Commodity Futures Trading Commission v. Winston Reed Investments L.L.C.

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF NORTH CAROLINA

ASHEVILLE DIVISION

1:20-cv-42-MOC-WCM

)

COMMODITY FUTURES TRADING )

COMMISSION, )

)

Plaintiff, )

)

v. )

)

WINSTON REED INVESTMENTS LLC )

and )

MARK N. PYATT, aka )

DANIEL RANDOLPH, )

)

Defendants. )

ORDER OF DEFAULT JUDGMENT, PERMANENT INJUNCTION, RESTITUTION,

CIVIL MONETARY PENALTIES, AND ANCILLARY EQUITABLE RELIEF AGAINST

DEFENDANT WINSTON REED INVESTMENTS LLC

I. INTRODUCTION

On February 10, 2020, the Commodity Futures Trading Commission (“Commission” or

“CFTC”) filed its Complaint [ECF No. 2] in the above-captioned action against Winston Reed

Investments, LLC (“WRI”) and Mark N. Pyatt (“Pyatt”) (collectively “Defendants”) seeking

injunctive and other equitable relief for violations of the Commodity Exchange Act (the “Act”),

7 U.S.C. §§ 1 et seq., and Commission Regulations (“Regulations”), 17 C.F.R. §§ 1.1 et seq.

The Complaint alleges that from at least April 2017 through at least February 2019

(“Relevant Period”), WRI, by and through its principal, Mark N. Pyatt, also known as Daniel

Randolph, and Pyatt directly, fraudulently solicited and received approximately $200,000 from at

least nineteen individuals (“pool participants”), who are not eligible contract participants

(“ECPs”), as defined in 7 U.S.C. § 1a(18) (2018). According to the Complaint, Defendants

solicited and received these funds in connection with pooled trades in commodity futures

contracts (“futures”) and retail foreign exchange transactions (“forex”), among other things. As

alleged in the Complaint, Defendants misappropriated most of pool participants’ funds for

business expenses and personal use, and to make Ponzi-like payments to other pool participants;

made false and misleading representations to pool participants; and issued false reports that

misrepresented trading profits purportedly achieved by Defendants on behalf of pool

participants.

The Complaint further alleged that Pyatt is liable as a control person for WRI’s violations

of the Act and Regulations pursuant to 7 U.S.C. § 13c(b) (2018), and that because Pyatt’s

violations of the Act and Regulations occurred within the course and scope of his employment,

agency, or office, WRI is liable as principal for Pyatt’s violations pursuant to

7 U.S.C. § 2(a)(1)(B) (2018), and 17 C.F.R. § 1.2 (2019).

The Complaint sought to enjoin Defendants’ alleged unlawful acts and practices, to

compel their compliance with the Act and Regulations, and to enjoin them from engaging in any

commodity or forex related activities. In addition, the Complaint sought civil monetary

penalties, restitution, and remedial ancillary relief.

II. PROCEDURAL HISTORY

The Commission filed its Complaint on February 10, 2020. [ECF No. 2]. Plaintiff

served Pyatt and WRI with a summons and the Complaint on February 19 and 22, 2020,

respectively. [ECF Nos. 8 and 9]. Neither Defendant timely filed an answer or otherwise

responded to the Complaint.

Thereafter, pursuant to Fed. R. Civ. P. 55(a), Plaintiff moved for entry of default against

WRI and Pyatt. [ECF Nos. 10 and 12]. The Clerk entered defaults as to WRI and Pyatt on

March 19 and 24, 2020, respectively. [ECF Nos. 11 and 13].

On August 21, 2020, Plaintiff moved for entry of default judgment against WRI and Pyatt

and submitted a supporting memorandum of law. [ECF Nos. 16 and 17]. On September 8, 2020,

Pyatt submitted a letter to the Court objecting to Plaintiff’s motion for default judgment. [ECF

No. 18]. Thereafter, Pyatt and the Commission negotiated and agreed to a proposed consent

order, which the Court approved on December 21, 2020. [ECF No. 24]. WRI was not a party to

the Consent Order and has not appeared in this litigation.

On January 4, 2021, the Commission submitted a revised proposed order of in support of

its motion for default judgment against WRI. [ECF No. 26]. The Court has considered carefully

the Complaint, the allegations of which are well-pleaded and hereby taken as true, the Motion,

and the Memorandum. Being fully advised in the premises, the Court hereby:

GRANTS the Commission’s Motion and enters the following Findings of Fact and

Conclusions of Law finding WRI liable as to all violations as alleged in the Complaint and

finding Pyatt liable as a controlling person for WRI’s violations. Accordingly, the Court now

issues the following Order which determines that WRI violated 7 U.S.C. §§ 6b(a)(1)(A)-(C),

6b(a)(2)(A)-(C), 6o(1)(A), (B) (2018); and 17 C.F.R. § 5.2(b)(1)-(3) (2019), imposes on the WRI

a permanent injunction, and orders Defendants, jointly and severally, to pay restitution, and civil

monetary penalties.

