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U.S. Commodity Futures Trading Commission v. Gramalegui

United States District Court, D. Colorado

September 26, 2018

U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
GREGORY L. GRAMALEGUI, Defendant.

          FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDERS

          ROBERT E. BLACKBURN UNITED STATES DISTRICT JUDGE

         This case came before me for a trial to the court on February 27 and 28, 2018. The plaintiff, the United States Commodity Futures Trading Commission (CFTC), brings claims against defendant, Gregory L. Gramalegui, for (1) fraud by a Commodity Trading Advisory pursuant to 7 U.S.C. §§ 6o(1)(A) & (B); (2) failure to disclose prominently information about customer testimonials and hypothetical trading results pursuant to 17 C.F.R. §§ 4.41(a)(3) and 4.41(b), respectively; (3) violations of the CFTC's July 2001 Order; and (4) making false statements to the CFTC pursuant to 7 U.S.C. § 9(2). (See Complaint for Injunctive Relief, Restitution, Civil Monetary Penalties, and Equitable Relief Under the Commodity Exchange Act [#1][1] filed October 19, 2015; Final Pretrial Order [#324] filed February 7, 2018.) The parties appeared through their respective attorneys, and defendant Gregory L. Gramalegui appeared in person.

         Having judicially noticed all relevant adjudicative facts in the file and record of this case pro tanto, considered the evidence educed at trial in its various forms, determined the credibility of the witnesses, weighed the evidence, considered all reasons stated, arguments advanced, and the authorities cited by the parties in both written and oral form, and being otherwise sufficiently advised, I enter the following findings of fact (which have been established by a preponderance of the evidence), conclusions of law, and orders.[2]

         I. FINDINGS OF FACT

         I have jurisdiction over the parties to this action pursuant to 7 U.S.C. § 13a-1 (violations of the Commodity Exchange Act).

         Venue is proper in the District Court for the District of Colorado pursuant to 7 U.S.C. § 13a-1(e).

         Plaintiff, the U.S. Commodity Futures Trading Commission (CFTC) is the federal regulatory agency charged with administering and enforcing the Commodity Exchange Act (“CEA” or “the Act”) and its regulations.

         Defendant Gregory L. Gramalegui is a resident of Vail, Colorado. At all times relevant to this litigation, he marketed and operated an online trading room called Emini Trading Systems (“ETS”).

         1 accept as established the following facts, to which the parties stipulated in the Final Pretrial Order, Exhibit A [#324-1], filed February 7, 2018:

