Commodity Investments
Including everything from orange juice and precious metals to pork bellies and treasury bonds, commodity futures contracts are fast paced and volatile instruments through which a customer hopes to earn money from future price changes. Unfortunately, as in most areas of investment where substantial profits can be made quickly, unscrupulous operators have taken millions of dollars from unsuspecting investors.
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These con men have also offered bogus investment contracts in such items as precious metals that may look like futures contracts but are not traded on regulated futures exchanges. They prey on individuals who probably should not be investing in commodity futures at all because they do not understand this type of transaction and can ill afford potential losses.In one California case, a large foreign currency dealer was unable to account for over $100 million sent by people who thought they were investing in a foreign currency trading program.A New York strategic metals dealer was sentenced to prison for bilking investors of $1.4 million in only four months time.
How Commodity Frauds Work
As in almost any fraudulent investment activity, the success of the swindlers and con men can be summarized in three words: THEY LIE WELL! Some of the red flags to watch out for are:
The North American Securities Administrators Association (NASAA) and the Coalition of Better Business Bureaus (CBBB) have prepared this Alert in cooperation with the National Futures Association (NFA) -- the commodity industry`s self-regulatory body. Together, these organizations warn that many firms offering commodity-related investments are not subject to any licensing by state or federal authorities and have been using high-pressure sales tactics, including misrepresentation of expected profits and risks, to sell questionable investments.
Many questionable commodity sales operations adopt impressive, legitimate-sounding names to market their products, such as "Dunn & Bradford" or "Forbes & Lloyds." They usually have impressive addresses as well, like "One Corporate Plaza" or "XXX Wall Street." Usually the address is nothing more than a mail-drop or rented back office. Glossy brochures touting past trading success are also issued by some fraudulent sales operations.
Most of the questionable operations are not registered with any regulatory body such as the National Futures Association (NFA) or the Commodity Futures Trading Commission (CFTC). In most instances, such registration is mandatory for firms that deal with customers in commodity futures or options transactions.
Commodity Futures Markets -- How They Really Operate
Futures contracts are standardized contracts traded through regulated exchanges whereby an investor agrees to buy or to sell a fixed quantity of a certain commodity at a specified price for delivery in the future. The customer`s funds are placed with a registered commodities dealer who is required to keep the funds separate and not use them for any other purpose than the intended investment.
Futures prices respond to many factors, including inflation, strikes, weather, economic forecasts and reports, politics, foreign events, new technology and even rumor. The events that affect prices can happen at any time and anyone who claims to guarantee profits in a commodities deal with little or no risk involved should be considered dangerous.
Another risk factor stems from the "leverage" inherent in futures contracts; that is, the small amount of money (known as "margin") that is required to control a large quantity of the underlying commodity. Because of this leverage, even a small change in the price can cause a large change -- upward or downward -- in the value of a futures contract. For example, in the case of a 5,000 bushel futures contract, a one cent per bushel change in the price is a $50 gain or loss for the futures investor. It should also be kept in mind that it is possible for an investor to lose more than the initial investment if market circumstances prevent immediate liquidation of the contract. Unlike stock markets, commodities have maximum daily trading limits that, when reached, halt all trading for that day. A string of such halts could prevent a customer from closing a contract until a large loss has been realized.
In sum, the nature of futures trading is such that investors can realize potentially large and rapid profits or incur equally large and rapid losses.
One Avoidable Risk
The largest single risk in futures trading, or in any form of investment, can be avoided with only a little effort. That risk is doing business with a dishonest or unethical individual or firm. A case in point is the person or company that falsely leads a potential investor to believe that the futures investment offered comes with safeguards -- such as segregation of customer funds -- that are provided by members of regulated futures exchanges. Should a firm not subject to these requirements go bankrupt, the customers` funds are usually gone.
An easy way to determine whether a firm is registered to conduct futures business is by contacting the National Futures Association, the self-regulatory organization for the futures industry. One might also check with the local Better Business Bureau to see if the company has a history of customer complaints. Other good information sources include your state or provincial securities administrators, the federal Commodity Futures Trading Commission, or your state attorney general.
Nine Questions to ask Before Investing
To play it safe, prospective investors in commodities must be inquisitive and understand the transaction. Most victims are "sold" on the profit potentials being touted without really understanding what they are getting into or who they are dealing with. Before dealing with a firm selling commodities, prospective investors should ask and get clear answers to the nine questions listed below. Evasive or incomplete answers are a danger sign that should warn you off the deal.
1. Is the dealer registered with the CFTC, NFA or any other regulatory agency?
2. Is the actual transaction to be executed through a
regulated commodity exchange?
3. Does the firm have literature or written materials explaining the transactions or a risk disclosure statement?
4. Does the dealer have or will it obtain the commodity bought?
5. What percentage of the investment will go for fees, commissions or other costs?
6. How long has the company been in business and who are its principals and officers?
7. Will the company provide a copy of its financial statement?
8. Where will the investment funds be held?
9. Can independent references be obtained?
The securities administrator in your state, province or territory is responsible for the protection of investors. If you have doubts whether particular offerings or sales representatives are duly registered, or if they fail to provide adequate information, contact your securities administrator.
The Council of Better Business Bureaus and the Better Business Bureaus in the United States and Canada answer inquiries on companies located in the area they serve. Before putting money in any investment plan, it is a good idea to contact your Better Business Bureau for a reliability report on the company you intend to deal with. For more information, contact the BBB office.
- Unsolicited, high-pressure phone calls
- Claims of inside information
- "You must act at once!" warnings
- Claims of large and rapid profits
- Claims of virtually no risk
- Contracts with names such as "deferred delivery," "fixed maturity" or "cash forward" that are not contracts traded through regulated commodities exchanges.
These swindlers are generally strong-willed, smooth-talking, persuasive individuals who try to overwhelm their targets. Hundreds of prospects a day are contacted from telephone boiler rooms in search of the few who "might" say "yes." Then the real "professional" comes on the line and attempts to close the sale. Often they will send messengers to pick up the money immediately, before the victims have a chance to understand the offer or change their minds.
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