III. FINDINGS OF FACT

A. The Parties

Plaintiff Commodity Futures Trading Commission is an independent federal regulatory

agency charged by Congress with responsibility for administering and enforcing the provisions

of the Act, 7 U.S.C. §§ 1-26 (2018), and the Regulations promulgated thereunder, 17 C.F.R. pts.

1-190 (2019).

Defendant Winston Reed Investments, LLC is a limited liability company formed in

April 2017 and organized under the laws of North Dakota. Its principal place of business is in

Williston, North Dakota. WRI has never been registered with the CFTC in any capacity.

Defendant Mark Nicholas Pyatt a/k/a Daniel Randolph is a natural person currently in

custody in the vicinity of Asheville, North Carolina. During a portion of the Relevant Period, he

resided in Waynesville, North Carolina. He served as the vice president and investment

consultant for, and held a power of attorney on behalf of, WRI. Pyatt has never been registered

with the CFTC in any capacity.

B. The Purpose and Organization of WRI

Pyatt established WRI to facilitate his trading of various financial instruments, including

futures and forex. Pyatt, on behalf of WRI, solicited prospective pool participants to trade

futures and forex through the WRI pool. In more than one solicitation, Pyatt identified himself

as “Daniel Randolph” when speaking with prospective pool participants.

When prospective pool participants agreed to deposit funds into the WRI pool, Pyatt had

the prospective pool participants sign an agreement with WRI. That agreement identified

“Daniel Randolph” as WRI’s President and Pyatt as its “Vice President, Investment Consultant

and POA.” Pyatt controlled WRI’s day-to-day operations and was responsible for, among other

things, trading pool participants’ funds.

In soliciting pool participants, Defendants made no attempt to determine if they were

ECPs. In fact, most, if not all, of Defendants’ pool participants were not ECPs.

C. WRI’s Acceptance of Pool Participant Funds

During the Relevant Period, WRI accepted $276,850 from pool participants for the

purpose of trading futures and forex. These pool participant funds were typically in increments

of $5,000. Each increment was referred to as a “contract.”

Pursuant to agreements signed by pool participants, WRI promised to deposit pool

participant funds into one of two accounts at “Chase Bank / First International Bank & Trust.”

WRI promised that those funds would then be deposited into an account at TD Ameritrade.

Under the agreements, pool participants had the option of depositing funds directly into the TD

Ameritrade account.

D. WRI’s Representations About Trading and Promised Returns

WRI, through Pyatt, told pool participants that it managed at least $1,000,000, which

Pyatt used to trade futures and some stocks at TD Ameritrade, that Pyatt developed a trading

algorithm, and that Pyatt was a successful trader. WRI, through Pyatt, also told pool participants

that Pyatt traded profitably, generating, in one instance $30,000 profit on a $10,000 placement in

six months and $240,000 profit in one year, and, in a second instance, $130,000 profit on an

initial investment of $20,000. The agreement pool participants signed at Pyatt’s direction stated

that “[t]he low average expected return on investments across the board is 15% per month.”

These representations were false. WRI’s representations, made through Pyatt, about the

amount of funds WRI managed and the profitability of WRI’s trading are contradicted by the

evidence.

E. WRI’s Representations and Omissions About the Use of Pool Participant Funds

The agreement signed by pool participants provided that “all funds are pooled into one

account” and “the purpose of trading all funds together is to give us a higher volume to trade

with.” The agreement also stated that pool participant funds would be used to trade: “[Pyatt]

will be trading ‘futures’ and ‘forex’ in a day-trading format and will specialize in energy related

stocks. Gold, NASDAQ and oil.” Under the agreement pool participants signed, WRI charged

each participant $300 per month for market analysis. The agreement further provided that the

fee for WRI’s services would be 10% of all gains. Under the agreement, all pool participant

funds were to be used to trade. Based on their interactions with Pyatt, pool participants believed

that all of the funds placed with WRI would be traded on their behalf.

Pyatt did not tell prospective pool participants that their funds would be used to pay his

business and personal expenses.

F. WRI Used Only a Fraction of Pool Participant Funds To Trade

WRI opened two accounts at TD Ameritrade in April 2017, one futures account and one

securities account. These accounts were opened in the name of “Daniel Randolph.”

As noted above, WRI accepted $276,850 from pool participants. Most of those funds

were initially deposited into a TD Ameritrade securities account. WRI did not trade in the TD

Ameritrade securities account. Moreover, during the Relevant Period, WRI transferred only a

fraction of the $276,850 provided by pool participants from the TD Ameritrade securities

account into the TD Ameritrade futures account. Transfers into the TD Ameritrade futures

account totaled only $13,416.68. WRI used the TD Ameritrade futures account to trade various

futures contracts between April 2017 and February 2019.

