Controlling a Financial Jurassic Park: Obtaining Jurisdiction Over Derivatives by Regulating Illegal Foreign Currency Boiler Rooms

Abstract

Most small investors are unfamiliar with the foreign currency ('Forex') market and the Commodities Futures and Trading Commission ('CFTC'), in part, because the securities or equities markets are regularly marketed to the general public, and reported upon in the financial news. Beginning in the early 1990s, with the proliferation of discount brokers and self-directed on-line securities trading brokerage firms, small investors began to enter their own trades, often with limited understanding of the stock and financial markets, which nonetheless resulted in fabulous returns. The Forex market never received this type of combustible trading synergy that occurred in late 1990s, and early 2000, in part, because the Forex market is a market viewed as the inner sanctum of more sophisticated investors such as banks, institutional and sophisticated investors, in part, because Forex investment fraud is a relatively new investment fraud that appears to be gaining momentum since the mid-1990s. Complicating and, at times, frustrating the efforts of the CFTC to commence enforcement actions against illegal Forex boiler-rooms are jurisdictional disputes between Congress, the Treasury Department and the courts in reaching uniformity as to the definition of certain investment terms such as “transactions in foreign currency, board of trade, and (3) futures contract. As Congress, the Treasury Department and the courts continue to struggle to resolve these jurisdictional disputes, Forex investment fraud will undoubtedly continue to increase exponentially. As more and more members of the general public continue to be defrauded, unsuspecting small investors will remain vulnerable to the high pressure manipulative sales techniques of unscrupulous Forex brokers who operate within illegal Forex boiler-rooms. This article examines the Seventh Circuit’s fairly recent decision in CFTC v. Zelener, in which the Court rejected the CFTC’s ability to commence enforcement actions against illegal Forex boiler-rooms. It also provides an examination of the Congressional modifications to the Treasury Amendment, in particular, its repeal, and the creation of the CFMA, which provides the CFTC and Securities & