U.S. Halts Deceptive Online Trading Ads

The U.S. Federal Trade Commission (FTC), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC) announced Monday that they have halted ad campaigns by 14 online brokerages that promised easy profits using their systems.

Day traders attempt to make money buying and selling stocks or other securities over a very short time period — usually within a single day. The high level of enthusiasm in the investing community, spurred by the U.S. economy’s unprecedented growth and the ease and speed of buying and selling stocks online, has contributed to a boom for day trading firms.

However, the government argues that in their marketing efforts to bring in new investors, many day trading firms have embraced dishonest tactics.

“People who push day trading systems or services as a sure way to make money are peddling pipe dreams,” said Jodie Bernstein, Director of the FTC’s Bureau of Consumer Protection. “Day trading is a high risk venture that’s likely to leave investors high and dry. The bottom line? If you’re considering becoming a day trader, don’t give up your day job.”

Unrealistic Promises

The firms involved in the crackdown touted their products with extreme claims — for example, that investors could make money regardless of whether the market goes up or down, or that investors could expect returns as high as 2,041 percent. The companies also reportedly used phony testimonials and made no mention of the risks involved in day trading.

Most day traders actually lose money, many industry observers say. According to Bradley Skolnik, the state of Indiana’s securities commissioner and president of the North American Securities Administrators Association (NASAA), “Seven in ten day traders lose money. Anyone who tries to tell you otherwise isn’t being straight with you. Always ask yourself: if this person really has figured out a foolproof way to make money day trading, why are they selling it to total strangers? Why aren’t they day trading themselves?”

CFTC Action

The CFTC targeted Web sites that were making fraudulent performance claims about their commodity trading systems — computerized programs that signal members when to buy and sell futures and options contracts based on technical analysis of market trends.

Phyllis Cela, Acting Director of the CFTC’s Division of Enforcement, said, “In the last couple of years, we have seen an increase in the number of commodity trading systems fraudulently advertised on Internet Web sites. Unscrupulous promoters have misrepresented that they have earned enormous profits by trading according to the signals generated by their trading systems. The CFTC’s investigations have revealed, however, that the claimed results were false and often were based on hypothetical or simulated trading, not actual trading in futures and options markets.”

CFTC issued orders requiring 10 companies to stop violating the provisions of the Commodity Exchange Act (CEA) and the CFTC’s regulations and to pay $10,000 (US$) in penalties, unless they can prove to the CFTC that they do not have the financial ability to pay such a penalty.

FTC Action

The FTC took action against three firms offering to train people in the art of day trading. The training consisted of combinations of online, ‘real time’ training; software programs; trading manuals; e-mail newsletters and mentoring services for prices ranging from $79 to $4995.

The FTC charged the firms with making unsubstantiated and misleading statements in violation of federal law, falsely representing the amount of risk involved in day trading, using false testimonials, and making misleading claims about potential earnings.

Consent orders filed in the complaints would bar false claims and require the respondents to have substantiation for any claims they make about earnings or benefits from the purchase or use of any trading program.

In addition, any future advertisements must contain the disclosure “DAY TRADING involves high risks and YOU can LOSE a lot of money.” The terms “CURRENCY TRADING” or “FUTURES TRADING” would be substituted as appropriate.

Failure to abide by the consent orders, which carry the force of law, could net violators a civil penalty of $11,000.

SEC Action

Convicted felon Robert Garganese, who is currently serving a one-year prison term for unrelated money laundering and telemarketing fraud charges, settled a civil administrative fraud charge with the SEC.

The SEC claims that Garganese and his company, Genesis Trading of Las Vegas, Nevada, enticed day traders to subscribe to his stock picking services through false and misleading advertising. Among Garganese’s claims were that his system was “a company composed of professional traders” that has created a system to track institutional buying and selling.

The truth is that Garganese, who is not a professional trader, was the only person running the online company. The Genesis Trading Web site also falsely claimed that more than 80 percent of the company’s recommended trades were profitable.

Garganese and his company agreed to stop violating the federal securities law. In addition, Genesis will provide a copy of the SEC’s order to all current and prospective subscribers for a period of one year.