Are Your Funds Safe? NFA to Shut down small forex fcms

Broker Discussion Forex Brokers
41

Another day, another small forex broker dealer shuttered. But before we start throwing dirt on the coffin of forward forex let’s take a peak inside and perform an autopsy on the cadaver. For some its old news but for those concerned about the fragile state of the forex industry I think a proper examination is in order. For starters, why and how did this firm get shut down by regulators?

Forward Forex was granted a NFA license in January of 2006.
BASIC Details

On June 18, 2007, the NFA began its examination of Forward Forex and met its CEO, Onelio Manuel Murias. Murias stuck around for an hour after the NFA arrived and then apparently slipped out the back door. He has not been seen since. That’s right. As soon as the regulators showed up at his door to look at his books the CEO of the company fled! It’s like an episode of “To Catch a Predator” where Chris Hansen breaks out the cameras and the perps go running. So the NFA goes over and speaks with another AP/Principal of the firm, Marshall David Wertheim. Wertheim then tells the NFA that he didn’t even know he was an Associated Person and just entered trades in the dealing room. And this guy was legally listed as an AP of the firm?! The rest of the audit consists of the NFA desperately trying to get basic book keeping information only to be told by clueless employees that “we know nothing.” Finally Murias’ lawyer followed up with the NFA and after a round of Monty Pythonesque negotiating conclude that Murias will not be responding to queries. Hard to believe right? See it all for yourself:
http://www.nfa.futures.org/BasicNet/CaseDocument.aspx?seqnum=1269

This goes right to the heart of what I have been saying these past few weeks. The National Futures Association has been inundated with this kind of activity amongst smaller, undercapitalized broker dealers (for the record Forward Forex had only $1.8 million according to the latest CFTC report.) When you don’t have any capital you skimp on things like, oh, well, accountants, compliance staff, Associated Persons… This company was a complete farce. But if you are an ordinary trader how can you really tell? Before this scandal broke they were registered with the NFA and were meeting their minimum capital requirements. I’m sure they had some smooth talking salesmen spinning stories about how well regulated they were. So from the outside it looked ok, right?

Wrong. This is why the NFA is dramatically raising capital requirements. They are tired of dealing with these flimsy, undercapitalized firms. The very fact that the NFA is raising capital requirements should tell you that they have very little confidence in firms with net capital below $5 million. This isn’t my opinion. This is the NFA’s own opinion. And if a regulator thinks that then the average trader needs to think long and hard before putting their hard earned money in the bank accounts of any of the dead forex firms walking.

One last point. It has been said by some that after the NFA decides to raise capital requirements that there will be an orderly process for unwinding the smaller brokers who can’t make the cut. Really? What’s to stop the Murias’ of the world from bolting with the company’s funds and fleeing the state or country once they know the jig is up? The NFA couldn’t even get the CEO of forward forex to answer some simple auditing questions and they’re going to be able to keep some of these bucket shops out there from fleeing with customer assets? This whole Capitalization issue has the potential to be a real train wreck. So do yourself a favor and keep a sharp eye out on the dead forex firms walking.

P.S. To those firms on the dead forex firms walking list just put up the money now. Why put your customers through the agony of not knowing whether or not your firm is going to make the cut?

42

Having put myself in a good mood chuckling over the antics of Forward Forex I have decided to exhume some other FX broker dealer corpses, all for the benefit of the general trading public of course. The point? To emphasize why regulators are so concerned about firms that are undercapitalized.

The term “Maggot Mile” (Forbes.com - Magazine Article) refers to a stretch of land running from Boca Raton to Miami, Florida. Within these geographic boundaries lies one of the greatest concentrations of wealth in the world (held by American retirees.) And preying on these often naive denizens are thousands upon thousands of crooks, criminals, crackpots and con-men. Forex happens to be the financial instrument of choice at the moment for these petty thieves in suits. Back in the 1980’s these same hucksters were peddling “oil lease scams” and in the 1990’s during the big stock boom they peddled bogus internet stocks. The actual financial instrument being sold is of little consequence to these crooks out on the hustings since the instruments can be interchanged with whatever the latest marketplace fad happens to be. The main point is that regardless of whatever the huckster happens to be selling it is guaranteed to make the victim millions of dollars. It’s the oldest sales pitch in the book.