G. WRI Misappropriated Pool Participant Funds To Make Periodic Payments to Other

Pool Participants and To Pay Business and Personal Expenses

WRI used pool participant funds to make Ponzi-like payments to other participants.

Payments totaling $21,000 were made to various pool participants from the TD Ameritrade

securities account.

As detailed below, for most of the Relevant Period, WRI was unprofitable trading pool

participant funds. To the extent that WRI’s trading generated profits, those profits were not

sufficient to sustain the periodic payments to pool participants.

WRI also used pool participant funds to pay business and personal expenses. For

example, payments were made from the TD Ameritrade securities account to American Airlines,

Best Buy, Eddie Bauer, Pizza Hut, Prime Video, Smokey Mountain Cigars, Starbucks, Uber,

Verizon Wireless, Walmart, and Zale’s Outlet, among others.

H. WRI’s Trading Was Not Profitable Overall

The TD Ameritrade futures account was active between April 2017 and February 2019, a

total of twenty-three months. WRI traded in the TD Ameritrade futures account during only

fifteen of those twenty-three months. Trading during nine of those fifteen months resulted in

realized losses totaling $15,081.66, while trading during the remaining six months resulted in

realized gains totaling $1,664.98. Overall, trading in the TD Ameritrade futures account

cumulatively resulted in a net loss of $13,416.68.

I. WRI Provided Statements to Pool Participants that

Did Not Accurately Reflect WRI’s Trading Performance

WRI provided monthly reports to pool participants concerning activity in the WRI pool.

These reports were typically transmitted to pool participants via a group email and typically

referred to substantial profits. For example, WRI’s monthly report for September 2018 stated

that trading resulted in a 36% profit for the month, that is, $1,800 profit per “contract.” WRI’s

monthly report for December 2018 stated that trading resulted in an 18.8% profit, that is, $941

profit per “contract.” A third monthly report transmitted by WRI claimed profits of 86.5%, that

is, $4,327 per $5,000 contract, while a fourth claimed profits of 83.9%, that is, $4,195 per $5,000

contract.

The monthly reports provided by WRI to pool participants did not accurately reflect

WRI’s trading performance.

WRI also provided individual updates covering multiple months of account activity to at

least two pool participants. According to a report WRI sent via email to those pool participants,

their initial placement of $10,000 yielded net profits of $24,035 in three months, and additional

profits of $110,146 on the following six months.

The individual updates WRI provided to pool participants did not accurately reflect

WRI’s trading performance.

J. Defendants’ Plans to Restart Trading

Pyatt reported purported catastrophic losses to pool participants in February 2019. Pyatt

also advised pool participants that all trading would be stopped pending review of the purported

catastrophic loss. However, no such catastrophic losses occurred in the TDA futures account. In

August 2019, Pyatt approached at least three investors about restarting trading in the pool.

IV. CONCLUSIONS OF LAW

A. WRI’s Failure to Properly Answer Warrants Entry of Default Judgment

Under Fed. R. Civ. P. 55(a), a default is entered when “a party against whom a judgment

for affirmative relief is sought has failed to plead or otherwise defend . . . .” Fed. R. Civ. P.

55(a). Upon entry of default, the defaulted party is deemed to have admitted all well-pleaded

allegations of fact contained in the complaint. CFTC v. Prestige Capital Advisors, LLC, No.

3:11-cv-431, 2013 WL 7224738, at *1 (W.D.N.C. Jan. 25, 2013) (granting default judgment

where defendants failed to answer allegations of fraudulent solicitation, misappropriation, and

issuance of false statements).

Entry of default judgment under Fed. R. Civ. P. 55(b) is left to the sound discretion of the

trial court. CFTC v. PMC Strategy, LLC, 903 F. Supp. 2d 368, 375 (W.D.N.C. 2012) (Mullen,

J.) (granting default judgment where a commodity pool operator and its control person engaged

in fraudulent solicitation, misappropriated pool participant funds and issued false statements).

“In considering a motion for default judgment, the Court accepts as true the well-pleaded

factual allegations in the Complaint as to liability.” Maaco Franchisor SPV, LLC v. Cruce, No.

3:18-cv-361, 2019 WL 5295702, at *4 (W.D.N.C. Oct. 18, 2019) (citing Ryan v. Homecomings

Fin. Network, 253 F.3d 778, 780 (4th Cir. 2001); TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d

915, 917-18 (9th Cir. 1987)). However, “the entry of ‘default is not treated as an absolute

confession of liability by the defendant of his liability or of the plaintiff’s right to recover.’”

Maaco, 2019 WL 5295702, at *4 (quoting Ryan, 253 F.3d at 780). Rather, the Court must

“determine whether the well-pleaded allegations in [the] Complaint support the relief sought.”

Id. (quoting Ryan, 253 F.3d at 780).

Regarding damages, the Court “cannot accept Plaintiff’s factual allegations as true and

must make an “independent determination.” Id. (quoting CGI Finance, Inc. v. Johnson, No.

