According to the Commodities Futures and Trading Commission ("CFTC"), federal prosecutors, and a criminal plea agreement, in 2004, Alan James Watson, 46, of Clinton Township, MI, created an investment club and served as its chief executive officer.
NOTE: The allegations in a civil or criminal Complaint are merely accusations and Defendants are presumed innocent unless and until proven guilty in a court of law.
In soliciting over 750 investors, Watson represented that their funds would be invested through an equities-trading system developed by an expert consulting firm (purportedly known as "Trade LLC"). Seems that Trade LLC was pretty good because Watson promised a 10% monthly return. Of course at that point, a prudent investor probably should have slowly backed out of the meeting with Watson, made some excuse, and gotten the hell out of there. Why? Well, for starters, a 10% guaranteed monthly return - really?
Nonetheless, as these stories too often go, from 2006 to 2009, Watson received almost $40 million from investors. Apparently, and sadly for the investors, Watson invested in Trade LLC only $6 million. What did he do with the remaining $34 million? It seems that Watson "secretly invested" those funds in a number of high-risk ventures, all without the consent or authorization of the club's investors.
Alas, whether Watson thought he could outperform Trade LLC or figured he was onto some great strategy, it doesn't matter because he lost virtually all of the secret investment. Apparently, Watson was not prepared to make a timely admission of his all-too human shortcomings as an investor guru. Rather than disclose to the club's investors the staggering losses, Watson created false monthly account statements, which depicted net gains.
Going a step farther, Watson apparently resorted to a Ponzi scheme in which he used new investor funds to pay off earlier investors - ah, now we better understand the source of the so-called "bonus" items that appeared on the fabricated statements. Lovely accounting ploy, that one, and quite unconventional.
By March of 2009, Watson simply gave up putting the club's money in the expert consulting firm and diverted those funds into unauthorized ventures. About a year later, Watson came clean with the club's members and fessed up to his unauthorized investing and the fabricated statements. By 2010, his machinations resulted in a combined $40 million loss for the club
On March 15, 2011, the CFTC filed a civil case in the Eastern District of Michigan charging Watson and and co-defendants Cash Flow Financial LLC (CFF), and Michael S. Potts with fraudulently soliciting and accepting at least $45 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 were ever registered with the CFTC. Earlier, on March 11th, a restraining order was entered freezing defendants' assets, prohibiting the destruction of books and records and appointing a receiver.
According to the CFTC Complaint, 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, CA, firm, which also was the subject of a CFTC enforcement action (CFTC Safevest Release 5688-09, August 6, 2009).
SIDE BAR: In the CFTC's Safevest case, it was alleged that more than 500 investors invested over $25.7 million in Safevest for the purpose of purchasing interests in a commodity pool that purportedly would trade commodity futures contracts. Sound familiar?
The Safevest defendants allegedly misrepresented that the company used computerized trading software that consistently produced daily profits of between 1.6 percent and 1.9 percent, which the defendants claimed were "virtually guaranteed" and that the investment program involved minimal risk of loss. Virtually all of the funds were misappropriated by the defendants.
On August 6, 2009, the CFTC obtained over $25 million in civil monetary penalties and equitable relief in orders against Safevest, and its owners and officers, Jon G. Ervin and John V. Slye. Separately, Safevest was ordered to pay $5 million civil monetary penalty and Ervin and Slye each to pay a $1 million penalty. The defendants were ordered to pay restitution and disgorgement totaling $18,431,931, and were permanently banned from trading in any commodity.
The purported expert consulting company in the Watson matters (Target) is the subject of a separate enforcement action alleging fraud and misappropriation brought by the CFTC in the U.S. District Court for the Southern District of Florida. (CFTC v. Trade LLC, No. 9:10-cv-80738-KAM, June 22, 2010)
On September 22, 2011, Watson, 46, pleaded guilty in the Eastern District of Virginia to one count of wire fraud and faces a maximum penalty of 20 years in prison. Sentencing is scheduled for December 2011.