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NATIONAL FUTURES ASSOCIATION BEFORE THE BUSINESS CONDUCT COMMITTEE In the Matter of: ALPARI US LLC (NFA ID #379678), JERMAINE C. HARMON (NFA ID #422961), and RICHARD A. LANI (NFA ID #101840), Respondents. )
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JUN 2 9 2012
NATIONAL FUTURES ASSOCIATION LEGAL DOCKETING
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NFA Case No. 12-BCC-020
COMPLAINT Having reviewed the investigative report submitted by the Compliance Department of National Futures Association (NFA), and having found reason to believe that NFA Requirements are being, have been or are about to be violated and that the matter should be adjudicated, NFA's Business Conduct Committee issues this Complaint against Alpari US LLC (Alpari), Jermaine C. Harmon (Harmon) and Richard A. Lani (Lani). ALLEGATIONS JURISDICTION 1. At all times relevant to this Complaint, Alpari was an NFA Member and approved Forex Dealer Member (FDM), which was registered with the Commodity Futures Trading Commission (CFTC) as a futures commission merchant (FCM) and Retail Foreign Exchange Dealer (RFED). As such, Alpari was and is required to comply with NFA Requirements and is subject to disciplinary proceedings for violations thereof.
At all times relevant to this Complaint, Harmon has been a listed principal and approved forex associated person (AP) of the firm, and an NFA Associate. As
such, Harmon was and is required to comply with NFA Requirements and is subject to disciplinary proceedings for violations thereof. Alpari is liable for violations of NFA Requirements committed by Harmon in the course of his activities on behalf of the firm. 3. At all times relevant to this Complaint, Lani has been a listed principal and approved forex AP of the firm, and an NFA Associate. As such, Lani was and is required to comply with NFA Requirements and is subject to disciplinary proceedings for violations thereof. Alpari is liable for violations of NFA Requirements committed by Lani in the course of his activities on behalf of the firm.
4. Alpari's main office is located in New York, New York and the firm has been an FCM and NFA Member since November 2007. Alpari became an RFED in September 2010 and was approved as an FDM and forex firm in October 2010. The firm's principal business is acting as the counterparty to customer accounts trading in off-exchange foreign currency transactions. 5. Since January 2011, Harmon has been a forex AP and principal of Alpari and an NFA Associate. Harmon also is a senior vice-president at the firm and oversees
Alpari's forex sales force and the trading platforms that Alpari utilizes. Lani has been a principal of Alpari since July 2011 and became a forex AP of the firm and an NFA Associate in November 2011. In addition, Lani is the firm's chief operating officer and chief compliance officer (CCO). Daniel J. Skowronski
(Skowronski) is the chief executive officer and a listed principal of Alpari, and Jennifer Granholm (Granholm) is the firm's compliance manager. However,
neither Skowronski nor Granholm is an AP of Alpari or an NFA Associate. 6. In March 2010, the percentage of Alpari's APs who had previously worked at a Disciplined Firm was such that the firm triggered NFA's Enhanced Supervisory Requirements. Since then, Alpari has been required, among other things, to tape
record all telephone conversations between the firm's APs and existing and potential customers. 7. Since February 2011, NFA has required FDMs, including Alpari, to submit daily electronic trade reports through NFA's Forex Transaction Reporting Execution Surveillance System (Fortress). These daily Fortress reports provide trade data, which the Fortress system automatically analyzes, and produce exception reports that assist NFA staff in identifying potential price manipulations and problematic trading activity. In addition, FDMs are required to report other activities to NFA through Fortress, including market events and individual trade adjustments that the FDMs have made. 8. NFA conducted an audit of Alpari in September 2011. At that time, Alpari had 20 APs and offered forex trading to about 5,000 U.S. customers and 2,500 foreign forex customers. The firm also offered forex options to about fifteen active For the trading of forex
customers and had four futures trading accounts.
options, Alpari used the platform of FX Bridge Technologies Corporation (FX Bridge) from approximately April 2011 until January 2012, when Alpari ceased offering forex options.