1. The “Emini” in the name ETS refers to the E-mini S&P 500 futures contract, which is traded on the Chicago Mercantile Exchange (“CME”) and has the ticker symbol “ES” (hereinafter, “ES” or “ES contract”). As a futures contract, the E-mini S&P 500 represents an agreement to buy or sell the underlying S&P 500 stock index at a specified future date. However, the ES contract is cash settled, which means that no delivery of the stocks that make up the index takes place. A trader engaged in day trading the ES contract places a directional “bet” (i.e., enters an order based on the expectation that the contract price will rise or fall) and then exits the trade with either a realized profit or loss.
2. Defendant was born on November 26, 1960, and is 57 years old.
3. Defendant has at all times been the sole owner and operator of the ETS Website.
4. ETS was not a brick-and-mortar business; it was operated entirely through a website at http://www.eminitradingschool.com.
5. Defendant developed the ETS products and services himself.
6. On December 2, 2014, defendant produced to the CFTC a copy of the Website in native web format saved in a .zip file (Tr. Exh. 48).
7. On January 14, 2015, CFTC counsel sent Robert Mackovski an email requesting a telephone call at his “earliest convenience.” When CFTC counsel and Mr. Mackovski spoke, counsel for the CFTC disclosed that a subpoena for documents and testimony was forthcoming and requested that defendant accept service via email. Mr. Mackovski stated that he would relay the request to defendant and left a voicemail on January 16thconfirming defendant's consent to email service.
8. At the deposition, which took place in Chicago on April 21, 2015, defendant was represented by Robert Mackovski and Gary Sinclair.
9. Defendant did not provide an accounting of revenues or records of his sales.
10. Defendant maintained a checking account at First Bank of Vail in the name of Trader 4x LLC (“Trader 4x Account”).
11. The majority of deposits into the Trader 4x Account came in the form of credit card transfers, without information identifying the associated customer.
12. From June 22, 2011, through October 29, 2014, ETS revenues were also deposited into defendant's PayPal account ending in -9591. These revenues totaled $4, 493.97.
13. Defendant held or controlled three accounts with two futures commission merchants, AMP Global and Dorman Trading, LLC, during the period of March 2010 through October 2015. Defendant did not hold, control, or execute trades in any other futures trading accounts during that time.
14. As of April 8, 2015, the ETS Website was live.
15. The text of the disclosures in the scrollbox on the bottom of webpages of the ETS website which the CFTC's preserved on October 7, 2014 (Tr. Exh. 638) read as follows:
Risk Disclaimer - Risk Disclosure
*RULE 4.41
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. SIMULATED RESULTS DO NOT NECESSARILY IMPLY FUTURE PROFITS. THE RISK OF LOSS IN TRADING FOREX OR COMMODITY CONTRACTS CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
Any and all systems, methodology, or pattern discussed within or in any of the product materials are for illustrative purposes only and are not to be construed as specific advisory recommendations. This material and any opinions are for education purposes only. Testimonials are not indicative of future performance results or any success and my not be representative or indicative of the experiences of other clients or your own experience. EminiTradingSchool and Trader4x LLC does not verify or endorse any claims or opinions provided by the above individuals.
Important Notice - Risk Disclaimer:
Futures & Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No. representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any emini trading system or methodology is not necessarily indicative of future results.
16. Neither “trading system” nor “advisory service” is defined in the CEA or the regulations promulgated thereunder.
17. On October 20, 2015, CFTC Division of Enforcement Staff carried out the court's Statutory Restraining Order by copying a hard drive at defendant's residence in Vail, Colorado.
18. On October 20, 2015, CFTC Division of Enforcement Staff carried out the court's Statutory Restraining Order by copying some documents and handwritten notes of defendant at defendant's residence in Vail, Colorado.
19. A “system” can consist of a collection of products or a package.
20. Defendant's FirstBank account ending in number 6518 is titled in the name of Trader4X, LLC.

         A. The 2001 Order

         Defendant is self-taught in the business of trading of futures contracts and, in particular, in the use of Market Profile, a method for viewing, organizing, and charting market data which was developed in the 1980s by a trader named J. Peter Steidlmayer.

         Defendant started his first futures trading business in 1997 or 1998.

         In 2001, the CFTC brought charges against defendant for fraudulent marketing of a software futures trading program called the “Trend Reflection Trading System.” The CFTC charged that

[i]n a series of magazine advertisements, Gramalegui made false claims that his mother traded the Trend System and implied that her trading results were positive. As such, Gramalegui's solicitations to actual and prospective customers of the Trend System constituted a practice or course business that operated as a fraud or deceit upon customers in violation of Section 4Q(1)(B) of the Act and Section 4.41(a)(2) of the Regulations.

(Tr. Exh. 2 ¶ III.A at 2.) In addition, the CFTC further alleged defendant

failed to disclose the fact that the Trend System trading results he published in his magazine advertisements and on his Internet web site were hypothetical, rather than actual, trading results, in violation of Section 4.41(b) of the Commission's Regulations, which require that hypothetical trading and the inherent limitations of hypothetical trading be disclosed in the form prescribed by Section 4.41(b).

(Tr. Exh. 2 ¶ III.A at ¶ 2-3.)

