NFA Cracks Down on California Capital
by Paul Springer
It takes a lot of chicanery to earn a permanent ban from the National Futures Association. But California Capital Trading Group pulled it off.
The firm and two of its brokers got the permanent shoe for a customer-crushing combination of bad trade recommendations and commission fluffing.
As the NFA puts it in its complaint, Whittier, Calif.-based California Capital “maximized commissions but left little opportunity for the customers to achieve and overall profit.”
The company did not dispute a variety of findings, including the NFA’s contention that fat commissions meant that trades typically feature a breakeven point in the 50% to 99% range.
Total round-turn fees were in the $90 to $95 range, way more than anyone needs to pay.
At the same time, the firm used the increasingly popular trick of trebling commissions by recommending mini e-trades when regular contracts would have made more sense – and generated fewer fees.
The NFA alleged that commission trebling was one of the maneuvers that earned broker Oscar Morales a permanent ban because of improper activities at California Capitol and Patriot Financial:
On Morales’ recommendation, [client] Tovenati purchased 45 mini-gold contracts. The same trading objective could have been accomplished with only 15 standard-sized gold contracts, as mini-gold contracts represent one-third of a standard gold contract. Morales’ advice resulted in Tovenati paying $3,735 in commissions and fees on the 45 mini-gold contracts when he could have traded 15 standard gold contracts for only $1,245 in commissions and fees.
And Tovenati lost $2,088 on the trade, in addition to fees. Tovenati deposited over $68,000 into his account in 14 months.
By the time it was over, the NFA says, the client had only $375 left. But Morales and California Capital had allegedly raked in over $51,000 in commissions.
In one pair of trades, Morales recommended a 10-lot call spread on gold and a 10-lot call spread on silver, trades with a 61.97% breakeven point. Morales claimed he had “insider information” that would double the client’s money. The client actually lost money on the trades – and paid $3,718 in fees.
The NFA banned Morales after he failed to respond to its accusations. Morales “lined his pockets with commissions without any regard for whether the trades were in his customers’ best interests,” according to the decision to ban him. “The Committee sees no purpose to be served by ever allowing Morales to have any future association with the NFA,” the decision says.
Broker Jason Lovely also received a permanent ban. Lovely allegedly told an NFA auditor posing as a customer that the customer would have to “unlearn everything he knows about trading” and stick to Lovely’s recommendations.
Lovely recommended option spreads, claiming the average customer made 10% on a monthly basis. In reality, the firm’s clients regularly suffered “substantial losses” on spread trades, the NFA says.
The NFA and CTFC have various documents warning retail customers about the risks of derivative investing. Maybe they just give people a copy of the NFA’s complaint in this case.
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