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CFTC charges Interactive Brokers for compliance failures

20 July 2007  |  2124 views  |  0 Source: U.S. Commodity Futures Trading Commission

The U.S. Commodity Futures Trading Commission (CFTC) announced today the issuance of an order filing and simultaneously settling charges against Interactive Brokers LLC (IBL), a discount direct access brokerage firm and registered futures commission merchant (FCM) headquartered in Greenwich, Connecticut.

IBL offers online trading of futures, options, forex, and stock and has just concluded an initial public offering under the name Interactive Brokers Group, Inc.

The CFTC order finds that IBL failed to supervise diligently its compliance employees' handling of a commodity futures trading account maintained in the name of Kevin J. Steele, a Canadian who used the account to defraud more than 200 Canadian, German, and United States citizens of approximately $8.1 million in a commodity pool fraud that was the subject of an earlier CFTC enforcement action (see CFTC News Release 5139-05, Nov. 28, 2005.) The July 17, 2007, order requires IBL to disgorge $175,000 in commissions it earned from Steele's account and to remit those funds to the Clerk of the Provincial Court of British Columbia, which will distribute the funds to the defrauded investors.

The CFTC order finds that, from February 2003 through May 2005, IBL accepted 135 third-party deposits in the form of wire transfers and checks totaling $7.7 million into Steele's personal account, but did not have procedures reasonably designed to detect the deposit of third-party funds in an individual trading account. The frequency and magnitude of deposits and withdrawals to Steele's account, relative to his stated liquid net worth, and the pattern of deposits followed by withdrawals suggested that Steele might be operating as an unregistered commodity pool operator. IBL compliance staff telephoned Steele on at least three occasions to inquire about the trading activity in his account. Each time, IBL compliance staff accepted Steele's explanations as reasonable without conducting any additional or independent inquiries.

As noted in the CFTC order, an FCM's ability to determine if funds in customer accounts are coming from someone other than the accountholder is a necessary part of an adequate supervisory system. If an FCM fails to monitor the source of funds being deposited into customer accounts at the time such funds are received, its ability to detect illegal activity such as pool fraud or money laundering is impaired. The order finds that, during the relevant time period, IBL's procedures for determining the source of funds received through wire transfers were inadequate to meet its supervisory responsibilities.

In a parallel action resulting from a settlement, on May 29, 2007, the National Futures Association (NFA), a registered futures association in which IBL is a member firm, fined IBL $125,000 for doing business with Steele and failing to maintain adequate books and records. The NFA also ordered IBL to create a restitution fund to pay up to $325,000 for the benefit of individuals who invested with Steele.

The following CFTC Division of Enforcement staff were responsible for this case: Diane M. Romaniuk, Ava M. Gould, Mary E. Spear, Scott R. Williamson, Rosemary Hollinger, and Richard B. Wagner.

The CFTC also appreciates the assistance it has received from the NFA, the Integrated Market Enforcement Branch of the Royal Canadian Mounted Police's Federal and International Operations Directorate, and the British Columbia Securities Commission.

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