         9. In response to these charges, defendant made an Offer of Settlement. On June 12, 2001, he agreed to the entry of an Order (the “2001 Order”) by which it was found that defendant, while acting as a Commodities Trading Advisor (CTA), had (a) engaged in a “practice or course of business which operates as a fraud or deceit upon any client or prospective client” in violation of, inter alia, 7 U.S.C. § 6o(1)(B); and (b) failed to provide in marketing materials the disclosure statement required by 17 C.F.R. § 4.41(b), concerning simulated or hypothetical trading results. (Tr. Exh. 2 ¶ III.C at 3-4.)

         The 2001 Order required defendant to cease and desist from violating § 6o(1)(B) and Rule 4.41(b). (Tr. Exh. 2 ¶ VII.1 at 7.)

         More specifically, the 2001 Order set forth a number of requirements to which defendant was to adhere in his advertising. Specifically, defendant was not to

• “[M]isrepresent, expressly or by implication: (1) the performance, profits or results achieved by, or the results that can be achieved by, users, including himself, of any commodity futures or options trading system or advisory service; and (2) the risks associated with trading pursuant to any commodity futures or options trading system or advisory service;”
• “[P]resent the performance of any simulated or hypothetical commodity interest account, transaction in a commodity interest or series of transactions in a commodity interest unless such performance is accompanied by [the disclosure statement required by Rule 4.41(b)]. In doing so, Gramalegui shall clearly identify those hypothetical or simulated performance results which were based, in whole or in part, on hypothetical trading results;”
• “[M]ake any representation of financial benefits associated with any commodity futures or options trading system or advisory service without first disclosing, prominently and conspicuously, that futures trading involves high risks with the potential for substantial losses;”
• “[R]epresent, expressly or by implication: (1) the performance, profits or results achieved by, or the results that can be achieved by, users, including himself, of any commodity futures or options trading system or advisory service; (2) the risks associated with trading using any commodity futures or options trading system or advisory service; (3) that the experience represented by any user, testimonial or endorsement of the commodity futures or options trading system or advisory service represents the typical or ordinary experience of members of the public who use the system or advisory service; unless: (i) Gramalegui possesses and relies upon a reasonable basis substantiating the representation at the time it is made; and (ii) for two (2) years after the last date of the dissemination of any such representation, Gramalegui maintains all advertisements and promotional materials containing such representation and all materials that were relied upon or that otherwise substantiated such representation at the time it was made, and makes such materials immediately available to the Division of Enforcement for inspection and copying upon request.”

(Tr. Exh. 2 ¶¶ VII.A-D at 7-9.)

         The 2001 Order did not provide definitions for the terms “trading system” or “advisory service, ” nor incorporate by reference outside authority defining those terms.

         In the years following entry of the 2001 Order, defendant operated a series of other online trading businesses marketing methods for trading futures or foreign currency (“forex”) contracts, including Trader 4x (see Tr. Exhs. 645, 646 at 4), Eminitv (see Tr. Exhs. 647, 648 at 24), Tradology (see Tr. Exhs. 6 at 112, 293, 914 at 715), and Ask Market Profile Trading (see Tr. Exhs. 6 at 131, 136-137, 142-143; Exh. 884. (See generally Tr. Exh. 3 at 294-295.)

         These trading businesses made marketing claims similar to those that gave rise to the 2001 Order and omitted the disclosures required by the 2001 Order. (See Tr. Exhs. 641-654.)

         B. Emini Trading Systems

         1. Structure and products offered

         Defendant began operating ETS in 2009 through the website http://www.emintradingschool.com. (See Tr. Exh. 892.) ETS was not incorporated. (Tr. Exh. 106 ¶ 18.) Defendant claimed the ETS program was one he had been using for over ten years. (Tr. Exh. 640 at 34, 78, 251.)

         The majority of the business's revenues were deposited in a bank account in the name of Trader 4x LLC. (Tr. Exh. 131.) At hearing on the CFTC's motion for preliminary injunction, defendant testified that all funds deposited in the Trader 4x account were received in connection with the operation of ETS. (See Transcript at 41-42 [#44], filed March 14, 2016.)

