May 28, 2023

Florida court freezes assets of limited liability company and owner charged with commodities-related fraud

The US Commodity Futures Trading Commission (“CFTC”) recently announced that it charged Systematic Alpha Management, LLC (“SAM”), a registered commodity trading advisor (“CTA”) and commodity pool operator (“CPO”), and its owner and registered Associated Person, Peter Kambolin, with violating the Commodity Exchange Act and CFTC regulations.  The CFTC’s complaint alleges that SAM and Kambolin fraudulently allocated trades in commodity pools operated by SAM that disproportionally benefited certain proprietary accounts at the expense of other customer accounts in the pool.  According to the CFTC, the proprietary accounts earned over $1.4 million in profits while other customer accounts incurred at least $1.5 million in net losses.  In response to these allegations, on April 24, 2023, a federal judge in the Southern District of Florida granted the CFTC’s request for a statutory restraining order (“SRO”) that not only froze the Defendants’ assets but also provided the CFTC with immediate access to their books and records.  On May 23, 2023, the court issued a preliminary injunction that solidified the prior SRO.

According to the CFTC’s complaint, between January 2019 and November 2021, SAM and Kambolin (“the Defendants”) executed unfair trades between two commodity pools, certain customer accounts, and proprietary accounts owned by Jersey City Partners, LLC, a company owned and controlled by Kambolin, and Thor Enterprises International, Inc., a company over which Kambolin’s brother was given full power of attorney to manage.  While the CFTC allows commodity pools to place “bunched” orders that allocate trades among certain accounts, CFTC regulations require CPOs and CTAs to allocate such trades on a fair and equitable basis, or in a manner that does not allow certain accounts to consistently receive favorable or unfavorable treatment.  The complaint alleges that Defendants violated CFTC regulations by placing these unfair trades and by misrepresenting to pool participants and managed account holders that pool investment opportunities would be allocated fairly and equitably.  The CFTC also accused Defendants of misrepresenting that the cryptocurrency pool and the FX pool would primarily trade cryptocurrency futures and FX futures, respectively, when evidence suggests that the Defendants placed only 45 percent of the trades in each pool in equity index futures contracts – trades that CFTC alleges were allocated unfairly.

The CFTC’s complaint specifically accuses SAM and Kambolin of committing fraud in violation of Sections 4b(a)(1)(A)-(C) and 4o(1)(A)-(B) of the Commodity Exchange Act, and engaging in inequitable allocation of orders in violation of CFTC Regulation 1.35(b)(5)(iv)(B).  The CFTC is seeking monetary penalties, disgorgement, restitution, registration and trading bans, and a permanent injunction against further commodities-related violations, as charged.

CFTC Press Release | CFTC Complaint | Order – SRO | Order – preliminary injuction hearing