On October 20, 2011, Alpari reported a "market event" through Fortress indicating that an error had occurred with the firm's forex options trading platform. Specifically, Alpari indicated that a system malfunction had allowed five customers to place new option orders 24 hours before expiration on October 20, 2011, which Alpari executed as the counterparty. However, Alpari provided no
information to NFA about whether the firm had adjusted any customers' accounts and did not otherwise inform NFA about the malfunction. 10. Several days later, one of Alpari's customers filed an arbitration claim with NFA alleging that Alpari had cancelled trades in his forex account because the firm claimed he had based his options trades on "wrong price quotes" resulting from technical issues with the trading system. NFA's Arbitration Department referred the claim to NFA's Compliance Department because of the nature of the allegations and NFA's then pending audit of Alpari. 11. The arbitration claim prompted NFA's Compliance staff to initiate a formal investigation into Alpari's system failure. In addition to reviewing the information that Alpari had reported through Fortress, NFA staff requested further information from Alpari and interviewed Skowronski and Granholm. Skowronski represented
that it was the firm's policy to prohibit options' customers from trading 24 hours prior to the expiration of options on the third Thursday of every month because the firm's liquidity providers imposed a similar trading restriction on Alpari. Skowronski also represented that the firm's options platform provider - FX Bridge - inadvertently enabled the system to allow the five forex options customers to place trades during the prohibited 24-hour period from Wednesday, October 19 through Thursday,
October 20, 2011, which was the expiration date for October options. As a result, five customers traded about 26,000 contracts overall during the so-called prohibited timeframe and generated almost $230,000 in total profits. The customer who filed the arbitration claim accounted for almost 25,000 of the contracts traded and over $220,000 of the profits generated. 12. NFA's investigation revealed that the trading platform malfunction was not an isolated incident and, instead, had existed for several months without Alpari's knowledge. Specifically, between May and September 2011, a few Alpari
customers traded almost 500 forex options contracts during the 24-hour period before expiration, incurring total net profits during those five months of close to $4,500. The trading platform malfunction went unnoticed by Alpari until the incident in October 2011, when the five customers made almost $230,000 trading within 24 hours of expiration. of Alpari's trade desk. 13. After the October 2011 system error occurred, Alpari decided to classify the trades as "phantom trades" and instructed FX Bridge to "bust" them and purge them from the system. In addition, Alpari determined that the profits resulting It was this incident that finally caught the attention
from the trades were "illicit" and unilaterally decided to remove those profits from the five affected customers' accounts, without contacting NFA in advance to determine whether this practice complied with NFA's Forex Requirements. Specifically, Alpari unilaterally made price adjustments that removed funds ranging from almost $153 to over $220,000 from the accounts of the five affected
customers, though Alpari later provided a $55,000 credit to the customer who had filed for arbitration. 14. Alpari based its decision to take back profits from the five customers on the premise that the customers took advantage of Alpari and its trading malfunction and, therefore, were not trading in good faith. Alpari claimed the affected customers knew about the company policy prohibiting the execution of options trades 24 hours before expiration because the firm's customer agreement disclosed the policy. However, the evidence does not support Alpari's claim that
these customers were not trading in good faith. 15. Specifically, in January 2012, NFA obtained what Alpari represented were the customer agreements for the five affected customers, but none of the agreements made any mention of the supposed 24-hour trading prohibition. When NFA questioned Granholm about this, she admitted that the agreement used for the one customer who opened his account in May 2011 did not contain the 24-hour prohibition, but claimed that customers were bound by subsequent amendments Alpari made to the agreement in July 2011, which supposedly added the firm's options expiration trading policy. When NFA asked how Alpari informed customers about the amendments to the agreement, Granholm told NFA that the firm had posted a July 13, 2011 notice in the "Company News" section of its website. However, that notice made no mention that the firm was
imposing a 24-hour prohibition on the trading of forex options prior to expiration and failed to identify any of the specific changes Alpari had made to its customer agreement. Instead, the notice merely included a link to the section of Alpari's
website that listed forms. Furthermore, Alpari buried the trading prohibition in a one-line addition to an exhibit incorporated as part of Alpari's nineteen-page customer agreement. 16. Other Alpari records, which included e-mails and tape-recorded telephone conversations with some of the affected customers, also demonstrate that these customers had no idea that the 24-hour trading prohibition prior to expiration existed prior to the October 2011 incident. 17. Alpari was unable to verify which version of its customer agreement applied to the four other customers (besides the customer who opened his account in May) who were affected by the October 2011 incident. Specifically, these four customers opened their accounts in August and September 2011, but the agreements Alpari initially produced to NFA for these customers did not contain the 24-hour trading prohibition that Alpari supposedly made part of its customer agreement in July 2011. After pointing out this discrepancy to Alpari, NFA learned that Alpari's programmers had evidently made an error when they were uploading a revised version of the firm's customer agreement in 2012 and overwrote data in Alpari's historical data files, including the version of the agreement the four Alpari customers had "electronically executed" when they opened their accounts with the firm. Granholm admitted that the firm was unaware of this programming error until NFA raised the discrepancy with the firm in April 2012, almost three months after the programming error evidently happened.
