The US Commodity Futures Trading Commission (CFTC) has filled a complaint in the US District Court for the Eastern District of Michigan charging defendants Alan James Watson and Cash Flow Financial LLC (CFF), both of Clinton Township, Mich, and Michael S Potts of Mountville, Pa, with fraudulently soliciting and accepting at least USD45 million from more than 600 individuals and entities to participate in a commodity pool to trade commodity futures contracts and securities. None of the defendants has ever been registered with the CFTC.
The CFTC complaint was filed under seal on March 10, 2011. On March 11, 2011, U.S. District Court Judge Lawrence P Zatkoff entered a restraining order, also under seal, freezing defendants’ assets, prohibiting the destruction of books and records and appointing a receiver. The court set a hearing on the CFTC’s motion for a preliminary injunction for March 30, 2011.
According to the CFTC complaint, from at least November 28, 2007, through the present, Watson and Potts failed to disclose material facts to actual and prospective pool participants, including that Watson was misappropriating pool participant’s funds for personal use and to pay principal and purported returns to existing pool participants, as is typical of a Ponzi scheme. Watson also allegedly used misappropriated funds to reimburse persons solicited by him to invest in a prior Ponzi-type scheme involving Safevest LLC, a Mission Viejo, Calif, firm, which also was the subject of a CFTC enforcement action (see CFTC Release 5688-09, August 6, 2009).
Watson and Potts allegedly falsely represented that the commodity pool was profitable and that all customer funds invested with CFF were traded by a Florida-based “investment club” named Trade LLC. However, investor funds were allegedly deposited in a variety of instruments not authorised by CFF pool participants. Of the USD45 million solicited, Trade LLC traded only USD8.1 million, according to the complaint. Trade LLC is also the subject of a separate CFTC complaint (see CFTC Press Release 5848-10, July 6, 2010).
According to the complaint, to conceal his substantial trading losses and the misappropriation, Watson allegedly issued false statements and/or other reports that reflected monthly trading profits of at least 10 percent before fees. The statements did not reflect the substantial losses incurred.
The complaint names The Jedburgh Group, also known as Jedburgh Group International, Inc., of Longwood, Fla, as a relief defendant. The Jedburgh Group allegedly received funds as a result of the defendants’ fraudulent conduct to which it has no legitimate interest or entitlement. Watson and CFF retained The Jedburgh Group to act as a private investigator to assist CFF in locating and recovering participants’ funds diverted by Watson in a variety of schemes, according to the complaint. The Jedburgh Group allegedly currently holds at least USD3 million of recovered pool participant funds in an escrow account. The complaint requests that these funds be disgorged.
In its continuing litigation, the CFTC seeks restitution, a return of ill-gotten gains, civil monetary penalties, trading and registration bans and permanent injunctions against further violations of the federal commodities laws. The CFTC continues to attempt to account for and locate pool participant funds.