         In the period between October 19, 2010, and October 28, 2015, a total of $480, 690.17 was deposited in the Trader 4x account. (Tr. Exhs. 131, 136 at 18, 137.)

         Defendant did not use his full name in connection with ETS, referring to himself as “Greg Lee, ” “Greg L., ” or simply “Greg.” (Tr. Exh. 3 at 338, 660 at 71.) A former ETS customer, Greg Ratica, testified at trial that he “[a]bsolutely” would not have purchased ETS had he know defendant had previously been charged with fraud by the CFTC. (Tr. Transcript (Day 1) at 37.)

         ETS offered a variety of products and services, including access to a trading room, software, written materials, videos, seminars, and one-on-one consultations. A one-month subscription to the trading room cost roughly $300; the complete package of materials and services ran to nearly $7, 000. (Tr. Exh. 841.)

         In marketing materials, discussed in more depth below, defendant represented his system was “simple to use and learn, ” made trading “easy, ” and could be learned in one week. (Tr. Exh. 640 at 50, 58; 569 at 17.)

         In theory, at least, that characterization seemed plausible. Defendant's system essentially required the investor to identify the “day type” based on real-time market activity and then follow a set of rules for that day type. (See Tr. Exhs. 640 at 47; 842 at 0391.0010.) These rules then purportedly would generate “signals” indicating when to take a trade. (Tr. Exhs. 640 at 47; 660 at 76, 93; 773 at 178, 189.) These signals were consistently represented to be automatic and nondiscretionary. (See Tr. Exhs. 731 at 141, 144.)

         In practice, however, this facially straightforward description belied a confusing and disorganized system set forth in a plan which ran to nearly 60 pages. (See Tr. Exh. 842.) The lack of clarity was not improved by defendant's inconsistent explanations of how it worked. For example, defendant at various points claimed there were six, seven, or eight different day types. (See Tr. Exhs. 747 at 146; 753 at 155; 73 at 197.) In addition, defendant periodically sent customers additional pages of handwritten instructions supplementing the plan. (See Tr. Exh. 845.) Defendant himself admitted he had not mastered the whole of his system. (Tr. Exh. 3 at 30.)

         Paul Durant purchased a package from ETS in February 2014 for $5, 600. The program defendant described to him was “very simple and easy to follow.” (Tr. Transcript (Day 1) at 106.) In his welcome package from ETS, Greg Ratica was promised that “[b]ecoming a better trader can happen in one week if you are new to trading or in a few days if you are an experienced trader.” (Tr. Exh. 569 at 17; Tr. Transcript (Day 1) at 40.)

         Instead, Mr. Durant found the plan to be full of “very confusing logic” and the trading room to be confusing and hard to follow. (Id.)[3] The instructions as to how to identify the day type were “complicated and confusing.” (Id. at 108.)

         Mr. Durant further found the trade room so “[c]onfusing” and “cluttered” as to be “useless.” (Id. at 109.) Videos of activity in the trading room on certain days played during the trial bears out Mr. Durant's description and experience of the trading room as cluttered and confusing.

         The trading room appears essentially as a chart, with the price levels shown on the vertical axis and the time of day on the horizontal axis. The screen is crowded with multiple horizontal and vertical lines, some solid, some dotted, of various colors, the combinations of which correspond to various pieces of information about the market. (See Tr. Exhs. 695 & 759; 698 & 761; 697 & 760.) Through an audio component, defendant can be heard narrating what purportedly was happening on the screen. Periodically, he would add text to the screen to further illustrate market events. Even with the benefit of transcripts and interpretation from witnesses, it was exceedingly difficult to make sense of what the graphics were attempting to represent.

         Yet even for a more sophisticated trader, such Greg Ratica, who also testified at trial, defendant's product was not worth what he paid for it. Mr. Ratica testified he could have learned as much by purchasing a book on Market Profile for $50. (Tr. Transcript (Day 1) at 73-74.)