Which brings us to our first slimy customer: Worldwide Commodity Corp in Ft. Lauderdale.
BASIC Details

The owner of Worldwide was one Steven Labell. A quick look at Labell’s resume should have sent the average investor screaming in terror. Labell has worked for one crooked operation after another. The firms Labell has been associated with showcase a rogue’s gallery of compliance outlaws:
BASIC Details

JCC INC (License Revoked in 1994 after massive commodities Fraud)
FSG International Inc (License forfeited in 2003 after being sanctioned for Fraud)
Financial Services Group Inc (License revoked in 1987 after massive commodities Fraud)
South Coast Commodities Inc (License revoked in 2007 after massive commodities Fraud)
Concorde Trading Group Inc (License revoked in 2002 after massive commodities Fraud)

While Labell was not guilty of every trespass at these firms clearly the apple didn’t fall far from the tree in this instance. Nor, surprisingly, did it stop Worldwide from getting their license which they got on November 24, 2003. Fresh with a license what did Steven Labell do as a newly minted master of the universe? Why he went around selling Forex options promising would be suckers that they couldn’t lose money betting on the war in Iraq� Add war profiteer to Labell’s dubious list of lifetime accomplishments. By June of 2004 the CFTC had hauled Labell and his cronies into court to answer for the fact that over 200 customers had lost nearly $1.8 million betting away their life savings.
CFTC Press Release 4944-04

So what was the court�s verdict? �The order holds Labell and WWF (Worldwide Forex) jointly and severally liable to pay WWF’s customers restitution in the following amounts: WWF $3.1 million and Labell $1.5 million. The order also imposes civil monetary penalties of $126,000 against Labell and $3.1 million against WWF. Finally, the order permanently prohibits defendants from engaging, directly or indirectly, in any commodity-related activity.�
CFTC Press Release, May 30, 2007

End of story right? Not in the U.S. domestic retail forex industry where the shysters rise from the grave like the flesh eating zombies from 28 days later. Nope, what really makes this story juicy is the fact that refugees from Worldwide apparently migrated over to another firm, a dead forex firm walking, by the name of Nations Investments LLC. ($1,699,000 in net capital).
BASIC Details

In fact, Nations even has the same address as did Worldwide!

1700 NW 64TH ST. SUITE 100
FT. LAUDERDALE, FL 33309

Anyone want to make odds on how long it will be before Nations gets shuttered? Perhaps the folks over at Intrade can add a dead forex firms expiration date contract to their prediction market. If so, I�m going long on Nations going under. And I ain�t worried about a margin call�

45

Yea, i lived in South florida for YEARS… Remember the MLM scams…whoa!
scams everywhere…Live in Orlando now…the fungus is creeping up here
Be careful in the Matrix, it’s not always what it seems :o

I am in FXCM right now, Demo trading…everyting is good maan…not sure what is going to happen when i GO LIVE…I will look into what you sent FAT TONY

Thanks for the info.

46

It’s an interesting concept. ECN model with commissions. I’ll give them a try in the future if they are able to make this new cash on hand requirement. Right now I’ll take a wait and see attitude.

47

Queue up the Queen music. The NFA has slapped another padlock on the front door of another teetering, undercapitalized forex firm. And the winner is… Cal Financial Corporation.
BASIC Case Summary

Who? Well, to be honest Cal Financial wasn’t exactly a dead forex firm walking (if only they were that lucky). Cal was more like a vegetable on life support- and the NFA finally decided to pull the plug. But with net capital of only $790,000 you wonder how they managed to even stay comatose all these years?