ELH-12-1895, 2013 WL 1192353, at *1 (D. Md. Mar. 21, 2013)). “Although the Court must

make an independent determination regarding damages, an evidentiary hearing is not required;

rather the Court may rely on affidavits or documentary evidence in the record to determine the

appropriate sum.” Prestige Capital Advisors, 2013 WL 7224738, at *1 (ECF No. 27-2 at p. 7)

(citing J&J Sports Productions, Inc. v. Romenski, 845 F. Supp. 2d 703, 706 (W.D.N.C. 2012)

(Conrad, C.J.)); see also CFTC v. Capitalstreet Financial, LLC, No. 3:09-cv-387, 2012 WL

79758, at *1 (W.D.N.C. Jan. 11, 2012) (Conrad, C.J.) (taking as true the factual allegations of the

complaint which were well-pleaded and issuing a final order of permanent injunction that also

provided for restitution, a civil monetary penalty and ancillary equitable relief pursuant to 7

U.S.C. § 13a-1); PMC Strategy, 903 F. Supp. 2d at 380–84 (same).

In this matter, a Clerk’s Entry of Default has been entered against WRI pursuant to the

Commission’s request. As such, in accordance with Fed. R. Civ. P. 55(b)(2) and 8(b)(6), the

allegations in the Complaint will be taken as true and default judgments are hereby entered

against WRI.

B. Jurisdiction and Venue

This Court has jurisdiction over this action under 28 U.S.C. § 1331 (2018) (federal

question jurisdiction) and 28 U.S.C. § 1345 (2012) (district courts have original jurisdiction over

civil actions commenced by the United States or by any agency expressly authorized to sue by

Act of Congress). 7 U.S.C. §§ 2(c)(2)(C) and13a-l(a) (2018), authorize the Commission to seek

injunctive relief against any person whenever it shall appear that such person has engaged, is

engaging, or is about to engage in any act or practice that violates any provision of the Act or any

rule, regulation, or order promulgated thereunder.

Venue properly lies with the Court pursuant to 7 U.S.C. § 13a-1(e) (2018), because

Defendants resided in this District, Defendants transacted business in this district, and the acts

and practices in violation of the Act occurred within this District.

C. WRI Violated the Act and Regulations

1. WRI Violated 7 U.S.C. §§ 6b(a)(1)(A)-(C) and 6b(a)(2)(A)-(C) (2018), and 17

C.F.R. § 5.2(b)(1)-(3) (2019)

7 U.S.C. §§ 6b(a)(1)(A)-(C), (a)(2)(A)-(C) make it unlawful for any person to (A) cheat

or defraud or attempt to cheat or defraud another person, (B) willfully to make a false report or

statement to another person, or (C) willfully to deceive or attempt to deceive another person by

any means whatsoever in connection with any futures or retail forex transaction.

17 C.F.R. § 5.2(b)(1)-(3) makes it unlawful for any person, by use of the mails or by any

means or instrumentality of interstate commerce, to (1) cheat or defraud or attempt to cheat or

defraud another person, (2) willfully to make a false report or statement to another person, or (3)

willfully to deceive or attempt to deceive another person by any means whatsoever in connection

with any forex transaction.

WRI violated 7 U.S.C. §§ 6b(a)(1)(A)-(C), (a)(2)(A)-(C) and 17 C.F.R § 5.2(b)(1)-(3) by

misappropriating pool participants’ funds, by making material misrepresentations with scienter,

and by willfully issuing false statements.

a. WRI Misappropriated Funds

During the Relevant Period, WRI accepted $276,850 from pool participants for the

purpose of trading futures and forex. During the same period, WRI made payments of $21,000

to various pool participants. Thus, WRI misappropriated $255,850.

Misappropriation of client and pool participant funds constitutes “willful and blatant”

fraud. CFTC v. Noble Wealth Data Info. Servs., Inc., 90 F. Supp. 2d 676, 687 (D. Md. 2000),

aff’d sub nom. CFTC v. Baragosh, 278 F.3d 319 (4th Cir. 2002).

b. WRI Made Fraudulent Misrepresentations and Omissions and Issued

False Statements

To establish liability for fraud based on misrepresentations and omissions, the

Commission must prove that: (1) a misrepresentation, misleading statement, or omission was

made; (2) that the misrepresentation, statement or omission was material; and (3) that it was

made with scienter. R.J. Fitzgerald & Co., Inc., 310 F.3d at 1328 (citations omitted). “Whether

a misrepresentation has been made depends on the ‘overall message’ and the ‘common

understanding of the information conveyed.’” Id. (citing Hammond v. Smith Barney Harris

Upham & Co., CFTC No. 86-R131, 1990 WL 282810, at *4 & n.12 (Mar. 1, 1990)). The

Commission has proven all three elements.

i. WRI’s Misrepresentations

WRI falsely represented to pool participants that Pyatt was a successful trader who could

generate substantial profits and that pool participants’ funds would be used to trade futures and

forex for their benefit. In fact, WRI’s claims of trading success were highly misleading, and

only a fraction of pool participants’ funds was used to trade.

ii. WRI Acted with Scienter

The scienter element is established when an individual’s acts are performed “with

knowledge of their nature and character,” Wasnick v. Refco, Inc., 911 F.2d. 345, 348 (9th Cir.

