Of the various whistleblower programs in place to date, probably the least well-known is that involving the trade of commodities and futures – an industry regulated by the Commodities Futures Trading Commission. This area of trading can be highly unpredictable, and often the savviest investors are hesitant to take on the risk associated with trading based on prices not yet known. This area is also highly prone to scam and fraud, which prompted the CFTC to organize its own whistleblower program designed to help curtail and deter the occurrence of costly fraud within this niche industry. The following answers some of the most commonly-asked questions regarding commodities futures trading fraud, as well as offers advice to anyone with knowledge or suspicions of fraud within this financial sect.
1. What is a commodity?
Generally speaking, a commodity is any good sold in its purest form – meaning it has not been altered or reformulated into another product. Examples of commodities include oil, livestock, grain, precious metals, natural gas, or electricity. Under the current regulations, an item is only considered a “commodity” if it meets three criteria:
-It must be standardized, or in its “raw state” within the context of agriculture
-It must be usable upon delivery, and
-Its price must vary, making it marketable[1.“What is a commodity?” InvestingAnswers.com, http://www.investinganswers.com/financial-dictionary/commodities-precious-metals/commodity-1035 (Retrieved Nov. 11, 2015).]
2. What is commodities future trading?
Commodities futures trading is a type of investment option that involves the buying and selling of contracts for the purchase of commodities at some point in the future. Unlike many other investments, which involve the actual item or product itself, commodities futures trading requires a sense of how the market will fluctuate. Investors make key decisions with the hope that the amount offered for the contract is lower than the actual price of the raw commodity when it is ready for sale, thereby making a profit. Risks in this market include weather fluctuations, political and regulatory changes, and loss of the product due to disease or natural disaster.
3. What types of frauds are common in this industry?
The commodities futures trading market is highly unpredictable and is generally recommended for the savvier, less risk-averse investor. Notwithstanding, it is not uncommon for scam artists to target the less sophisticated investor, promising unrealistic return rates and very little risk – two components hardly ever found in any market-based investment strategy.[2.“Fraud Awareness & Prevention,” U.S. Commodity Futures Trading Commission, http://www.cftc.gov/consumerprotection/fraudawarenessprevention/index.htm (Retrieved Nov. 11, 2015).]
Additionally, fraud also occurs within the context of precious metals, foreign currency, and crude oil. In these scams, fraudsters may invite investors to pool their money or offer a great deal up front – to major red flags a scam is afoot. Investors are advised to be wary of get-rich-quick schemes or any scenario involving an “Interbank Market” – a term referring to the international trade of foreign currency between large banks or lending institutions.
4. Who should I contact if I suspect fraud?
If you are involved in the commodities futures trading industry or were recently solicited by a possible scam artist, do not hesitate to contact Berger & Montague, P.C. today for help.