         Moreover, contrary to its marketing, the ETS system was not automatic. Instead, ETS employed a trading method based on Market Profile. As defendant's expert, David Aronson, testified at trial, a trading methodology which employs Market Profile (as defendant's purportedly does) per force employs a subjective or discretionary strategy, as opposed to one which relies on a predetermined algorithm or set of rules that generate definitive buy and sell signals. Although defendant had made some additions or adjustments to Market Profile, Mr. Aronson characterized the ETS product as employing “a highly interpretive, subjective approach.” (Tr. Transcript (Day 2) at 260-262.) Defendant himself admitted his software was not automatic and instead required the user to determine for himself where to place a stop or exit a trade. (See Tr. Exh. 3 at 144-150, 171.)

         Throughout this litigation, defendant has maintained that his products and services were purely educational in nature and that he himself was merely a teacher. I rejected this argument previously and found defendant was a commodity trading advisor (“CTA”).[4] (See Order Re: Objections to Recommendation of the United States Magistrate Judge at 2-5 [#273], filed July 31, 2017.)

         In his expert report, defendant's expert, David Aronson, opined that defendant did not provide an advisory service because, inter alia, his advice was not specifically tailored to a particular client. (See Tr. Transcript (Day 2) at 273.) At trial, however, Mr. Aronson testified that the terms “CTA” and “advisory service” were identical; that is, a CTA by definition provides advisory services. (Tr. Transcript (Day 2) at 71-72.) The CFTC's expert witness, Jack Schwager, testified that in his opinion, defendant both advertised and offered an advisory service as that term is commonly understood in the futures industry. (Transcript (Day 2) at 93.)

         2. Marketing

         Defendant marketed ETS using a variety of methods, including distributions to email lists, presentations, seminars, and videos.

         Defendant's marketing was designed to appeal to novice or inexperienced traders who “dreamed about becoming a professional emini day trader and saying goodbye to the work day world.” (Tr. Exh. 640 at 1; see also Tr. Exh. 650 at 4 (“Day Traders can live wherever they want, work as few hours as they want each day and not have a boss or employees.”).) ETS's system was represented to constitute an “exciting alternative for creating and maintaining wealth.” (Tr]. Exh. 640 at 1.)

         Mr. Durant testified at trial that he purchased the ETS system intending ultimately to be able to replace his $50, 000 a year income as a machinist. Instead, he lost over half his account - more than $6, 000 - trading in the ETS system. (Tr. Transcript (Day 1) at 109.)

         In his marketing materials and presentations, defendant made various representations about the performance, profits, and results he and others had achieved as a result of using the ETS trading system and implied that others could achieve similar success.[5]

         Defendant made general claims suggesting the ETS trading approach was based on proven “winning” (i.e., profitable) trading strategies (Tr. Exh. 640 at 58) and was “consistently profitable throughout the years” (Tr. Exh. 484).

         Defendant also made specific claims about the performance and potential profits associated with the ETS trading system. He repeatedly touted how he was “winning every day” in the markets, and claimed traders also could “win” consistently once they learned his system. (Tr. Exhs. 341, 342, 396, 414, 416, 418, 420, 423, 426, 432, 433, 448, 449, 505, 507, 508.)

         Although defendant claimed, in response to discovery, that by “winning day” he meant “[s]uccessfully identifying and applying the trading plan with the day types and corresponding set-ups and their destination levels” (Tr. Exh. 83 at 9), his marketing materials plainly suggest that “winning” trades were ones that realized a profit (see, e.g., Tr. Exh. 348 (touting a “highly profitable day” in which defendant “identified four winning trades”); Exh. 408 (“This is not a get rich fast scheme, but a way to win each day.”); 627 at 130 (“I trade till I win and then done.”).

         Mr. Ratica testified that to him, a “winning day” indicated one in which the trader realized a profit from an actual trade. As Mr. Ratica noted “this is not some type of board game that you're playing for points.” (Tr. Transcript (Day 1) at 63.)