We pick up the story in the summer of 2004. Ah remember those days? A confident John Kerry was introducing a beaming John Edwards to the world and proclaiming the glory of having “good hair.” England was eliminated from the Euro Cup in heartbreaking fashion to Portugal. Usher was at the top of the pop charts and Catwoman was bombing at the box office. And in Thousand Oaks, California John Indelicato had a dream: to conquer mainland China and get rich gloriously.

Cal’s goal was “to develop its forex business overseas, and based on the level of success, determine whether it should take on U.S. customer accounts.” To that end Cal had two principals located in China where they recruited customers under the name of the “Shanghai Carewell Financial Planning Company.” But the going was tough. In a 2006 NFA audit Cal was cited for not collecting any proof of employment information for SCFP accounts. Cal responded that Chinese customers did not like to give out this kind of information so Cal instituted a don’t ask, don’t tell policy. Needless to say the NFA was not amused and to Cal’s credit they voluntary liquidated the accounts.

But in the end it wouldn’t matter anyway. On March 1, 2007, the NFA issued a complaint against Cal citing it for a variety of accounting violations that essentially finished them off.
http://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=1069

But what stands out in the complaint are the NFA’s accusations about the shoddiness of Cal’s bookkeeping. The NFA charges that Cal:

[B]a) failed to maintain, at all times, a record of customer deposits and withdrawals
b) include approximately $92,000 of its customer accounts balance in its ledger, resulting in an understatement of the amount of customer funds on deposit
c) maintain an equity run and/or similar report aggregating all balances for the firm’s forex customers, including cash, open positions, and realized profit/loss[/B]

What’s my point in listing all of this? It’s simple: running a forex broker dealer is not easy. It requires talented, trained professionals with accounting, compliance and administrative backgrounds. It can’t be done by Willie Loman alone. And the simple fact is if you are a small firm, with limited resources and limited capital on hand you just aren’t going to invest your money in these things when you also have to pay for servers, sales staff, office space, etc… So you try to do the administrative stuff on the cheap. Well, you can’t. John Indelicato couldn’t. And the NFA by raising its capital requirements is making it clear it doesn’t think anyone under $5 million can, else it wouldn’t be making this proposal in the first place.

In all fairness to Indelicato, he is no fraudster. By his own account he has been in the futures business for 35 years. He’s just not very good at it…

48

EFX is the forex-only division of MBTrading. EFX is the introducing broker for MB. If you like MB then EFX could be a good way to go since you may receive better customer service from them than if you went directly with MB.

When I looked at this webpage yesterday it made me put MB on my questionable list. I will do more research on them today since I don’t know this woman.

49

After reading through the first Forward Forex complaint it appears there is much I left out. The material is just too good to pass up so for those who want a second helping of forward forex follies, keep reading.

It appears that Forward Forex’s lightening quick CEO, Onelio Murias, is so slippery he evaded the NFA’s audit team the first time around because he isn’t even listed in the original complaint. The first complaint was issued on June 4th, 2007, and the charges then were leveled solely against Forward Forex and Marshall Wertheim (you’ll remember that Wertheim was the sad sack that got left holding the bag after Murias flew the coop in July.)
http://www.nfa.futures.org/BasicNet/CaseDocument.aspx?seqnum=1192

In any case the original complaint has some hair raising adventures. Nobody commits fraud like the folks at forward forex! Let’s skip to page two of the NFA complaint…

[B]"Forward Forex is located in Hollywood, Florida. It has been an NFA Member since January 2006 and began conducting customer business the following month. (Marshall) Wertheim is Forward Forex’s President and its only AP. (Curious statement from the NFA considering Murias is listed as being a principal of the firm dating back to 2005.)

  1. Forward Forex employed an unregistered entity named F8 Real Estate, Inc. (“F8”) to purportedly manage its finances and pay expenses. Forward Forex’s association with F8 is, at the very least, suspicious.