The above programming error revealed other record keeping problems at Alpari relating to its customer agreements. Alpari supposedly adopted a revised
customer agreement (Version 1.5.1) on September 1, 2011, which it claimed contained the 24-hour trading prohibition prior to expiration. Two of the
customers, who made profits on October 19 and 20, opened their accounts with Alpari after September 1, 2011 and therefore should have used Version 1.5.1 of the customer agreement. However, when NFA asked Alpari for copies of the
customer agreements these two customers executed, Alpari provided NFA not with Version 1.5.1 of the customer agreement but with another version of the agreement. In fact, records NFA received from Alpari during the investigation
showed that none of the customers who opened an account after September 1, 2011 executed Version 1.5.1 of the customer agreement even though it was supposedly in effect at the time. 19. Moreover, a document submitted by the customer who filed the arbitration claim against Alpari further contradicts the firm's representations to NFA about its customer agreements. The customer included an Alpari customer agreement
marked as "Version 1.5.1" as an exhibit to the arbitration claim he filed in October 2011, but this agreement made no mention of a 24-hour trading prohibition. When NFA asked how and when the customer obtained this document, he indicated he downloaded the agreement from Alpari's website in late October 2011 after Alpari removed the $220,000 trading profit from his account and he decided to file for arbitration.
Not only did Alpari provide NFA with contradictory information about the firm's customer agreements, but Alpari's website also contained conflicting information about trading options at expiration. Specifically, the Frequently Asked Question
(FAQ) section of Alpari's website included the question, "Can clients trade daily and weekly expiry options?" However, the response to this question did not state
that the firm's policy prohibited options trading within 24 hours prior to expiration. When NFA staff raised this issue with senior Alpari staff in February 2012, they claimed the response to the above question was a mistake and, later that day, the firm changed the response in the FAQ section of its website. 21. NFA's investigation also revealed that Alpari was not taping all required conversations between the firm's APs and its existing customers. NFA asked
Alpari to produce all e-mails and recorded telephone calls with the options customers affected by the October 2011 system malfunction. In response, Alpari
provided a recorded telephone call between Alpari AP Shaun Nace (Nace) and one of Alpari's options customers. NFA listened to the recording and heard Nace
refer to an earlier telephone conversation between the customer and Alpari AP Harmon. Since the firm had not provided NFA with a recording of that conversation, NFA asked Alpari to produce it. However, the firm was unable to produce the recording as Harmon did not record the call with the customer. According to Alpari, while the phones belonging to Alpari APs are recorded automatically, Harmon's call was not recorded since he does not "solicit" retail customers. In addition, it is Alpari's policy not to record the calls of "Executive
Office" APs, including Harmon and Lani, since many of their calls are supposedly
"sensitive in nature," and involve proprietary or privileged subject matter. However, NFA's Enhanced Supervisory Requirements - to which Alpari was subject - make no exceptions for the types of telephone conversations between APs and customers that must be tape recorded. They all must be tape-recorded and be made available to NFA. APPLICABLE RULES 22. NFA Compliance Rule 2-9(b) requires, in pertinent part, that Members adopt supervisory procedures for the supervision of telemarketing. 23. NFA Compliance Rule 2-10 requires, in pertinent part, that Members maintain adequate books and records necessary and appropriate to conduct their business including, without limitation, the records required to be kept under CFTC Regulations 1.18 and 1.32 through 1.37. 24. NFA Compliance Rule 2-36(c) provides that FDMs and their Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their forex business. 25. NFA Compliance Rule 2-36(e) provides, in pertinent part, that each FDM shall diligently supervise its employees and agents in the conduct of their forex activities and each associate of an FDM who has supervisory duties shall diligently exercise such duties in the conduct of that Associate's forex activities for or on behalf of the FDM. 26. NFA Compliance Rule 2-43(a) provides,in pertinent part, that an FDM may not
cancel an executed customer order or adjust a customer account in a manner that would have the direct or indirect effect of changing the price of an executed