         Defendant claimed traders using his system were highly successful, i.e., profitable. He made specific claims as to the magnitude of profitable trades customers could expect. (See, e.g., Tr. Exhs. 151-153, 155, 157, 159-164, 166, 179 (claim that “[m]ost traders have made enough on one trade to pay for the monthly subscription”); Tr. Exhs. 723 at 3, 660 at 76, 729 at 126, 736 at 12 & 15 (transcripts of marketing presentations in which defendant suggested traders had made anywhere from 3 to 30 points[6] profit in a day).)

         Defendant also suggested he had successfully used the system to purchase a luxury sports car (see Tr. Exhs. 660 at 85 & 659) and promised that, by following his plan, traders could “say[] goodbye to the work day [sic] world” (Tr. Exh. 640 at 1).

         Further, defendant's marketing suggested he engaged in actual trading within the trading room. Communications with new customers suggested that they were part of a “real money trading room.” (Tr. Exh. 513.) Defendant repeatedly stressed that he was actually trading on his own account in the trading room using real money. (See, e.g., Tr. Exhs. 516, 530, 630 at 83, 755 at 9, 865.) He pointed to this purported fact to differentiate himself from competitors. (Tr. Exhs. 755 at 9, 865.)

         Testimonials used in marketing the ETS system also stated outright “Greg trades real money right alongside us and isn't afraid to show and explain the losers. I believe this makes the entire method legitimate.” (Tr. Exhs. 640 at 38, 818 at 5.)

         Users' experience in the trading room seemed to confirm this impression. The two former customers who testified on behalf of the CFTC at trial - Greg Ratica and Paul Durant - both believed defendant was actually trading with real money. As Mr. Ratica testified, the trading room password was “wereallytrade10.” (Tr. Transcript (Day 1) at 40; see also Tr. Exhs. 514, 547, 569.) Mr. Ratica testified “there's a big difference between trading with demo, a demo account, versus real money. When you trade with real money, all the other factors, psychological factors, come into play, the fear, the greed. (Tr. Transcript (Day 1) at 68.)

         Moreover, Mr. Ratica testified that the way defendant interacted in the trading room - setting break even and profit target points for a particular contract, telling the room that he was “getting out” at a particular point or had “filled in” a contract, and stating “I win” with respect to a trade - all led him to believe defendant was actually engaged in real trades. Viewing a video showing activity in the trade room, Mr. Ratica identified various points at which defendant noted profit targets and break even points, suggested traders “go long” (i.e., buy futures contracts), identified where to place “stops” (i.e., an order identifying a particular price point, which if reached, will cause that contract automatically to be closed out), and indicated that he was closing out particular positions. (Tr. Transcript (Day 1) at 47-72.)

         Michelle Bougas, a Futures Trading Investigator with the CFTC's Division of Enforcement, testified at trial that despite defendant's claims of “winning” consistently in the market, in the period from March 2010 through February 2015, although defendant had profitable days, he suffered net losses in 36 of those 60 months. Cumulatively, his losses during this period totaled $15, 697.98. In months where he did realize a profit, his profits were comparatively meager - the maximum profit in a single month was $538.19. In several months, defendant's net profits totaled less than $10 for the month. Defendant was similarly unprofitable in the period from March to October 2015. (See Tr. Exhs. 147, 148; Tr. Transcript (Day 1) at 158-173.)

         Defendant's marketing campaign did not accurately reflect this performance history. For example, repeatedly in marketing emails, defendant claimed to have had a “winner” on a particular day, when in fact he had not traded at all on that day. Likewise, defendant frequently represented that he had experienced a particular number of “winning” days in a row, when in fact not only had he traded on fewer than the specified number of days but actually had net losses, not profits, on some of those days. (See generally Tr. Exh. 148.) On two specific occasions, plaintiff touted having realized a “huge winner” on the preceding day (see Tr. Exhs. 153 & 281), when records in fact reflect he made but $8.50 on both those days (compare Tr. Exh. 148 Rows 6 & 35).

