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How NFA auditors uncovered Indiana ponzi scheme
On July 20, the CFTC obtained a permanent injunction against Phillip Ferguson-a non-NFA Member-and his firm, Ferguson Financial, of Marion, Indiana. The CFTC's complaint, charging Ferguson with commodity pool fraud and failure to register as a CPO, was the result of a thorough investigation by NFA auditors who were the first to uncover Ferguson's multi-million dollar ponzi scheme.
NFA has a long history of successfully disciplining Member firms and individuals who violate NFA rules and CFTC regulations. Conducting periodic audits, following up on customer complaints and investigating allegations from other NFA Members are all methods NFA uses to uncover rule violations.
Presenting a bigger challenge, however, are the unregistered firms and individuals who practice investment fraud outside of NFA's jurisdiction.
"If a firm or individual is not registered with the CFTC or a Member of NFA, it's very difficult for us to know they even exist," says Ron Hirst, the associate general counsel in charge of NFA's enforcement efforts. "We tell our Compliance staff to keep their eyes and ears open during their audits, because they may be surprised at what they uncover."
That advice proved very useful last June when NFA Field Supervisor Heather Rankin-Sendera was performing a routine audit of an Introducing Broker (IB) Member located in Chicago. As part of NFA's audit procedures, Rankin-Sendera examined a sampling of copies of checks which the IB's customers had sent to be deposited into their futures trading accounts. Rankin-Sendera noted that one customer had made a $15,000 deposit by endorsing a third-party check made payable to the customer from First Investors Group (FIG) of Marion, Indiana.
"When I asked the IB personnel about FIG, they said they knew nothing about the firm," says Rankin-Sendera. "But when I called the customer, he told me that the check represented a withdrawal from a managed futures account that he had at FIG and that FIG was operated by Ferguson Financial of Marion, Indiana."
Reviewing NFA's registration records, Rankin-Sendera found that neither FIG nor Ferguson Financial was registered in any capacity with the CFTC, nor were they Members of NFA.
Rankin-Sendera then searched NFA's registration/membership database by address and zip code and discovered two sole-proprietor IB NFA Members who had the same address in Marion as the address shown on the FIG check. When Rankin-Sendera's supervisor, Vilia Sutkus-Kiela, and Staff Auditor Jason Chenoweth made a surprise visit to their offices on June 21, they received conflicting stories from the two IBs.
While these interviews were being conducted, Sutkus-Kiela also interviewed Ferguson by telephone. Ferguson told her that FIG had approximately 20 individual investors, some of whom were family members and friends. He claimed that FIG did not have to be registered as a commodity pool operator because he did not solicit for investors and was not paid.
"Obviously, when we put all of these different stories together, we knew someone was lying," says Sutkus-Kiela. "We arranged a meeting with Ferguson and alerted the CFTC. However, when we and the CFTC investigators arrived at Ferguson's office, he telephoned and told us that he would decline to provide any further information. Unfortunately, that was our last contact with Ferguson before he disappeared."
Armed with information provided by the two IBs sharing FIG's offices, NFA and CFTC staff members appeared before a judge in Fort Wayne to ask for a permanent injunction against Ferguson. The judge agreed, freezing Ferguson's accounts and appointing a receiver for his funds.
Acting as agents of the CFTC, Rankin-Sendera and NFA Associate Director Robert Krewer returned to FIG's offices to collect additional information.
"We found a key to a storage locker which contained several years' worth of account documents," says Rankin-Sendera. "Actually, the key opened a Pandora's Box of documents, including addresses of drop boxes in several cities and paperwork relating to three illegal companies Ferguson was operating. Because this case was outside of our jurisdiction, we gave everything we found to the CFTC."
As the investigation widened, more law enforcement agencies became involved, including the FBI, the SEC, the NASD and the Indiana States Attorney's Office. Since NFA brought the case to the attention of the CFTC, NFA staff have provided assistance in the Commission's investigation and prosecution of the injunction case, including reviewing and analyzing hundred of books and records and providing testimony.
"We're very happy that Mr. Ferguson's illegal investment schemes have been halted," says Hirst. "We will continue to offer our full cooperation to all of the agencies involved in this case."
Rankin-Sendera is proud of the investigative work she and the other Compliance staff assigned to the case conducted. But she also knows that many lives were affected by Ferguson's scams.
"I didn't put a human face on all of this illegal activity until the day we went to Fort Wayne, " says Rankin-Sendera. "Between 40 and 50 of Ferguson's customers were at the courthouse that day. As I talked with several of them, they displayed a wide range of emotions-disbelief, anger, and fear. It was very sad to see the emotional and financial toll Ferguson had taken on these people."