the firm's website, while its APs also solicited customers via oral and written presentations. R. 96-1 ¶¶ 38-39. During Donelson's tenure, the goal was for APs to make 200 calls to prospective customers per day. R. 96-1 ¶ 40. Donelson reviewed written communications and recorded calls between Long Leaf APs and customers monthly. R. 96-1 ¶¶ 41-42. Donelson was aware that Long Leaf's APs told prospective customers that “76.5 percent of options expired worthless,” which “increased the customer's statistical likelihood of success,” and that “one of Long Leaf's values was to create a strong return for customers.” R. 96-1 ¶¶ 43-44. At Donelson's direction, Long Leaf APs told customers that their “strategies” targeted a 6 to 12 percent annual return. R. 96-1 ¶¶ 45-46.
While Donelson was CEO, Long Leaf customers, including prospective customers, were not told that substantially all TMM customers lost money in the program. R. 96-1 ¶ 47. By the time of a sales meeting in February 2018, the results from TMM were “very bad.” R. 79-1 ¶ 45. Nonetheless, at the meeting, Donelson instructed APs not to provide customers with any information in response to questions about past performance, consistent with the policy that had existed under prior management. R. 96-1 ¶¶ 48-50. Donelson testified he was adopting a new trading model at this time. R. 96-1 ¶ 48. Long Leaf APs were provided with “rebuttal” scripts instructing them to respond to requests for past performance information with claims the “structure of the program” was “unmatched” and the reason it had been so successful. R. 79-1 ¶ 43. The policy against providing customers and prospective customers with information on past performance remained in place until June 2019. R. 96-1 ¶ 51.
On February 22, 2018, Donelson sent a letter to Long Leaf customers (through its APs) that stated he had “10 years of financial and business development experience at two of the largest proprietary trading companies.” R. 96-1 ¶ 53. However, Donelson in fact had never worked as a trader for any company, and his only prior experience in options trading was a single trade in 2016 in which he lost $30,000. R. 96-1 ¶¶ 55-56. Donelson never shared this information with Long Leaf customers or prospective customers. R. 96-1 ¶ 57. The customer letter also said Donelson was working with Scott Gecas (then a Long Leaf AP) on “redesigning the trading processes to provide improved returns.” R. 96-1 ¶ 53. Donelson and Gecas developed trading recommendations together...
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