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California firm fined USD20.3m in commodity options fraud action

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The US Commodity Futures Trading Commission has obtained more than USD20.3m in civil monetary penalties and equity relief in a federal judgment order against David Michael Kogan and his company First Capitol Futures Group, both of Sherman Oaks, California, in an anti-fraud action.

The order, entered by US District Court for the Western District of Missouri, stems from CFTC charges filed against the defendants in 2009 for operating a fraudulent commodity options scheme.

Specifically, the order finds that the defendants operated a fraudulent investment scheme involving 58 customers and causing more than USD3m in customer losses.

The order requires Kogan and First Capitol Futures Group to each pay a USD7,540,000 civil monetary penalty and to pay, jointly and severally, restitution totalling USD3,064,061.

The order also requires the defendants to disgorge more than USD2.2m collected as commissions and fees during the scheme and permanently bans them from the futures industry.

According to the order, during 2007 and 2008 the defendants fraudulently solicited members of the public to trade options on commodity futures contracts by misrepresenting and failing to disclose material facts concerning (1) the likelihood that a customer would realise large profits from trading options, (2) the risk involved in trading options, (3) the existence of certain options positions in customer accounts and (4) the dismal performance record of First Capitol customers trading options.

As part of the investment scheme, Kogan and other First Capitol brokers repeatedly misrepresented to customers that they would make substantial amounts of money in a very short time trading options and routinely failed to disclose the risks inherent in trading options.

The order also finds that of the more than USD3m that customers lost, USD2.2m was commissions and fees charged by defendants.

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