Commodity trading has a long history in United States financial markets. From the earliest days of the republic, commodities ranging from wheat to pork bellies have been sold through small, informal markets. By the end of the 19th century, commodities trading had become a much larger business, institutionalized through markets like the Chicago Board of Trade.
Commodities trading can frequently be divided into two lines of activity: spot sales, entitling the owner to immediate delivery of the commodity in question, and futures contracts, entitling the owner to take delivery of a commodity at a specified date.
While commodity trading has existed in the Untied States for centuries, the regulatory approach to the practice has changed considerably over time. In 1936, Congress and President Franklin Roosevelt established the Commodity Exchange Authority to address what was perceived as rampant fraud and abuse in the commodities markets.
In 1974, Congress and President Gerald Ford replaced that agency with the Commodity Futures Trading Commission, tasking the replacement entity to serve as the lead regulator of commodities markets. In 2010, Congress and President Barack Obama further extended the powers of the CFTC through the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Commodities trading is frequently done on the basis of individual accounts, which refers to the money that an individual or entity puts forward to place trades in the commodities or commodities futures markets. However, a recent financial innovation has been increased trading in the form of commodities pools. Regulation of this form of investment has been strict, primarily because the government is intent upon protecting the assets of people who may be ill-prepared to invest and speculate on the commodity futures markets.
A commodity pool refers to a group of investors who combine their money together to invest in commodities or commodity futures. This form of commodities trading is perfectly legal when it follows the regulations that are promulgated by the Commodity Futures Trading Commission. In recent years, however, the federal government has investigated and aggressively prosecuted multiple cases of fraud in the formulation and execution of commodity pools.
Commodity pool fraud can occur in a number of ways, although three types are the most common. In the majority of cases, investors in a commodity pool are defrauded through misrepresentation. This means that the commodity pool is marketed through a misleading prospectus or other false or materially misleading statements by the organizer. For instance – in a classic case of commodity pool fraud – an organizer may promise a low rate of risk or a high rate of return while knowing that such claims are false.
Another example of commodity pool fraud is the misappropriation of commodity pool funds. In these cases, the organizer of a commodity pool deposits money intended for investment in commodities into unrelated – and typically personal – accounts. Because such misappropriation typically causes losses for investors, it is another serious federal offense.
Finally, failing to follow the CFTC’s regulations regarding registration – which must occur after a certain number of investors join or a certain amount of money is invested in a pool – is a federal offense.
Penalties for commodity pool fraud charges are often severe. Under federal law, the CFTC is empowered to bring civil actions to recover money from commodity pools. In some cases, pool organizers and managers have been responsible for millions of dollars in restitution payments.
Worse, the criminal penalties for commodity pool fraud are harsh. If found guilty of a single county of commodity pool fraud, an individual can face up to 10 years imprisonment per count. Since many indictments include multiple counts, such a sentence can quickly become an effective sentence of life imprisonment.
If you, your associates, or a loved one are being investigated or have been charged with commodity pool fraud, it is imperative that you contact an experienced criminal defense attorney immediately to safeguard your legal rights.
A competent, qualified defense lawyer can ensure that your legal rights are protected during the course of the investigation. If you are criminally charged in a commodity pool fraud matter, a criminal defense attorney can work with prosecutors to reach a favorable plea agreement or – if necessary – present a strong defense before a judge and jury.