order, unless the cancellation or adjustment is favorable to the customer or if the FDM exclusively uses straight-through processing. 27. NFA Compliance Rule 2-48(a) provides that an FDM must file a daily electronic report of trade data with NFA using the electronic filing method required by NFA. The report must contain the data and be in the format prescribed by NFA. Each FDM must prepare the report as of 5:00 P.M. Eastern time and file it with NFA by 11:59 P.M. Eastern time the same day. COUNT I VIOLATIONS OF NFA COMPLIANCE RULES 2-43(a) AND 2-48(a): IMPROPERLY CANCELLING FOREX TRADES AND REMOVING PROFITS FROM CUSTOMER ACCOUNTS AND FAILING TO TIMELY REPORT TRADE DATA AND OTHER REQUIRED INFORMATION TO NFA. 28. The allegations contained in paragraphs 1,4, 7 through 14,26 and 27 are realleged as paragraph 28. 29. As alleged above, Alpari cancelled trades in five Alpari customer accounts in October 2011 based on the firm's determination that the orders amounted to "phantom trades." However, it was a system malfunction with Alpari's own
options platform that allowed the five customers to place the orders, which Alpari executed as the counterparty. In addition, the problem with Alpari's options
platform had existed for several months, without the firm's knowledge, because Alpari did little or no testing to detect system problems before allowing the platform to go live within 24 hours after receiving it from its platform provider. 30. In addition to unilaterally cancelling the executed trades in the above five accounts - because Alpari regarded them as "phantom trades" - Alpari also removed the realized profits from these five accounts. These actions on Alpari's part constituted 11
clear violations of Compliance Rule 2-43 which - with limited exceptions which are not applicable here - prohibits an FDM from cancelling an executed customer order or adjusting a customer account in a manner that would have the direct or indirect effect of changing the price of an executed order, unless the cancellation or adjustment is favorable to the customer. 31. In addition, although Alpari reported the October 2011 market event to NFA, the firm failed to report through NFA's Fortress system that the error had existed since May 2011 and also failed to report that it had made price adjustments to the trades in the five affected customers' accounts by cancelling such trades and taking the profits generated by those trades. 32. By reason of the foregoing acts and omissions, Alpari is charged with violating NFA Compliance Rules 2-43(a) and 2-48(a). COUNT II VIOLATIONS OF NFA COMPLIANCE RULES 2-10 AND 2-36(c): FAILING TO KEEP ACCURATE RECORDS AND FAILING TO OBSERVE HIGH STANDARDS OF COMMERCIAL HONOR AND JUST AND EQUITABLE PRINCIPLES OF TRADE. 33. The allegations contained in paragraphs 1, 4, 15 through 20, 23 and 24 are realleged as paragraph 33. 34. As alleged above, Alpari claimed that the five customers involved in the October 2011 incident were not trading in good faith and used this claim as the rationale for cancelling the profitable trades in the accounts of these five customers and removing the profits from these accounts. Alpari knew or should have known that its claim of bad faith on the part of the five customers was baseless and wholly unsupported by any evidence or Alpari's own records. Therefore, in asserting this
baseless claim as a pretext for taking the profits of the five customers, Alpari breached its obligation to uphold just and equitable principles of trade that FDMs are required to observe. 35. As also alleged above, Alpari failed to keep accurate records. The firm's programmers overwrote, and therefore destroyed, data in Alpari's historical files that made it impossible to determine which version of the customer agreement form the above five customers "executed" when they opened their accounts. Alpari failed to notice the programmers' error for several months. Furthermore,
In addition, Alpari
lacked sufficient records to establish which version of the customer agreement was used by the five customers involved in the October incident. 36. By reason of the foregoing acts and omissions, Alpari is charged with violating NFA Compliance Rules 2-10 and 2-36(c). COUNT III VIOLATION OF NFA COMPLIANCE RULE 2-9(b): FAILING TO COMPLY WITH NFA'S ENHANCED SUPERVISORY REQUIREMENTS. 37. The allegations contained in paragraphs 1 through 4, 6, 21 and 22 are realleged as paragraph 37. 38. The Interpretive Notice to NFA Compliance Rule 2-9(b), "Compliance Rule 2-9: Enhanced Supervisory Requirements," specifically requires Member firms meeting the Enhanced Supervisory Requirements criteria to make complete audio recordings of all telephone conversations that occur between the firms' APs and both existing and potential customers, including existing and potential retail forex customers of Members subject to NFA Compliance Rule 2-36.
As alleged above, Alpari failed to make complete audio recordings of all telephone conversations that occurred between its APs and both existing and potential customers by not recording Harmon's call with a customer concerning the October system malfunction. In addition, it was Alpari's policy not to record
the calls of "Executive Office" APs, including Harmon and Lani, since many of their calls supposedly involve "sensitive" information. However, NFA's Enhanced
Supervisory Requirements - to which Alpari was subject - requires that all telephone conversations between APs and customers be tape-recorded and there are no exceptions to this requirement. 40. By reason of the foregoing acts and omissions, Alpari is charged with violating NFA Compliance Rule 2-9(b). COUNT IV VIOLATION OF NFA COMPLIANCE 41. 42. RULE 2-36(e): FAILING TO SUPERVISE.