  2. F8 appears to be owned by Silvia Stambler, who has no registration history in the industry. However, her husband, Andrew Stern (“Stern”), has been for many years affiliated with a number of South Florida brokerage firms and has been named in three disciplinary Complaints issued by this Committee and two Commodity Futures Trading Commission (“CFTC”) enforcement actions."[/B]

So the starting lineup for Forward Forex is now set. At quarterback we have the fleet footed Onelio Murias. Behind him carrying the rock is tailback Andrew Stern with his wife Silvia Stambler leading the way at fullback. Snapping the ball to Murias is Wertheim. Surrounding Wertheim and blocking up front would be the rest of the employees at Forward Forex. Finally, rounding out this team of criminal all-stars is the receiving corps. You know, the guys who catch all those accounts? And for this position Murias chose to go into the free agency market and sign up a gang of crooked pirates even the old Oakland Raiders would never have employed. They went by the name of the Hamlin Mercer Financial Group. And this gang of high flying, free agents wreaked more havoc on the field then Ted Hendricks, Jack Tatum and Lyle Alzado combined. Here is what the NFA flagged them for:

  1. Sold junk options with commissions and spreads so high that 94% of all customers lost their money. The average loss was $21,000 although ten customers lost more than $100,000. Meanwhile the firm was making millions.

  2. Used unregistered solicitors who said to one customer that they “had access to information from the government about currency movements that only the biggest banks knew and that Herickoff (customer) had to act immediately if he wanted to have any chance of profiting from this information. Blauch (Solicitor) Also told Herickoff that his account for them was far to small to waste his time on and thus had to add another $25,000 to his account. Also told him his account was making a false return.”

  3. Used unregistered solicitors who said to one customer that they “never lost money and promised Willingham (customer) large profits. After Willingham invested, Blauch assured him that his account was doing well and had quickly turned a profit. At the account’s peak, Blauch told him that it was worth $800,000 and said that they would cash out as high as $1.25 million, after which Blauch would just day trade the remaining profits. Contrary to Blauch’s rosy reports, Willingham was actually suffering ruinous losses.”

  4. Customer Colley attempted to get in touch with Cohen (Solicitor) but was told that Cohen was out of the office with medical problems. Colley reach an individual named Michael Ewan at IMF, who told Colley that his account’s value had appreciated to $15,000. Based on Ewan’s representation, Colley decided to liquidate his positions and take his profit. However, Colley could not reach anyone at IMF to liquidate his positions, after making repeated calls to IMF. By the time Colley was able to through to someone at IMF, his account had a value of $25.

And on and on it goes. Customers are pressured into sending in their 401k money or to take out second mortgages, which are then promptly flushed down the drain in worthless options contracts. Sales agents are described as harassing, berating and screaming at customers to send in money. One “Customer Service” representative tells a distraught customer who is losing his shirt that their sales agent (who else but the notorious Blauch) can’t be reached because he has “had a heart attack” and then finishes the conversation by saying “sorry, but this is the chance you took.” And my personal favorite, sales agents throwing chairs across the room in fits of rage.

After reading through this does anyone seriously doubt the NFA is going to raise capital requirements? This is what the NFA has been dealing with on a day to day basis. This is how the forex industry is perceived by many in the financial world. The only way to change that is to flush the bottom feeders, which is precisely what the NFA is about to do. Good riddance.

50

[B]Developing…[/B]

The National Futures Association has closed another Dead Forex Firm Walking. Only a few days ago you’ll remember I spoke of going short Nations LLC at Intrade. I only wish there were such a contract because the firm has officially gone belly up and I could have made a killing. The NFA on its website today stated the firm has been shuttered:

BASIC Search…&contrib =NFA

The firm was a whopping $3.5 million under its capital requirement. One of the important points I probably have not stressed enough is that in addition to the minimum $5 million a firm is going to need to meet its initial cap requirement, firms also need to set aside 10% of their customers assets in addition to meeting various CFTC outstanding position requirements. That means most firms will probably need $10 million just to stay in business when the new cap requirement passes. Just think if dead forex firms walking aren’t even meeting their capital requirements now how on Earth will they be able to meet them when they get raised dramatically in the future? It looks like the The Forward Forex Follies is going to be just the tip of the iceberg in the months to come…

51

I have received some interesting feedback regarding the regulatory status of FXDD. As you know FXDD is listed in the Dead Forex Firms Walking list with a net capital of $786,000. Where did that figure come from? Well, it came from the futures affiliate (Tradition Securities and Futures Inc) of FXDD’s parent company. So why is FXDD listed as a result?