         Indeed, defendant admitted he did not “back test” his trading system and had no records to substantiate his performance claims. In fact, he maintained he did not track his own or his customers' trading performance at all. (See Tr. Exhs. 3 at 195-196, 271-272, 316; 70 at 6; 106 ¶ 55.) Nevertheless, his marketing implied that his strategies had been tested. (See Tr. Exh. 660 at 98.)

         Defendant also made representations in his marketing about the functionality and predictive ability of the ETS trading system.

         Defendant claimed the ETS trading plan was 90 percent (or sometimes 95 percent) accurate. (Tr. Exhs. 9 at 141, 660 at 118, 697 at 29.) He compared his system's ability to predict the market to having a “crystal ball.” (Tr. Exh. 761 at 18.) He touted ETS as being able to predict prices “to the tick, ” i.e., to a precise incremental change. (See, e.g., Tr. Exhs. 180, 334, 398, 434, 640 at 50, 723 at 6, 724 at 17.)

         Concomitantly, defendant suggested his system decreased the risks involved in trading futures contracts. He promised low risk-reward ratios as a result of employing the ETS system, and suggested that the “stops” built into the program minimized risk. (See Tr. Exhs. 640 at 50; 729 at 120.)

         These claims were aspirational rather than actual. When questioned at his April 2015 deposition[7] as to the basis for the ETS website's claim that “[o]ur trades often boast a 5:1 reward-risk ratios” (Tr. Exh. 640 at 50), defendant acknowledged that as a “Market Profile trader, that's what you want it to be” and suggested “it would be nice to get” at 4:1 ratio (Tr. Exh. 3 at 173).

         Defendant's marketing also implied his trading system was automatic. The ETS website represented that the trading software “directs which way to trade each and every day.” Defendant claimed the software would tell customers where to place price stops and when to exit a trade profitably and that the stops would “automatically adapt to the current market conditions.” (Tr. Exh. 640 at 32, 47, 50, 76; see also Tr. Exh. 733 at 161 (stating that ETS was “easy because the trading plan tell us what to do. We're not here to think.”).) Mr. Durant testified ETS was attractive to him specifically because it was represented to be an automatic system.

         3. Disclosures

         In connection with the marketing of ETS, defendant provided testimonials and hypothetical performance results on its website and in marketing emails and marketing videos.

         Pursuant to the terms of the 2001 Order, such representations were required to be accompanied by certain disclosures.

         I have already found defendant's disclosures inadequate as to certain specific hypotheticals and testimonials set forth in his marketing materials. (See Order Re: Objections to Recommendation of the United States Magistrate Judge at 11 ¶ 3.a. [#273], filed July 31, 2017.)

         I denied the CFTC's motion for partial summary judgment as to exhibits constituting screen captures of defendant's website. (See Id. at 8-10 & ¶¶ 2.a. & 3.b. at 11.) Those exhibits were admitted without objection at the trial. (See Tr. Transcript (Day 1) at 212-213; Tr. Exhs. 640, 651, 652, 653, 654.)

         Each of these versions of the ETS website contains both testimonials (see Tr. Exhs. 640 at 36-40; 650 at 23-26; 651 at 36-39; 652 at 23, 27-29, 31-32; 653 at 11-12) and hypotheticals (see Tr. Exhs. 640 at 72, 209, 227; 651 at 15-16, 22-23, 25-27, 42-45; 652 at 28-32). With respect to each of these examples, a “Risk/Disclosure/Risk Disclaimer” mimicking that recited in paragraph 5.o. of these Findings of Fact appears at the bottom of the page.[8]

         The disclaimer appears in 7-point font, in a box beneath a box containing “Quick Links” to other parts of the website, as well as links to follow ETS on various social media, subscribe to the newsletter, and/or receive a free three-day trial of the program. The are not equally prominent, let alone more prominent, than the substantive surrounding text or the advertising on the same page.

