It is Friday afternoon and you're not reading this, but that is your loss because here is a pretty entertaining Commodity Futures Trading Commission press release and the related consent order. I'm going to tell you about it, with the caveat that it's a neither-admit-nor-deny sort of consent order, so everything here is the CFTC's side of the story and maybe it's wrong. But it's a $29 million settlement, so ... ?
Anyway the story is that CTI Group LLC and Cooper Trading, operating collectively as CTI and controlled by two characters named Stephen Craig Symons and James David Kline, sold computer programs named "Boomer" and "Victory" that would spit out S&P futures trades that you should do. And you'd set up an account with a broker and the broker would do the trades that the system spat out. And they sold those programs -- for $5,000 to $6,000 a pop, with 10 percent or so going as commissions to salespeople -- over the phone, in pretty boiler-roomy ways:
54. Typically, Clients were initially contacted by what CTI referred to as an ''Opener," who determined whether or not the Client had an interest in subscribing to a Trading System. CTI's Openers were expected to make a minimum of 200 to 300 calls per day.
If they got any interest, the client was passed on to another CTI salesperson, referred to imaginatively as a "Closer." How did they close? Well, important people like to deal with other important people. Are you one? The Closers were:1
71 . In conversations or communications with Clients, CTI's salespersons knowingly or recklessly falsely referred to themselves as being an "owner," "founder," "Senior Partner," or "President" of CTI.
Also they had great names and credentials:
74. Moreover, certain of CTI's promotional material described "CTI's Senior Officer" "Burt Monroe" as a "veteran trader" and "Jack Logan" as CTI's "Senior Technology Director" and a "[w]ell-known Designer and Senior Programmer."
Did you guess who those names were in quotes?
77. ... "Burt Monroe" was a fictitious name used by Defendant Symons, "Jack Logan" was a fictitious name used by one of CTI's Closers, and "Mark Bishop" was a fictitious name used by Defendant Kline. ...
80. Most, if not all of CTI's personnel, used fictitious names when communicating with Clients.
Why all the fake names? The CFTC is so glad you asked:2
83. By virtue of one of CTI's Closer's use of the fictitious name "Jack Logan," Defendants concealed from CTI's Clients that for most of the time since in or around 2000, rather than working on the technology behind CTI's Systems, as he claimed to a Client, that Closer has either been in prison following his conviction for sex with a child under the age of 16, or working as a telemarketer selling, among other things, cemetery plots and sushi makers.
84. Similarly, by using the fictitious name "Mark Bishop" for Defendant Kline, Defendants knowingly or recklessly concealed from CTI's Clients that Kline never earned a degree in economics, as "Mark Bishop" (i.e., Kline) claimed to Clients, and that from in or around 1995 until in or around 2008, Kline (CTI's purported Chief Compliance Officer or Compliance Officer) held a string of non-finance related jobs, including telemarketing and sales (for, among other things, discount coupon books, sports betting advice, and real estate time shares) and provided psychic readings over the phone using the pseudonym "Ivan."
The main point of the complaint, of course, is not so much the pseudonymity as that they lied about the actual system, with Kline telling one client that it provided "good, strong, consistent income, which I, which I like," and another that as a result of using the system "he would not have to use his retirement or savings to help support his two children who were going to college." They (allegedly, etc.) lied about how many customers used the system, and how much money those clients were making. They claimed to offer a money-back refund, and said that no customer had ever asked for a refund; in fact, many had. (Some got refunds, but "CTI ignored or denied many of those requests.")
Because obviously the system was all fake! Except, wait, no, not really? There really was a computer system that generated trade ideas, and not via a random-number generator either:
49. Each of CTI's Trading Systems had been developed by applying various trading strategies to known historical trading data. This process is known as "back-testing," and it does not involve any actual trading.
50. By the use of back-testing during the development of CTI's Trading Systems, CTI's System developer was able, with knowledge of past market patterns and trends, to construct a profitable hypothetical past performance history when developing the Trading System.
So the CFTC is pretty sneery about back-testing your way to total trading victory but, I don't know, isn't that sort of how it works? You study past market patterns and trends, you apply a bunch of strategies, you see what would have worked in the past, and you adapt it for the future. What else is there, you know? Do you think real quantitative trading firms are working with something other than "various trading strategies" and "known historical trading data"?
I mean obviously they're doing a better job with it. CTI's application of strategy to data was unimpressive:
For example, in a May 11, 2010 email from Defendant Symons to CTI's System developer, Symons stated:
"The [B]oomer is taking to [sic] many lose [sic] that are big and the winners [sic] are small. I have had an account with [CTI's IB] that I opened up October 1st 2009. I opened with 2500 and as of today incliding [sic] the loss with commissions and[ ]slippage [sic] I am at 2180. So in essence I am down 14% in 7 and a half months. Not good!"
Not good! But sort of encouraging? One: There was a developer! Like, they actually hired a guy to build a box to make some trades. Two: They ate their own cooking! Not very much of it, I guess -- Symons had a $2,500 Boomer account while he was apparently making millions on this scheme3 -- but, still, he seemed to expect Boomer to actually make him money. And berated the developer when it didn't.
And, three, I mean, down 14 percent on S&P futures (during a period when the S&P was up 12 percent) sure isn't great, but in the annals of stock scams it doesn't sound that bad either. Even in the annals of non-scams. Remember when the Libya Investment Authority had a 98 percent loss trading with Goldman Sachs?
I don't know, I find these scoundrels sort of charming. They decided to pivot from selling psychic readings and cemetery plots to selling stock trading computers, and they actually went and built the computer. Sure it was bad, and sure they seem to have lied about it compulsively and at massive scale, but it staggered vaguely in the direction of a real thing. As these fraud cases go, that's pretty good. No wonder they made so much money on it.
1 Blame John Whitehead for the squiggly grammar there, sorry.
2 Incidentally, why both "CTI" and "Cooper"? Well, "Shortly after commencing operations, negative information about 'Cooper Trading' began to appear on the internet. In response, Defendant Symons directed that salespersons refer to the company simply as 'CTI.' "
Ooh, also: "The CFTC’s Complaint also named as Relief Defendants California companies Snonys, Inc. and Dragonfyre Magick Incorporated, which, according to the Complaint, were owned or operated by Symons and Kline, respectively." Those are pretty good names too. Dragonfyre Magick speaks for itself, but let's not underestimate "Snonys," which appears to be Symons's name backwards and misspelled.
3 Symons agreed to pay $3.15 million of disgorgement, which I guess is his profit. Kline is disgorging $275,471. CTI and Cooper are disgorging $10.18 million, and there are fines too ($10 million from CTI/Cooper, $4.5 million from Symons, and $1 million from Kline).
To contact the writer of this article: Matt Levine at email@example.com.