It’s a fair question. And the fair answer is that because FXDD is unregulated and because the average forex trader knows absolutely nothing about their financial status FXDD deserves to be judged on the closest data available. Forex traders conducting their due diligance are truly groping in the dark when trying to evaluate FXDD since they are not licensed by the NFA and do not directly report any financial data to the CFTC. That means that no one is checking in on FXDD to look at their books and make sure they are solvent. No one is checking in on their sales and marketing practices (notice that FXDD is one of the only major forex brokers that states on its website that they offer “Commission Free Trading” with no disclaimer about how they make their money on the spread.) Got a complaint about FXDD and want to file a claim or go to arbitration? Good luck. The NFA or CFTC won’t hear your case because they have no jurisdiction so you’ll pretty much have to rely on Judge Wapner. In the age of forex fraud I can’t see how anyone would allow themselves to roll the dice and take a risk by opening an account with a firm that is completely unaccountable to any government regulators. Doesn’t anyone remember RefcoFX? RefcoFX was the unregulated arm of Refco and when Refco went under and Refco’s creditors looted RefcoFX’s customer accounts the NFA and CFTC sat on their hands and stated they could do nothing because RefcoFX was unregulated.

But in the interest of fairness I’m going to relocate FXDD off the Dead Forex Firms walking list and onto a new list. Call it the “Unknown Unknowns” list becaue no one has any idea when or if FXDD might explode. Now I’m not saying FXDD is a bucketshop or that they are in immediate danger of collapse. In all likelihood the NFA capital requirement increase will have no effect on them (although it remains to be seen how it will effect Tradition.) But since they are unregulated and answer to no one how the hell is anyone to know exactly who or what they are?

52

Forex Savior, good work. I back up your statement with my research. FXDD is not registered with the CFTC/NFA.
Unless regulated with them, or a foreign equivalent, everyone here has no business talking to a broker. I spoke with them, and one of their IBs, at great length. Not registered, they are not required to report much information.
why work with someone who is (essentially) hidding their business?

53

So what happened at Nations? Why was the NFA forced to take an “emergency Action” and shut them down? Well, because it was basically one of the industry’s worst nightmares come true. An undercapitalized firm suffered massive losses and was forced to cover them with customer funds. Here is what the emergency action states:

“On Saturday, July 21, 2007, Nations sent to NFA, via e-mail, notice that it had fallen under the minimum required adjusted net capital.”

On Monday, July 23, 2007, NFA sent a letter to Nations notifying the firm that as it was unable to demonstrate compliance with the minimum requirements Nations was to cease doing business. That same day, NFA received another notice from Nations representing that the firm had fallen under the required minimum “due to losses in the forex markets.” This letter also indicated that Nations was attempting to raise $5 million “to make customers whole.” (YIKES! “make customers whole?!” Who on Earth is going to give Nations $5 million?! While nations has been successful at making a fool of their customers they certainly won’t be making them whole.)

Nations also provided NFA with a Form 1-FR as of July 20, 2007, which indicates that Nations owes customers trading in on-exchange futures more than $3 million and customers trading Forex more than $5 million. (Wow. What an implosion. They are $8 million in the hole? What the hell were they doing over there going to Vegas and playing craps with customer funds?)