1990) (internal quotation marks and citation omitted), and that the defendant acted with more

than “mere negligence, mistake or inadvertence.” Id. This standard may be met by

demonstrating that a defendant committed the alleged wrongful acts intentionally or with

reckless disregard for his duties under the Act. See Drexel Burnham Lambert, Inc. v. CFTC, 850

F.2d 742, 748 (D.C. Cir. 1988) (finding that recklessness is sufficient to satisfy scienter

requirement). To prove that conduct is intentional, the Commission need only show that a

defendant’s actions were “intentional as opposed to accidental.” Lawrence v. CFTC, 759 F. 2d

767, 773 (9th Cir. 1985).

WRI acted with scienter. First, WRI, through Pyatt, engaged in misappropriation of pool

participant funds to pay WRI’s business and personal expenses and to make Ponzi payments to

pool participants. Second, Pyatt exercised complete control over WRI. He was solely

responsible for developing WRI’s trading strategy, and directing the trading. He was responsible

for the agreements with pool participants and prepared the false monthly and individual reports

transmitted to pool participants. Thus, WRI knew that its representations of trading success and

disposition of funds were false.

iii. WRI’s Misrepresentations Were Material

A statement is material if “it is substantially likely that a reasonable investor would

consider the matter important in making an investment decision.” CFTC v. Driver, 877 F. Supp.

2d 968, 977 (C.D. Cal. 2012) (granting summary judgment to CFTC against CPO), aff’d 585

Fed. App’x 366 (9th Cir. Oct. 7, 2014). Any fact that enables customers to assess independently

the risk inherent in their investment and the likelihood of profit is a material fact. Driver, 877 F.

Supp. 2d at 978 (“Driver’s representations and omissions were false and material because they

impacted the pool participants’ decisions to invest, remain in the pool, or make additional

investments.”). Any fact that enables investors to assess independently the risk inherent in their

investment and the likelihood of profit is a material fact. In re Commodities Int’l Corp., [1996-1998

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,943, at 44,563-64 (CFTC Jan. 14, 1997).

Moreover, a material misrepresentation or omission is a violation whether or not it induces customer

action or inaction; rather, it is sufficient that a material misrepresentation or omission is made to

“attempt to cheat or defraud” or willfully to “attempt to deceive” a person. Comm’n v. Int’l Fin.

Servs., 323 F. Supp. 2d 482, 502 (S.D.N.Y. 2004) (because the Act makes actionable not only fraud,

but the “attempt to cheat or defraud,” it may be “unnecessary to show reliance even in a private

action – for an attempt that fails (perhaps because no one relied on it) is nonetheless a violation”

(quoting Slusser, 210 F.3d at 786)).

WRI’s misrepresentations were material. A reasonable individual would want to know,

among other things, that his/her funds were not being used to trade as promised, but rather were

misappropriated by WRI and that Pyatt was not a highly profitable trader.

c. WRI Issued False Statements

WRI violated 7 U.S.C. §§ 6b(a)(1)(B) and 6b(a)(2)(B) of the Act when they provided

periodic written reports to pool participants. The pool-wide reports typically referred to

substantial gains each month. The reports WRI provided to pool participants did not accurately

reflect WRI’s trading results using pool participants’ funds.

2. WRI Violated 7 U.S.C. § 6o(1)(A), (B) (2018)

7 U.S.C. § 6o(1)(A), (B) (2018), in relevant part, makes it unlawful for a Commodity

Trading Advisor (“CTA”) or Commodity Pool Operator (“CPO”), by use of the mails or any

other means of interstate commerce, directly or indirectly, to: (A) employ any device, scheme,

or artifice to defraud any customer; or (B) engage in any transaction, practice, or course of

business that operates as a fraud or deceit upon any customer. “[7 U.S.C. § 6o(1)] broadly

prohibits fraudulent conduct by a [CTA]” and “applies to all [CTAs] whether registered, required

to be registered, or exempted from registration.” CFTC v. Weinberg, 287 F. Supp. 2d 1100,

1107–08 (C.D. Cal. 2003) (citing CFTC ex rel. Kelley v. Skorupskas, 605 F. Supp. 923, 932

(E.D. Mich. 1985)). The same fraudulent conduct that violates Section 4b of the Act also

violates Section 4o(1) of the Act.