The allegations contained in Counts I through III are realleged as paragraph 41. As evidenced by the violations alleged above, Lani, Harmon and the firm failed to adequately carry out their supervisory duties. In particular, Harmon oversees the forex sales function for Alpari and supervises the firm's trading platforms. However, Harmon failed to monitor the firm's options trading platform to detect the system malfunction and failed to make sure that Alpari complied with its Fortress reporting obligations.
Lani, as the firm's CCO, is responsible for ensuring that Alpari has adequate policies and procedures in place to achieve compliance with NFA Requirements. In addition, since November 2011, Lani has been responsible for ensuring that
the firm is complying with NFA's Enhanced Supervisory Requirements. However, despite having these responsibilities, Lani has knowingly allowed the firm to continue its policy of exempting certain firm's APs, namely himself and Harmon, from recording calls with potential and existing customers. 44. By reason of the foregoing acts and omissions, Alpari, Harmon and Lani are charged with violating NFA Compliance Rule 2-36(e). PROCEDURAL REQUIREMENTS ANSWER You must file a written Answer to the Complaint with NFA within thirty days of the date of the Complaint. The Answer shall respond to each allegation in the Complaint
by admitting, denying or averring that you lack sufficient knowledge or information to admit or deny the allegation. An averment of insufficient knowledge or information may only be
made after a diligent effort has been made to ascertain the relevant facts and shall be deemed to be a denial of the pertinent allegation. The place for filing an Answer shall be: National Futures Association 300 S. Riverside Plaza Suite 1800 Chicago, Illinois 60606-3447 Attn: Legal Department-Docketing E-Mail: Docketing@nfa.futures.org Facsimile: 312-781-1672 Failure to file an Answer as provided above shall be deemed an admission of the facts and legal conclusions contained in the Complaint. allegation shall be deemed an admission of that allegation. provided above shall be deemed a waiver of hearing. 15 Failure to respond to any Failure to file an Answer as
POTENTIAL PENALTIES, DISQUALIFICATION
At the conclusion of the proceedings conducted in connection with the issuance of this Complaint, NFA may impose one or more of the following penalties: (a) (b) expulsion or suspension for a specified period from NFA membership; bar or suspension for a specified period from association with an NFA Member; censure or reprimand; a monetary fine not to exceed $250,000 for each violation found; and order to cease and desist or any other fitting penalty or remedial action not inconsistent with these penalties. The allegations in this Complaint may constitute a statutory disqualification from registration under Section 8a(3)(M) of the Commodity Exchange Act. Respondents in this matter who apply for registration in any new capacity, including as an associated person with a new sponsor, may be denied registration based on the pendency of this proceeding. Pursuant to the provisions of CFTC Regulation 1.63, penalties imposed in connection with this Complaint may temporarily or permanently render Respondents who are individuals ineligible to serve on disciplinary committees, arbitration panels and governing boards of a self-regulatory organization, as defined in CFTC Regulation 1.63. NATIONAL FUTURES A CIATION BUSINESS CONDUCT OM ITTEE
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AFFIDAVIT OF SERVICE I, Nancy Miskovich-Paschen, on oath state that on June 29,2012, I served
copies of the attached Complaint, by sending such copies bye-mail and regular mail, firstclass delivery, in envelopes addressed as follows to: Ana D. Petrovic, Esq. Duane Morris LLP 190 South LaSalle Street Suite 3700 Chicago, IL 60603-3433 E-mail: email@example.com Alpari US LLC 14 Wall Street Suite 8B New York, NY 10005 Attn: Jennifer Granholm E-mail: firstname.lastname@example.org Jermaine C. Harmon 120 Sun Ridge Lane Stratford, CT 06614 E-mail: email@example.com Robert P. Bramnik, Esq. Duane Morris LLP 190 South LaSalle Street Suite 3700 Chicago, IL 60603-3433 E-mail: firstname.lastname@example.org Richard A. Lani 24 Hatteras Way Barnegat, NJ 08005 E-mail: email@example.com
Subscribed and sworn to before me on this 29th day of June 2012.
OFFICIAL SEAL MARY A PATION NOTARY PUBLIC, STATE OF ILLINOIS MY COMMISSION EXPIRES 08/28/2013
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