This looks like another messy court case. With financials like this I expect the creditors will be coming out of the woodwork laying claim to what’s left of Nations. If they’re lucky they might be able to seize a fax machine or two, but as for customer funds, well, looks like some stripper in Vegas got her hands on that money first…

54

What about Refco? This is a common refrain I have been hearing from critics of the NFA Forex Dealer Dead Pool. Refco was massive and they went under in record time which proves that being adequately capitalized doesn’t matter right? Wrong. While citing Refco is a good sound byte it in no way helps the case of the undercapitalized. Here’s why:

First of all Refco was a gigantic octopus of a company that had various affiliates and subsidiaries that were both regulated and unregulated. The two main players in the Refco saga were Refco Capital Markets (the unregulated outfit in Bermuda that was doing all those shady off-exchange trades) and Refco LLC (which was the licensed futures brokerage most traders knew about.) Refco Capital Markets was where the scandal erupted. For years executives at RCM covered up huge trading losses with creative bookkeeping. But when the scandal became public it caused a bank run everywhere at Refco. The bank run occurred even though Refco had adequate capital to handle the huge trading loss RCM had incurred. But that didn’t matter because Refco was a publically traded company. As the stock price tanked talk of lawsuits by shareholders accelerated the bank run and that’s when Refco’s creditors stepped in and pushed the firm into bankruptcy knowing the only assets the firm had were the customer funds on deposit.

Had Refco not been a public company the scandal would have been a one day hiccup and it would have been business as usual precisely because it had a lot of capital reserves. That is a huge distinction that needs to be made. But when undercapitalized firms such as Nations Investments take huge trading losses there is no room for error. It’s one and done because they have no capital in reserve. Again, this is why the NFA has issued this proposal. Undercapitalized firms do not have the luxury of taking the kinds of hits that large firms can take. This is also why there hasn’t been a single case of a registered forex dealer member with over $10 million ever going bankrupt. So to the critics I say cite Refco all you want but it has no place in this debate unless you want to discuss the perils of being unregulated.

55

Well, all this will not affect me, I am with FXS Forex in Australia! :slight_smile: :slight_smile: :slight_smile:

Regards, Tymen Wortel, Perth, Western Australia.

56

Looks like the media is starting to pick up on the undercapitalization story. Both FX Week and Euromoney did recent stories on what I have been saying for several weeks now:

Proposed NFA rules seen as catalyst for consolidation in US retail
http://www.euromoneyfix.com/

US regulators clamp down on retail FX dealers
FX Week - The Global business of foreign exchange lic%2FshowPage.html%3Fpage%3D459830

Subscriptions are required for both but here is the money quote from the FX Week:

[B]The NFA said it has been concerned about the lack of protection for FX customers. “From what we’ve been seeing and the enforcement actions we’ve been taking recently, for the protection of the customer in the markets, we really need to raise the minimum capital requirement for these firms,” said a Chicago-based NFA spokesman.

Since March, eight FDMs have fallen under the NFA’s early warning requirement of $1.5 million, and the regulator’s worries have been heightened as the amount of retail customer funds held by FDMs has increased to more than $1 billion as of May 22.

The largest FX dealer firms are well clear of the proposed $5 million requirement, according to the CFTC’s May 31 report of adjusted net capital holdings, which showed CMS holding $11,512,421, FXCM $55,668,469, FX Solutions $12,650,227, Gain Capital $18,694,143, GFT $47,681,883, and Oanda $35,361,139. [/B]

Once again if regulators are going on the record as saying they don’t have any confidence in the manner in which undercapitalized firms operate why should retail fx traders have any?

