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Commodity Futures Trading Commission v. Tallinex

United States District Court, D. Utah, Central Division

July 9, 2018

COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
TALLINEX a/k/a TALINEX, Ltd.; and GENERAL TRADER FULFILLMENT, Defendants.

          ORDER FOR FINAL JUDGMENT BY DEFAULT, PERMANENT INJUNCTION, CIVIL MONETARY PENALTIES, AND OTHER STATUTORY AND EQUITABLE RELIEF

          David Nuffer United States District Judge.

         On May 30, 2017, the Commodity Futures Trading Commission (“Commission” or “Plaintiff”) filed a Complaint[1] charging Defendant Tallinex a/k/a Tallinex, Ltd. (“Defendant” or “Tallinex”) with violating Sections 2(c)(2)(C)(iii)(I)(aa), 4b(a)(2)(A) and (C) and 6(c)(1) of the Commodity Exchange Act (“the Act”), 7 U.S.C. §§ 2(c)(2)(C)(iii)(I)(aa), 6b(a)(2)(A), (C) and 9(1) (2012) and Commission Regulations (“Regulations”) 5.2(b)(1) and (3), 5.3(a)(6)(i), 5.5 and 180.1, 17 C.F.R. §§ 5.2(b)(1) and (3), 5.3(a)(6)(i), 5.5 and 180.1 (2017).

         On August 15, 2017, Tallinex was properly served with the summons and Complaint pursuant to Rule 4(f)(2)(C)(ii) of the Federal Rules of Civil Procedure (“Fed. R. Civ. P.”) by registered mail addressed by the Clerk of the Court.[2] Defendant Tallinex's Answer was due on September 5, 2017. Tallinex has failed to appear or answer the Complaint within the time permitted by Fed.R.Civ.P. 12(a)(1). Accordingly, upon the Commission's filing of a motion for entry of a clerk's default against Defendant Tallinex, [3] and on April 24, 2018, the Clerk of this Court entered a default against Defendant Tallinex.[4] The Commission has now moved this Court to grant final judgment by default against Defendant Tallinex, order permanent injunctive relief, and impose a restitution obligation and a civil monetary penalty.[5]

         Having carefully considered the Complaint, the allegations of which are well-pleaded and hereby taken as true, the Commission's memorandum in support of its motion, the record in this case, and being otherwise advised in the premises, IT IS HEREBY ORDERED that the Plaintiff's Motion for Default Judgment[6] against Defendant Tallinex is GRANTED. Accordingly, findings of fact, conclusions of law, and an Order of Final Judgment by Default for Permanent Injunction, Civil Monetary Penalties, and Other Statutory and Equitable Relief (“Order”) pursuant to Sections 6c and 6d of the Act, 7 U.S.C. § 13a-1 (2012), are entered as set forth herein.

         I.

         FINDINGS OF FACT AND CONCLUSIONS OF LAW

         A. Findings of Fact The Parties to This Order

         1. Plaintiff Commodity Futures Trading Commission is an independent federal regulatory agency that is charged by Congress with administering and enforcing the Act, 7 U.S.C. §§ 1-26 (2012), and the Regulations promulgated thereunder, 17 C.F.R. Pt. 1.1 - 190.10 (2017).

         2. Defendant Tallinex a/k/a Tallinex Limited is an Estonian company licensed to do business in St. Vincent and the Grenadines. It uses as a business address The Jaycees Building Stoney Ground, P.O .Box 362, Kingstown VC0100, St Vincent and the Grenadines, and also purports to have a business address in Estonia of Tornimae tn5, Kesklinna Iinnaosa, Tallina linn, Harju Maarkond 10145. Tallinex has never been registered with the Commission in any capacity.

         Tallinex's Operations

         3. Tallinex operated a website at www.tallinex.com and also operated an introducing broker program whereby companies introduced forex trading accounts to Tallinex and received commissions on revenue generated by the accounts' trading activity.

         4. At least during the relevant time period, Tallinex solicited and accepted funds and orders from non-ECP, U.S. resident customers to trade leveraged forex contracts.

         5. Customers could open trading accounts by submitting information online through Tallinex's website. During the relevant period, the Tallinex website, in the frequently asked questions section, stated, “Tallinex welcomes residents of the U.S. . . . and provides them with the same leverage and hedging facilities as non-U.S. . . . residents.” Further, Tallinex's online application contained a drop down menu for the applicant to select his or her “country” and the U.S. was one of the choices. The online application also allowed a customer to select a currency for his or her account, and one of the two available currencies was the U.S. dollar.

         6. In or around September 2016, Tallinex changed its website to state that it does not accept U.S. customers.

         7. Tallinex's online application did not solicit information concerning whether prospective customers were ECPs and it failed to inquire whether a prospective customer had the ability or the business need to accept foreign currency into his or her bank account. Tallinex permitted customers to open forex trading accounts with a minimum initial deposit of 100 EUR/USD. Tallinex's website stated that its ECN-Micro account was “designed for traders new to the [f]orex market, and those needing to trade smaller volumes.” 8. Tallinex determined the “spread” for the forex contracts it offered to customers. Tallinex offered its customers' variable spreads averaging between 0.5 and 2.5 pips (the measuring mechanism for price changes in forex contracts per contract such as EUR/USD (Euros versus U.S. dollars). Tallinex therefore acted as the counterparty to its customers' contract.

