CFTC Charges Chicago Commodity Pool Operators, Owner, and Former Chief Portfolio Manager with Fraud and Supervision Failures
Former Chief Risk Officer Settles Fraud Charge
Washington, DC (STL.News) The Commodity Futures Trading Commission today announced filing charges in federal court against Chicago commodity pool operators (CPOs) LJM Partners Ltd and LJM Funds Management Ltd, (collectively LJM), their Chairman, owner, and registered associated person (AP) Anthony J. Caine of Colorado and Chief Portfolio Manager Anish Parvataneni of Illinois with commodity pool fraud and fraud in connection with options on futures contracts for false or misleading statements about worst-case losses, risk management, and LJM’s risk profile.
The complaint also charges LJM and Caine for failing to diligently supervise their employees and agents. According to the complaint, in January 2018, LJM had over $1 billion in assets under management, but on February 5 and 6, 2018, LJM’s portfolios suffered large trading losses (over 80%) when the Chicago Board Options Exchange’s Volatility Index (VIX) spiked over 20 points and, shortly thereafter, LJM closed its business.
The CFTC today also issued an order filing and settling fraud charges against LJM’s former Chief Risk Officer and registered AP of LJM, Arjuna Ariathurai and requiring him to pay a civil monetary penalty of $150,000, disgorgement of $83,333, along with pre-judgment interest of $14,111, and to cease and desist from further violations. The order also requires Ariathurai not to engage in certain trading-related activities, apply for registration or act as a principal or agent for any CFTC registrant for three years.
In its continuing litigation against the defendants, the CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction against further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.
“It is imperative that all participants in our markets receive full disclosure of material information and protection from fraudulent practices,” said Acting Director of Enforcement Vincent McGonagle. “When companies or individuals make false or misleading statements about the risks of trading or fail to diligently supervise their employees or agents’ activities relating to their business as CFTC registrants, the CFTC will seek to hold them accountable.”
The CFTC complaint alleges that from at least June 2016 through February 2018, LJM managed several commodity pools, a mutual fund, and individually managed client accounts and made several false and misleading statements to prospective and existing pool participants and others in connection with its short options trading strategies. The complaint alleges LJM represented that the worst-case scenario for its strategies was a maximum daily loss of 20% for P&G, 30% for Moderately Aggressive, and 35-40% for Aggressive as calculated from LJM’s internal historical scenario analysis (i.e. events like Lehman Bros collapse 2008, Flash Crash 2010, and S&P downgrade of U.S. debt 2011). This representation was false because the worst-case scenarios were not based on historical scenarios, and LJM’s internal historical scenarios showed losses much greater than 40% for each strategy, according to the complaint.
The complaint also charges LJM with falsely representing to prospective and existing pool participants and others in connection with its options trading strategies that LJM had “robust risk management” that utilized historical scenario analysis when, in fact, LJM did not use historical scenarios in risk management. In addition, LJM failed to disclose in writing that it ignored the impact of vega or volatility risk in risk management and that it failed to comply with its own internal risk policy. The complaint charges that LJM and Parvataneni failed to disclose that the risk profile of LJM’s portfolio had changed after repeatedly touting to pool participants that LJM maintained a consistent risk profile. The complaint alleges that by late 2017 through February 2018, LJM had significantly deviated from its historical risk profile, in that the delta had moved from negative to consistently positive, vega decreased, gamma decreased and the portfolio’s vulnerability to loss in certain scenarios more than doubled.
Caine is charged with liability for all of LJM’s misrepresentations as a controlling person who knowingly induced the violations or did not act in good faith. Additionally, both Caine (registered AP of LJM) and LJM (registered CPO) are charged with failing to diligently supervise their employees and agents who, among other things, made certain false and misleading statements and failed to comply with LJM’s risk policy.
CFTC Order Against Ariathurai
The order against Ariathurai finds that statements of Ariathurai in the Risk FAQ and 2016 DDQ that potential worst-case daily losses from selling options could be limited to 20-40%, depending on the strategy were false and misleading; and that, when speaking to prospective and existing pool participants about LJM’s risk management, he failed to disclose that LJM did not actually implement historical scenarios in risk management.
The Securities and Exchange Commission (SEC) today also issued an order filing and settling similar charges against Ariathurai and filed a complaint against LJM, Caine, and Parvataneni in federal court. Per the terms of the CFTC and SEC orders, any payments of the monetary sanctions paid by Ariathurai will be credited by each agency. Moreover, per the terms of the SEC order, a Fair Fund may be established for the benefit of affected investors.
The CFTC acknowledges and appreciates the cooperation and assistance of the SEC, the National Futures Association (NFA), and the Financial Industry Regulatory Authority (FINRA).
The Division of Enforcement staff members responsible for this action is W. Derek Shakabpa, Patrick Daly, Michael Cazakoff, Elizabeth May, Jordon Grimm, David Acevedo, Lenel Hickson, and Manal Sultan.
CFTC’s Commodity Pool Fraud Advisory
The CFTC has issued several customer protection Fraud Advisories, including the Commodity Pool Fraud Advisory, which warns customers about a type of fraud involving individuals and firms, often unregistered, offering investments in commodity pools.
The CFTC also strongly urges the public to verify a company’s registration with the CFTC before committing funds. If unregistered, a customer should be wary of providing funds to that entity. A company’s registration status can be found using NFA BASIC.
Customers and other individuals can report suspicious activities or information, such as possible violations of commodity trading laws, to the Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382), file a tip or complaint online, or contact the Whistleblower Office. Whistleblowers are eligible to receive between 10 and 30 percent of the monetary sanctions collected paid from the Customer Protection Fund financed through monetary sanctions paid to the CFTC by violators of the CEA.