58

It’s been close to two months since I started reporting on Dead Forex Firms Walking. Since my first post much has changed and the list is in need of an update. So here it is, Introducing:

[B]NFA Dead Forex Firms Walking, version 2.0:[/B] (Adjusted Net Capital as of May, 2007, direct from the CFTC: http://www.cftc.gov/files/tm/fcm/tmfcmdata0705.xls)

Advanced Markets ($1,021,000)
American National Trading Corp ($1,985,000)
Bacera Corporation (Shutdown!)
Cal Finanical Corporation (Shutdown!)
Direct Forex ($1,406,000)
E FX Options ($2,631,000)
Forex Club ($2,873,000)
FiniFX ($1,314,000)
Forward Forex (Shutdown!)
FX Option1 Inc (Shutdown!)
GFS Futures & Forex ($2,223,000)
Hamilton Williams ($1,202,000)
MB Trading ($3,952,000)
Money Garden ($3,627,000)
Nations Investments (Shutdown!)
One World Capital ($1,502,000)
Performance Capital International ($483,000)
Royal Forex Trading ($1,088,000)
SNC Investments ($1,510,000)
Solid Gold Financial ($2,039,000)
Spencer Financial (Shutdown!)
Trend Commodities (Shutdown!)
United Global Markets (Shutdown!)
Worldwide Clearing (Shutdown!)
Wall Street Derivatives ($936,000)

[B]Unregulated Firms (Buyer Beware)[/B]
FXDD (?)
GCI (?)
Cletus’ Fishing & Forex (?)

So there you have it. A total of [B]NINE[/B] licensed forex dealer members have recently been closed by the NFA. Anyone still doubt this new $5 million cap requirement rule will be passed soon? I didn’t think so. Certainly more closures await the dead forex firms walking in the days ahead. Hopefully you won’t have money in one of them when they go under. In any case, I’ll be here to report all the gory details.

60

As of August 2, 2007, this is where we stand in regards to the NFA proposal to raise capital requirements to $5 million:

FX Week states, "Following redrafting to include industry feedback, the proposals will be presented to the NFA board in August and then to the CFTC, and are not expected to be effective until the end of the year, the NFA explained."
http://www.fxweek.com/public/showPa...gin2&url=%2Fpublic%2FshowPage.html%3Fpage%3D459830

So if the proposal passes all the firms in the forex dealer dead pool, which from all appearances are currently meeting their capital requirement, will have several months to meet the new one. The big question is should this pass which will meet it and which ones won’t? And for those that cannot meet the new requirement what will happen to the firms, and more importantly the customers of these firms? You could have a situation where one of the proprietors of these firms runs off with customer funds in the last hours. You could also see a situation where the NFA goes in to close a firm only to discover they have no money left and the firm then gets forced into bankruptcy.

Now, the likelihood of this happening to firms with $3 or $4 million in capital is a lot less than with firms with only $1.5 million in capital. But the whole point of this thread is to point these dangers out to the trading public and then let them draw their own conclusions.

61

Page 42 of the current issue of Currency Trader Magazine (Free Subscription) has an article about the new NFA proposal. It reports on exactly what I have been saying these last few weeks. (Currency Trader Magazine – July 2007)

Here are some key quotes from the article:

�The NFA wants to raise capital requirements for registered Forex Dealer Members (FDM) to $5 million, plus it wants improved accounting standards.�

�The proposal could potentially wipe out 90 percent of existing forex brokerages, although it�s likely major consolidation would occur if the rule passes.�

�Since 2000, the NFA has authorized Forex Dealing licenses to more than 50 firms. However, many of these firms went out of business because they were undercapitalized, and fraud continues to be a problem in the forex brokerage arena.�

�The NFA estimates the new rules, combined with existing rules, will force firms to have at least $10 million in adjusted net capital to remain in business.�

�The NFA listed four specific reasons for the rule change:

  1. Trading Spot Forex, which FDMs do, creates more risk than trading futures and options listed on an exchange.
  2. Since spot forex is not a priority under the NFA�s Bankruptcy Code, it�s particularly important for FDMs to have adequate capital.
  3. Two of the three bankruptcy proceedings in which the NFA has taken part in the past four years have involved smaller FDMS�
  4. The Case of CFG Trader which was shut down by the NFA and forced to liquidate all open positions because it was undercapitalized.�

So this is the third independent media source to confirm what I have been saying. Again, this doesn�t mean that all the firms in the Dead Pool are going under or that they are not currently meeting their requirements. But they are in a very precarious position. When the media is saying that the proposal �could potentially wipe out 90% percent of existing forex brokerages� than traders should sit up and take notice.