7 U.S.C. § 1a(11) (2018) defines a CPO as, among other things, any person engaged in a

business that is of the nature of a commodity pool and who solicits, accepts, or receives from

others, funds, securities, or property for the purpose of trading commodity interests. For forex, a

CPO is defined in 17 C.F.R. § 5.1(d)(1) (2019), as “any person who operates or solicits funds,

securities, or property for a pooled investment vehicle that is not an ECP as defined in section

1a(18) of the Act, and that engages in retail forex transactions.”

7 U.S.C. § 1a(18)(A)(xi) (2018), in relevant part, defines an ECP to mean an individual

“acting for its own account —who has amounts invested on a discretionary basis, the aggregate

of which is in excess of—(I) $10,000,000; or (II) $5,000,000 and who enters into the agreement,

contract, or transaction in order to manage the risk associated with an asset owned or liability

incurred, or reasonably likely to be owned or incurred, by the individual.” Most, if not all, of the

pool participants were not ECPs.

7 U.S.C. § 1a(12) (2018), defines a CTA as any person who for compensation or profit,

engages in the business of advising others as to the value or advisability of trading in, among

other things, futures contracts or forex transactions. Similarly, 17 C.F.R. § 5.1(e)(1) (2019)

defines a CTA as “any person who exercises discretionary trading authority or obtains written

authorization to exercise discretionary trading authority over any account for or on behalf of any

person that is not an [ECP] in connection with retail forex transactions.”

During the Relevant Period, WRI acted as a CPO by soliciting and accepting funds for a

pooled investment vehicle from non-ECPs for the purpose of engaging in trading futures and

forex.

E. WRI Is Liable for the Violations of Its Agent, Pyatt

Under 7 U.S.C. § 2(a)(1)(B) (2018) and 17 C.F.R. § 1.2 (2019), a principal is strictly

liable for the violations of its officials, agents, or other persons acting for it within the scope of

their employment or office. Rosenthal & Co. v. CFTC, 802 F.2d 963, 966 (7th Cir. 1986) (“[W]e

have no doubt that section 2(a)(1) imposes strict liability on the principal . . . provided, of course,

as the statute also states expressly, that the agent’s misconduct was within the scope or

(equivalently but more precisely) in furtherance of the agency.”). Pyatt was an official,

employee, or agent of WRI and acted within the scope of his employment or office. Thus, WRI

is liable for Pyatt’s violations of the Act and Regulations described above and in the Complaint.

F. Pyatt Is Liable as a Controlling Person for WRI’s Violations

7 U.S.C. § 13(b) (2018), states that a controlling person of an entity is liable for the

violations of that entity, provided that the controlling person knowingly induced, directly or

indirectly, the violations, or provided that the controlling person did not act in good faith. “A

fundamental purpose of Section [13(b)] is to allow the Commission to reach behind the corporate

entity to the controlling individuals of the corporation and to impose liability for violations of the

Act directly on such individuals as well as the corporation itself.” R.J. Fitzgerald & Co., Inc.,

310 F.3d at 1334 (internal quotation marks and citation omitted).

To establish controlling person liability under Section 13(b) of the Act, the Commission

must show both: (1) control; and (2) lack of good faith or knowing inducement of the acts

constituting the violation. See In re First Nat’l Trading Corp., CFTC No. 90-28, 1994 WL

378010, at *11 (July 20, 1994), aff’d without opinion sub nom. Pick v. CFTC, 99 F.3d 1139 (6th

Cir. 1996). The Commission has proven both elements here.

To establish the first element, control, a defendant must possess general control over the

operation of the entity principally liable. See, e.g., R.J. Fitzgerald, 310 F.3d at 1334

(recognizing an individual who “exercised the ultimate choice-making power within the firm

regarding its business decisions” as a controlling person). The Commission must also show that

a defendant possessed specific control, which is “the power or ability to control the specific

transaction or activity upon which the primary violation was predicated.” Monieson v. CFTC,

996 F.2d 852, 860 (7th Cir. 1993) (internal quotation marks and citation omitted).

In addition to control, the Commission must show the controlling person knowingly

induced, directly or indirectly, the acts constituting the violation, or did not act in good faith. To

show knowing inducement, the Commission must show that a defendant had actual or

constructive knowledge of the core activities that constituted the violation of the Act or the

Regulations, and allowed the activities to continue. R.J. Fitzgerald, 310 F.3d at 1334; Spiegel,

1988 WL 232212, at *7. To show lack of good faith, the Commission must show that a

defendant failed to maintain a “reasonably adequate system of internal supervision and control”

or did not oversee the system “with any reasonable diligence.” Monieson, 996 F.2d at 860 (7th

Cir. 1993) (quoting Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873, 881 (7th Cir. 1992)).

As to Pyatt’s general and specific control, he was the vice president, investment

consultant and had power of attorney for WRI, and directed every aspect of the fraudulent

scheme. He directly made misrepresentations to pool participants, provided false information to

pool participants, and misappropriated pool participants’ funds. Thus, Pyatt had general control

over WRI and specific control over the misconduct alleged in the Complaint.

