by Bill Singer
A Not-so Mini E-Mini Commodities Fraud Results in Charges and Arrest
December 1, 2010
According to a federal criminal Complaint unsealed on November 23, 2010, the United States Attorney for the Southern District of New York alleges that in 2009, Joshua Wallace, a principal of System Capital, LLC ("System Capital"), a commodity trading advisor, met representatives of a Third Party Marketer located in Chicago (the "Third Party Marketer") and told the Third Party Marketer that he traded in e-minis, which are futures contracts that can be traded electronically on the Chicago Mercantile Exchange and are based on the S&P 500 index. Wallace falsely stated that he had at least $28 million in assets under management; and he also provided the Third Party Marketer with documents that reflected a false ten-year "Monthly Performance History" for System Capital.
NOTE: The charges contained in the Complaint are merely accusations, and the defendant is presumed innocent unless and until proven guilty.
Obtaining $3.5 Million
Based on the information the Third Party Marketer received from Wallace, the marketer prepared a tear-sheet document with essential background and financial data regarding System Capital, with the same false information Wallace had provided regarding the past performance history and assets under management of System Capital. The Third Party Marketer also introduced Wallace to brokers, as well as Futures Commission Merchants, to help Wallace to obtain clients.
The total amount of client money entrusted to Wallace through his fraudulent solicitations totaled at least $3.5 million.
Misrepresentations to the Fund Representative
In late 2009, Wallace met the head of a Manhattan based fund (the "Fund Representative"). According to the Fund Representative, Wallace claimed that
- System Capital was a commodity trading advisor that had registered with the National Futures Association the previous year;
- he traded e-mini futures; and
- he was looking for people, such as the Fund Representative, who could refer potential clients to him.
According to the criminal Complaint, Wallace allegedly provided the Fund Representative with false documents, including what Wallace represented were audited returns that had been prepared by a large auditing firm (the"Audit Firm"). The Fund Representative subsequently learned that the Audit Firm had done no work for Wallace or System Capital.
Charged and Arrested
Wallace, 34, of Portland, Oregon, was arrested on November 23, 2010, in Oregon and appeared there before a magistrate judge. He is expected to appear in Manhattan federal court at a later date. Wallace is charged with commodities fraud, mail fraud, and wire fraud for his role in the commodities fraud scheme. If convicted, he faces a maximum sentence of
- Mail and Wire Fraud: 20 years on each of the counts; and a fine of the greater of $250,000, or twice the gross gain or loss from the offense of mail and wire fraud, and
- Commodities Fraud: 10 years on the count of commodities fraud; and a maximum fine of $1,000,000.
Bill Singer's "Street Sweeper" Column