62

Breaking News:

Both the National Futures Association and the CFTC have apparently de-listed Performance Capital International Inc. The NFA says on its website their membership was withdrawn on July 26, 2007. The most recent CFTC report also shows Performance as a member of its “deletions” category right next to FX Option1 Inc and the Cal Financial Corporation.

It could be that Performance was rolled into the Solid Gold Group as it says it is a member of the “SolidGold Group” on the front page of its website which is still functioning. In any case that is one less firm to report on.
Welcome to PFEC - Online Forex FX Currency Trading - Performance Forex - www.eforex-asia.com

Another firm that no longer has a functioning website is FiniFX: FINI FX - Forex International Investments, Inc.

The website says they are “under construction” and the word on the street is that they are no longer accepting new customers. However, they are still a member in good standing with the NFA according to the NFA’s website so I won’t pronounce them dead quite yet. But it looks like they have one foot in the grave.

Coming up Next Week:

  1. New CFTC Capital Numbers - Some of the numbers will surprise you
  2. A Three part Series on the Demise of the Concorde Forex Group
  3. The Sordid Saga of Crooklyn native Udo Rotmistrenko

Enjoy the Weekend!

63

The CFTC only steps in for enforcement actions. You need to go to the NFA’s website for details on brokerage closings.

64

I have spent a lot of time discussing the issue of forex fraud and how this has been one of the motivating factors driving the regulators’ desire to raise capital requirements. But the issue of broker dealer insolvency is in many respects more pressing. The failure rate for firms with capital below $5 million is shockingly high. And why is that? Because too many people think running a forex broker dealer is as easy as running a bagel shop. But this next three part series on the demise of Forefront Investments (aka CFG) is evidence of how difficult it is to run a forex brokerage and why as a result of CFG�s collapse the NFA has an even stronger case to raise capital requirements.

I first became interested in the CFG case when an attorney posted this thread at Forex Factory:
(CFG Trader/Snellgrove) asking former customers of CFG to contact him if they were still owed money. Still owed money? That piqued my curiosity. And so I began digging through the wreckage of CFG. Here is what I discovered:

CFG got its license in November of 2003. But its owner, Don Snellgrove, founded the company in 1998. (Concorde Forex Group, Inc. : Henrico County, Virginia)

Originally the firm was in the forex training business. Essentially, for a fee, CFG would assign traders a mentor whose job it would be to teach �the forex� to rookie traders. While some customers complained about the ineffectiveness of the training (Rip Off Report: CFG - Concorde - Concorde Forex Group - Concorde Financial Group - Don Snellgrove Absolute GARBAGE Total failure of me and many others Richmond Virginia) there are no indications that CFG was involved in any fraudulent activities. Indeed, Snellgrove had a reputation for being a very religious man and is quoted on his own website as saying, �We sincerely want people to succeed! Galatians 5:1 in the Bible, states that one should not be under bondage. 99% of the people who talk with me are under the bondage of debt. The Forex market is the largest legal cash flow industry in the world and a potential vehicle to achieve success by just about anyone and thus move out of bondage.� (CFGNews - Page: 8 of 11)

Unfortunately, Snellgrove�s decision to turn his training business into a full fledged forex broker dealer would not only leave his customers still under the bondage of debt, but transform them into the Gimp from Pulp Fiction after the firm went under and their accounts were frozen.

But before going there it is important to review Snellgrove�s career to date. He was a good and moral man, he had a clean regulatory record, his company was fairly transparent as he had an open door policy with all his customers at his rather large office in Virginia, and he had been in the business since the late nineties. But there was one missing ingredient in this forex broker dealer cake: Snellgrove was poorly capitalized. And that�s why the firm went under. More to come�

Tomorrow- Part II �The Collapse of CFG