The word “Bucket Shop” gets thrown around a lot in the retail forex business. But what exactly is a bucket shop?
Online Trading Resource for Stocks Futures and Forex describes a Bucket Shop as follows:
Describes a brokerage facility that books (takes the opposite side of) retail customer orders without actually having them executed on an exchange. The term comes from the practice of placing an order in a bucket rather than transmitting it to an exchange as a broker would normally do. Bucket Shops were popular during the 1920’s at a time when many stocks traded at over $100 a share and the average salary was $1,000 a year, making investment in the stock market too expensive for most people. The most sophisticated bucket shops, known as bucketeers, were hard to distinguish from legitimate brokerage offices, having their own ticker tapes and chalkboards. The bucketeers would often take opposite positions in the market to ensure that their customers could not win.
Forex bucket shops essentially do the same thing and simply pocket the money right up front without even bothering to go into the market to offset customer trades. Instead, the firm simply creates dummy statements showing customers they are making money and that as a result they should send in more money. Then after they have milked the customer enough they’ll send out another dummy statement showing them they have lost it all. Or they just fold up shop and run like the wind.
Such were the sales practices of such prominent dead forex firms walking as Forward Forex, Trend Commodities Limited, Worldwide Clearing and FX Option1 Inc. Add to this list another con-man, and newly baptized convict, Udo Rotmistrenko. Udo was a licensed Commodity Trading Advisor registered with the CFTC. The NFA granted him his license in March of 2000:
BASIC Details
Udo was the sole proprietor of Rittmeister Capital Management and his specialty was managed forex funds. But by June 2, 2004, the only thing he would be managing was how to find enough spare change to make his lone phone call from prison. For on that day he would be arrested by the feds for forex fraud. The details of Udo’s case can be found here: http://www.usdoj.gov/usao/nys/pressreleases/June07/rotmistrenkosentencingpr.pdf
For the condensed version here is essentially what Udo did; courtesy of the Fraud Digest: Fraud Digest - Online Fraud Magazine
On March 31, 2005, Rotmistrenko pled guilty to twelve counts of wire fraud and twelve counts of mail fraud. During his guilty plea, Rotmistrenko admitted that, from 1999 to 2003, as then-CEO and president of Rittmeister Capital Management in New York City, he fraudulently induced investors to wire and mail him funds by giving the investors inaccurate information regarding his company�s profit history. Rotmistrenko did so by giving the investors account statements that falsely inflated the profits the investors were earning and by using investor funds to pay his personal expenses without disclosing those expenditures to the investors. According to the Indictment, Rittmeister held itself out to the investing public as a brokerage firm that managed investments for retail customers in the foreign currency exchange (�forex�) market.
In order to induce potential customers to invest funds through Rittmeister, Rotmistrenko and Rittmeister sales representatives made false and fraudulent representations regarding Rittmeister�s trading history in the forex market. Specifically, they falsely represented to retail customers that Rittmeister historically generated large profits, as high as in excess of 43 percent per year, for its customers through forex trading. In fact, Rittmeister generated little or no profits for Rittmeister�s customers through trading in the forex market. Furthermore, sales representatives told retail customers that Rittmeister�s customer investment funds were used to invest in the forex market, when, in fact, the company failed to transfer a large majority of investor funds to any forex trading firm for the purpose of executing forex trades. Rather, a substantial amount of investor funds were diverted to pay Rotmistrenko’s personal expenses, and to pay Rittmeister�s operating expenses. To hide the fact that a large portion of the customer funds Rittmeister received was being diverted to pay Rittmeister�s operating expenses and for Rotmistrenko’s personal benefit, Rotmistrenko created and sent clients false and fraudulent account statements that represented trading activity and profits and/or losses incurred on trades in client accounts. In truth, Rittmeister failed to generate any trading profits for the customer accounts. Rotmistrenko diverted customer funds from Rittmeister�s bank accounts in various ways, including the following: (i) approximately $319,000 was withdrawn in cash; (ii) approximately $146,900 was paid to an associate; (iii) approximately $24,900 in checks was made payable to Rotmistrenko; (iv) in excess of $30,000 was used for car payments and other car expenses; (v) approximately $38,000 was used to pay college tuition for Rotmistrenko’s wife; and (vi) funds were used to pay for numerous hotel, motel and restaurant bills, wedding expenses, and gym memberships.
In fact, Udo is quite the sportsman. Not only did he use customer funds to bankroll his trips to the gym but he used them to pay for scuba diving lessons too! A simple googling of old Udo shows him to be a member of the “2001 Rec Scuba Rogues” Rec Scuba Rogues 2001. You can see his mugshot under the name “chaoswolf.” Wonder how many pips all that scuba gear cost his investors? And boy could I spend hours and hours coming up with appropriate metaphors for Udo’s membership in a club titled “Scuba Rogues…”
But alas Udo won’t be breaking out his wetsuit anytime soon because on June 17, 2007, Udo was sentenced to 51 months in prison by Judge Deborah Batts. Ouch. Rarely do forex fraud criminals get such harsh prison sentences. What gives? Well, this was not your typical clumsy regulatory action. This case was initiated and prosecuted by the United States Attorney of the Southern District of New York. This was the office that gave America Rudy Giuliani. In short, these guys don’t mess around. And that is an important thing to remember because prior to Udo’s being arrested he had been given a clean bill of health by the NFA. What does that mean? It means that doing a background check is no guarantee that you’re dealing with a legit firm.
In short, there is only one way to avoid the bucket shops and that is to avoid any and all unregistered firms and to avoid anyone that isn’t showing a healthy balance sheet. Am I saying that firms with just a couple million dollar are bucket shops? Of course not. But since we know forex fraud is primarily taking place with smaller firms why take the chance? In short, until the industry gets flushed by regulators investors should be wary of any firm that isn’t showing a healthy balance sheet else you stand a chance of being eaten alive by the Chaoswolves of the world.