In addition, Pyatt knowingly induced the violations because he individually had

knowledge of the wrongdoing and allowed it to continue. See Spiegel, 1988 WL 232212, at *7

(“[W]e reject the view that a controlling person must know that the acts at issue amount to a

violation in order to be held to have ‘knowingly’ induced the acts constituting the violation. . . .

[I]f the controlling person knowingly induces acts that amount to a violation, he will not escape

liability merely because he acted in good faith.”). Thus, Pyatt is liable for WRI’s violations as a

controlling person.

V. ORDER FOR RELIEF

A. Permanent Injunction

7 U.S.C. § 13a-1(a) provides that:

(a) Whenever it shall appear to the Commission that any registered entity

or other person has engaged, is engaging, or is about to engage in any act

or practice constituting a violation of any provision of this chapter or any

rule, regulation or order thereunder . . . the Commission may bring an

action in the proper district court of the United States . . . to enjoin such

act or practice, or to enforce compliance with this chapter, or any rule,

regulation or order thereunder . . .

Based upon and in connection with the conduct described above, pursuant to 7 U.S.C.

§ 13a-1, WRI, and any other person or entity associated with it, is permanently restrained,

enjoined and prohibited from directly or indirectly:

1. Cheating or defrauding, or attempting to cheat or defraud, other persons; issuing

or causing to be issued false reports; and willfully deceiving or attempting to deceive other

person in or in connection with any order to make, or the making of, any contract of sale of any

commodity for future delivery, or forex contract that is made, or to be made, for or on behalf of,

or with, any other person in violation of , 7 U.S.C. §§ 6b(a)(1)(A)-(C), 6b(a)(2)(A)-(C), (2018),

and 17 C.F.R. 5.2(b)(1)-(3) (2019);

2. Using the mails or other means or instrumentalities of interstate commerce to

directly or indirectly employ a device, scheme, or artifice to defraud clients or prospective

clients, or engage in transactions, practices, or courses of business which operate as a fraud or

deceit upon clients or prospective clients in violation of 7 U.S.C. § 6o(1) (2018);

3. Trading on or subject to the rules of any registered entity (as that term is defined

in 7 U.S.C. § 1a(40);

4. Entering into any transactions involving “commodity interests” (as that term is

defined in 17 C.F.R. § 1.3(2019)) for WRI’s own personal accounts or for any account in which

it has a direct or indirect interest;

5. Having any commodity interests traded on its behalf;

6. Controlling or directing the trading for or on behalf of any other person or entity,

whether by power of attorney or otherwise, in any account involving commodity interests;

7. Soliciting, receiving or accepting any funds from any person for the purpose of

purchasing or selling any commodity interests;

8. Applying for registration or claiming exemption from registration with the

Commission in any capacity, and engaging in any activity requiring such registration or

exemption from registration with the Commission except as provided for in 17 C.F.R. §

4.14(a)(9) (2019); and/or

9. Acting as a principal (as that term is defined in 17 C.F.R. § 3.1(a) (2019)), agent

or any other officer or employee of any person registered, or exempted from registration, or

required to be registered with the Commission except as provided for in 17 C.F.R. § 4.14(a)(9)

(2019).

B. Restitution

This Court has the authority to award restitution to the victims of Defendants’ fraud.

7 U.S.C. 13a-1(d)(3) states, in relevant part, that:

. . . the Commission may seek, and the court may impose, on a

proper showing, on any person found in the action to have

committed any violation, equitable remedies including— (A)

restitution to persons who have sustained losses proximately

caused by such violation (in the amount of such losses). . .

The object of restitution is to restore the status quo and return the parties to the positions

they occupied before the transactions at issue occurred. Prestige Capital Advisors, 2013 WL

7224738, at *1 (ECF No. 27-2 at p. 18) (imposing restitution for violations of Sections 4b and 4o

of the Act) (citing Porter, 328 U.S. at 402 (equitable restitution consists of “restoring the status

quo and ordering the return of that which rightfully belongs to the purchaser or tenant”)).

“Restitution is measured by the amount invested by customers less any refunds made by

the [D]efendants.” Prestige Capital Advisors, 2013 WL 7224738, at *1 (ECF No. 27-2 at p. 19)

(quoting Noble Wealth, 90 F. Supp. 2d at 693). See also CFTC v. Marquis Fin. Mgmt. Systems,

Inc., 2005 WL 3752232, at *6 (E.D. Mich. 2005) (ordering restitution in the amount of net

customer deposits); Rosenberg, 85 F. Supp. 2d at 455 (ordering restitution in amount of customer

deposits).

Here, WRI fraudulently solicited $276,850 from pool participants, and returned $21,000

to some pool participants. Accordingly, the proper measure of restitution is $255,850, the total

amount of losses incurred by WRI pool participants.