         9. Tallinex offered its non-ECP customers forex contracts with leverage of up to 1:1000. This meant that a customer could increase its trading position by buying or selling up to 1000 times the amount of funds he or she had invested. Thus, for example, a Tallinex customer could trade up to $1, 000, 000 notional value in foreign currencies with a $1, 000 deposit, and a customer with $10, 000 invested could trade up to $10, 000, 000 in foreign currencies. This spectacularly high degree of leverage meant that even a small price movement could produce large losses in relation to the customer's initial deposit and could result in customers rapidly losing their funds and being unable to ever recover from a losing trade.

         10. Tallinex's online account application did not require that the customer state whether or not the customer had the ability to deliver and accept delivery in connection with the customer's lines of business, which is one of the prerequisites to qualify as an ECP.

         11. Tallinex's forex contracts neither resulted in delivery within two days nor created an enforceable obligation to deliver between a seller and a buyer who had the ability to deliver and accept delivery, respectively, in connection with their lines of business. Rather, these forex contracts were ultimately offset without anyone making or taking delivery of actual currency (or facing an obligation to do so).

         Tallinex's Solicitation Fraud

         12. Defendant Tallinex fraudulently solicited U.S. retail forex customers by making false and misleading misrepresentations of material fact and omitting material information, including but not limited to: (a) falsely representing that Tallinex could do business in the United States; (b) misrepresenting and omitting the likelihood of profit and risk of loss involved in trading their forex contracts; (c) falsely and misleadingly representing the safety of customer funds in the event of Tallinex's financial collapse (i.e., counterparty risk).

         13. Defendant Tallinex made these false and misleading misrepresentations of material fact and omitted material information during the relevant period on its website, in correspondence and discussions with retail forex customers, and in social media sites available to the general public, among other places.

         14. Defendant Tallinex falsely represented to U.S. customers that it could do business in the U.S. by stating on its website that it “welcomes residents of the U.S.” and using at least one domestic IB to solicit U.S. customer accounts on Tallinex's behalf.

         15. Further, in the course of soliciting U.S. customers, Tallinex misrepresented and omitted material facts regarding the likelihood of profit and the risk of loss associated with trading Tallinex's forex contracts.

         16. Specifically Tallinex's website represented that money managers who traded its forex contacts for customers made purported profits of 162.29% in a little over a year [and] up to 1301.10% in a little over a two-year period. Tallinex promoted these extraordinary profits to create the misleading impression that forex investments made with it were likely to be profitable for the specific purpose of increasing its number of customer accounts. However, the website failed to disclose the likelihood of profits and risk of loss in trading its forex contracts. For example, it did not disclose the percentages of retail forex accounts that were profitable and not profitable. By acting as an RFED, Tallinex had a duty to disclose this information under Regulation 5.5 in order to give a balanced and realistic view of the results of trading its forex contracts.

         17. Tallinex also did not provide all customers with a risk disclosure statement that warned customers of the risk of rapid losses using leveraged trading. By acting as an RFED, Tallinex had a duty to disclose this information under Regulation 5.5 in order to give a balanced and realistic view of the results of trading its forex contracts with leverage.

         18. Tallinex knowingly or recklessly made these material misrepresentations and omissions. Tallinex had actual profit and loss history in its possession, but failed to disclose this balanced information to customers and potential custormers while touting extraordinary profits, including profits of between 162.29% and 1301.10%. Accordingly, Tallinex made these misrepresentations knowingly or recklessly.

         19. Tallinex also misrepresented to customers that their funds were segregated, suggesting that customers were protected from risk events such as Tallinex's financial collapse. This representation, which Tallinex posted on its website, was false.

         20. In fact, the written disclosure statement prescribed in Regulation 5.5 warns that RFEDs must state that the RFED may commingle customer funds with the RFED's own operating funds, use them for other purposes, and in the event of the RFED's bankruptcy any funds the RFED is holding for the customer, including any amounts owed to the customer, may be treated as an unsecured creditor's claim even if the customer accounts are segregated.

         B. Conclusions of Law Jurisdiction and Venue

         21. This court has jurisdiction over this action under 28 U.S.C. § 1331 (2012) (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). In addition, Section 6c of the Act, 7 U.S.C. § 13a-1 (2012), provides that whenever it shall appear to the Commission that any person has engaged, is engaging, or is about to engage in any act or practice constituting a violation of any provision of the Act or any rule, regulation, or order promulgated thereunder, the Commission may bring an action in the proper district court of the United States against such person to enjoin such act or practice, or to enforce compliance with the Act, or any rule, regulation or order thereunder.

         22. Venue properly lies with this court pursuant to Section 6c(e) of the Act, 7 U.S.C. § 13a-1(e) (2012), because the Defendant(s) transact business in this jurisdiction and the acts and practices in violation of the Act and Regulations occurred within this District, among other places.

         VIOLATIONS OF THE COMMODITY EXCHANGE ACT

         COUNT ONE: VIOLATION OF SECTION 2(c)(2)(C)(iii)(I)(aa) OF THE ACT, and COMMISSION REGULATION 5.3(a)(6)(i)

         Operating As an Unregistered ...


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