         Defendant also sent out various marketing emails which also contained hypotheticals and/or testimonials. Each contained a more abbreviated risk disclaimer than that found on the ETS website.[9] Similarly to the website, the disclaimer appeared at the very bottom of the email in 7- or 8-point font, much smaller than the substantive text of the email. (See, e.g., Tr. Exhs. 152-153; 155; 157; 159; 162-165; 199; 203; 207; 222-223; 227; 229-230; 241; 249; 279-281; 285-287; 291=294; 296-298; 306-307; 324; 328; 334-335; 341; 346; 348; 351; 353-354; 357-365; 368-371; 373-382; 384-386; 392; 394-398; 407; 410; 416-418; 421; 424-425; 427-428; 430-431; 434-437; 439-452; 454-455, 457; 472; 476; 484; 541.)

         On October 15, 2014, the CFTC requested defendant produce copies “of each and every advertisement or marketing material, including but not limited to customer testimonials, used by you or your agents to market or advertise ETS in any manner” are required by the 2001 Order. (Tr. Exh. 40 at 2.)

         Defendant's response consisted of three “testimonial” emails (which were not marketing emails but rather emails from customers who had provided testimonials to defendant) (see Tr. Exhs. 45-47), a prototype email described as containing “news, price and info update[s]” (Tr. Exhs. 50; 44), and a copy of the ETS website (Tr. Exh. 48). Otherwise, counsel for defendant claimed that defendant “does not advertise in the traditional sense of the word. There are no magazine ads or buyi [sic] placements or placing ‘ads' on other websites. My client gets prospective customers from search engines like google and yahoo.” (Tr. Exh. 44.)

         Defendant testified that he did not retain copies of marketing emails. (Tr. Exh. 3at 240.) Nevertheless, in November 2016, defendant produced more than a hundred such emails to the CFTC for the first time. (See Order Overruling Objections to Recommendation of the United States Magistrate Judge at 2-3 [#283], filed August 28, 2017 (approving and adopting magistrate judge's recommendation to impose sanctions relating to this belated discovery.) In addition, the CFTC recovered other ETS marketing materials from third parties.

         As described in more detail below, the copy of the website defendant produced to the CFTC had been altered. Unbeknownst to defendant, the CFTC had taken screen captures of defendant's website one week prior to its production request.

         Defendant did not preserve as backup copy of his website as it existed at the time of the CFTC's request prior to overwriting it with the changes noted above. Nor did he advise the CFTC that he had made any changes to the website prior to producing it.

         The magistrate judge previously found defendant had engaged in “pervasive, continuous and intentional pattern of discovery violations” representing “an intentional plan to deprive the CFTC of discovery with which it should have been otherwise provided” in this case. (See Order Re: Objections to Recommendation of United States Magistrate Judge at 4 [#280], filed August 18, 2017.) As a sanction for this spoliation, I indulged the following adverse inferences in favor of the CFTC:

a. That the spoliated documents would have demonstrated that all defendant's marketing materials were in fact disseminated or made available to customers or potential customers;
b. That the spoliated documents would have demonstrated that defendant sent each of his marketing e-mails to numerous recipients using mass distribution lists, in which defendant collected tens of thousands of e-mail addresses;
c. That the spoliated documents from defendant's e-mail accounts were consistent with the non-spoliated documents the Commission was able to obtain from those accounts, i.e., if defendant's spoliation had not occurred, there would be still more examples of defendant's use of his e-mails accounts to conduct Emini Trading School (“ETS”) business from at least 2009 through January 2015, including, among other things, evidence of (1) the marketing and sale of ETS products and services; (2) communications with customers individually; and (3) customer feedback about the products;
d. That the spoliated documents, including transcripts of ETS trading room sessions and other documents from Webinato (i.e., Omnovia) and Citrix, would have demonstrated that, beginning at least as early as 2009 and continuing through at least July 2015, defendant operated the ETS Trading Room in a manner consistent with that shown in transcripts the Commission obtained; and
e. The spoliated documents, including sales records and other documents from defendant's e-mail accounts, would have demonstrated that defendant had many more customers and sales than what is reflected in the documents that were not destroyed.

(Id. at 6.)

         4. ...


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