Investors seeking exposure to commodities through pooled investment funds can take steps to protect themselves against fraud.
Commodity pools offer diversification, but also expose investors to the risk of financial scams, according to federal regulators who’ve conducted dozens of enforcement activities this year alone against fraudulent operators of pooled investment scams involving foreign currency, and precious metals and other commodities.
Last week defendant William Center was ordered to pay more than $13 million in fines and restitution for a $28.4 million Ponzi scheme he operated with Gregory Center, according to the U.S. Commodity Futures Trading Commission. The two were found guilty ofmisusing at least $9.6 million of commodity pool funds for their personal use and to continue a Ponzi scheme that solicited some $28.4 million from at least 2,000 customers.
Retail investors seeking exposure to alternative investment products through commodity pools - funds that trade futures and securities - can take steps to protect themselves against fraud:
· Check for registration: Most fraudulent commodity pools involve unregistered operators, according to the CFTC. Commodity pool operators are generally required to register with the CFTC, but exemptions apply to small pools with less than $400,000 in capital and those with 15 or fewer participants, according to the National Futures Association. A registered commodity pool operator must also belong to the NFA to do futures business with the public.
· Recognize the signs: Fraudulent operators often solicit investors with false claims of high profits and low risk, and may work through established networks of friends, relatives, social organizations and church groups. Sales pitches may give investors the idea they can profit from widely reported news, and may use common persuasion tactics to solicit money. Be wary of commodity pool operators who promise large, quick and guaranteed returns, boast a highly profitable track record, claim to have special credentials or experience, or create a false sense of urgency, advises the CFTC.
· Ask questions and conduct a background check: Investors are advised to check a commodity pool operator’s registration and history through the CFTC or NFA. Regulators also recommend investors ask to see an operator’s risk disclosure documents and performance history, Investors are also urged to ask why the product is suitable and to determine the qualifications of the pool operator. The CFTC also recommends asking about all fees and commissions charged and requesting copies of statements from trading companies to the commodity pool operator.