C. Civil Monetary Penalty

This Court has the authority to impose a CMP against Defendants. 7 U.S.C. § 13a-

1(d)(1) states, in relevant part, that

(d)(1) . . . the Commission may seek and the court shall have

jurisdiction to impose, on a proper showing, on any person found

in the action to have committed any violation . . . a civil penalty in

the amount of not more than the greater of $100,0001 or triple the

monetary gain to the person for each violation . . . .

The Court is free to fashion a civil monetary penalty appropriate to the gravity of the

offense and sufficient to act as a deterrent. Miller v. CFTC, 197 F.3d 1227, 1236 (9th Cir. 1999);

see also CFTC v. Hayes, 2007 WL 858772, at *5 (E.D. Va. Mar. 13, 2007) (imposing penalty of

triple the monetary gain). “In determining how extensive the fine for violations of the Act ought

to be, courts and the Commission have focused upon the nature of the violations.” Capitalstreet

Financial, LLC, 2012 WL 79758, at *15 (quoting Noble Wealth, 90 F. Supp. 2d at 694).

Conduct that violates the core provisions of the Act, such as fraud, should be considered

extremely serious. Prestige Capital Advisors, 2013 WL 7224738, at *1 (ECF No. 27-2 at p. 22);

see also JCC, Inc. v. CFTC, 63 F.3d 1557, 1571 (11th Cir. 1995). In JCC, Inc., the U.S. Court of

Appeals for the Eleventh Circuit upheld the district court order imposing a civil monetary

penalty, finding that “[c]onduct that violates the core provisions of the Act’s regulatory system –

such as manipulating prices or defrauding customers should be considered very serious even if

there are mitigating facts and circumstances.” JCC, Inc., 63 F.3d at 1571 (internal quotation

marks and citation omitted) (emphasis added). In the case at hand, there are no mitigating facts

or circumstances. Instead, Defendants were blatant and malicious in their fraudulent conduct.

The Commission has requested that the Court impose a serious and significant sanction

against to Defendants and order them to pay a CMP of triple the monetary gain to Defendants.

The Court agrees that serious and significant sanctions should be imposed, and the Court orders

WRI and Pyatt to pay, jointly and severally, $727,299.96 which represents triple the monetary

1 For the time period at issue in the case at bar, the maximum civil monetary penalty (“CMP”)

that may be ordered is $182,031 for each violation of the Act committed on or after November 2,

2015, or triple the monetary gain to the Defendant, whichever is higher. See 17 C.F.R.

§ 143.8(a)(1)(iv) (2012).

gain to Defendants, i.e., triple the amount of money placed by pool participants ($276,850), less

funds returned to customers ($21,000) and funds actually used to trade ($13,416.68) (the “CMP

Obligation”).

WRI and/or Pyatt shall pay the CMP Obligation immediately and post-judgment interest

shall accrue on the CMP Obligation beginning on the date of entry of this Order and shall be

determined by using the Treasury Bill rate prevailing on the date of this Order pursuant to 28

U.S.C. § 1961 (2006).

WRI and/or Pyatt shall pay the CMP Obligation by electronic funds transfer, or by U.S.

Postal money order, certified check, bank cashier’s check, or bank money order. If payment is to

be made other than by electronic funds transfer, the payment shall be made payable to the

Commodity Futures Trading Commission and sent to the address below:

MAC/ESC/AMK326

Commodity Futures Trading Commission

Division of Enforcement

6500 S. MacArthur Blvd.

HQ Room 181

Oklahoma City, OK 73169

(405) 954-6569 office

(405) 954-1620 fax

9-AMC-AR-CFTC@faa.gov

If payment is to be made by electronic funds transfer, WRI and/or Pyatt shall contact

Marie Thorne or her successor at the above address to receive payment instructions and shall

fully comply with those instructions. WRI and/or Pyatt shall accompany payment of the penalty

with a cover letter that identifies the Defendant and the name and docket number of the

proceedings. The WRI and/or Pyatt shall simultaneously transmit copies of the cover letter and

the form of payment to the Director, Division of Enforcement, Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581, and the

Chief, Office of Cooperative Enforcement, Division of Enforcement, at the same address.

VI. MISCELLANEOUS PROVISIONS

Equitable Relief: The injunctive and equitable relief provisions of this Order shall be

binding upon WRI and upon any persons who are acting in the capacity of agent, officer,

employee, servant, attorney, successor and/or assign of WRI, and upon any person acting in

active concert or participation with WRI who receives actual notice of this Order by personal

service or otherwise.

Notices: All notices required to be given to the Commission by any provision in this

Order shall be sent certified mail, return receipt requested, as follows:

Richard A. Glaser

Deputy Director

Commodity Futures Trading Commission

Division of Enforcement

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

Continuing Jurisdiction of this Court: This Court shall retain jurisdiction of this case

to assure compliance with this Order and for all other purposes related to this action.

Signed: February 2, 2021

p-crvrnne<

Max O. Cogburn i )

United States District Judge Feat