I Trade FX Takes the Stand
Last Friday I Trade FX’s response to the NFA regarding the complaint lodged against them was posted on the NFA’s website. Below are the details:
BASIC Case Summary
The Nine Lonely Whales
Right off the bat I Trade comes out swinging in their response, denying that they had only 9 accounts with balances of $50,000 or more and insisting they had “substantially more” such accounts. They did not, however, deny the NFA’s statement that they had only 3,000 active customer accounts in total. The number of large accounts is of course an important part of this case. If I Trade only had 9 large accounts than surely they would notice any large transactions taking place amongst any of them. The NFA’s entire case rests upon the charge that I Trade did not take any action to report the suspicious transactions that were happening with the Olint accounts, among others.
The Vetting of David Smith
I Trade FX then sticks in the knife with a great line in response to the NFA’s repeated references to David Smith acting as a Principal in the firm. “Respondents admit that David Smith was listed as a principle of I-Trade starting on March 27, 2007, but only after the NFA took six months to conduct its due diligence investigation of Smith prior to approving Smith as a principal of I-Trade…”
Ka-POW! I Trade is basically telling the NFA, “hey if this guy was so bad why the hell did you approve him to be a principal in the first place?” Gotta admire the moxie of I Trade as that takes some brass cajones to get up in NFA’s face like that.
However, I could not find any response from I Trade FX in regards to the NFA’s charge that David Smith funded I Trade FX with almost all its operating capital in 2007. So it appears that I Trade is conceding that their company was basically bankrolled by David Smith during his tenure as principal. That in my opinion is the real sin for I Trade FX, that their company was using an alleged con man’s money to inflate their net cap numbers throughout 2007.
David Smith’s Secret Bank Records
As you’ll recall in an interview conducted by Jamaican Radio David Smith claimed that he would have given NFA his bank records had he had the time to do so before changing his story and stating he couldn’t turn them over for “legal reasons.” I Trade FX states for the record that they simply did not have the legal authority to compel David Smith to provide NFA with the documents when they asked about them. So the question for David Smith remains “why would you not turn over your bank records? What legal authority was preventing you from doing this?”
The Guts of the Complaint
The main charge NFA is lodging in this complaint is that I Trade FX failed to notify authorities about suspicious activity going on in David Smith’s accounts, among others. Here is I Trade’s response regarding the Olint account activity:
“Respondents lack knowledge or information sufficient to form a belief as to the truth of the allegations contained in Paragraph No. 8. Respondents’ deny that I-Trade failed to file any Suspicious Activity Reports that should have been filed.”
Deny, deny, deny. In plain English it seems I Trade FX is telling NFA “we aren’t going to admit these transactions were suspicious and we don’t believe we failed to file any Suspicious Activity Reports.”
In another clever bit legal jujitsu I Trade FX bats down the charge that they didn’t respond to certain “Red Flags” with this answer:
Respondents admit that NFA’s 2002 Interpretative Notice identifies the items listed in Paragraph No. 11 above as “Red Flags” and state in the affirmative that NFA’s 2002 Interpretative Notice provides that those “red flags” may alert employees to suspicious activity … that could cause further investigation….” (Emphasis added).
Translation: this rule you passed was vague and doesn’t require a firm to do jack squat.
That may be the case but doesn’t common sense tell you to report this stuff? Ah but common sense has no place in an American courtroom! Gotta love lawyers…
The next several pages delve into the specific accounts in question with I Trade admitting some things, denying other things and refusing to comment on the rest. But I’m skipping over this because it appears to me most of this legalese is “he said, she said” type stuff that can’t be proven until this case goes to trial. Also, it hurts my head. There is a reason I chose not to go to law school…
But this caught my eye at the end:
Paragraph No. 28. Despite the highly suspicious activity in the Olint and TCI accounts and the Harris account, as alleged above, at no time did I-Trade file a SAR for any of these accounts contrary to the requirements of NFA Compliance Rule 2-9, the Notice, and I-Trade’s own AML Program.
ANSWER: Respondents are barred by federal regulations from disclosing to the subject of a SAR that a SAR had been filed against the customer, and because this Answer will be publicly disclosed by the NFA on its website, the Respondents respectfully decline to admit or deny the allegation in Paragraph 28, and are prevented from asserting affirmative statements in their defense, and respectfully suggest that NFA’s publication of its Complaint in this matter may have been in violation of the confidentially (sic) provisions of the applicable federal law.
Brilliant! I Trade FX is accusing NFA of possibly violating federal law! Again, I’m not a lawyer and I have no way of judging whether or not this is a legitimate line of defense, but once again I Trade is really taking it to NFA and from that perspective it does make for good entertainment. Could this be the reason NFA delayed posting I Trade FX’s answer? Well, if it is it appears their legal counsel rubbished this line of defense in the end by brazenly publishing the ANSWER last week.
So now what? Well, I think this case will probably be decided by events on the ground. There are still far too many questions surrounding Olint and David Smith. If the Feds can’t prove any financial wrong doing my guess is I Trade FX and NFA will settle the matter a few months from now. But if the Feds find some really nasty stuff on David Smith I can’t imagine NFA will give I Trade FX a slap on the wrist.
Lucky for I Trade FX they are not a public company or else their stock would be in the toilet. In the meantime, I am cautioning traders to take a wait and see attitude towards this besieged and embattled firm.
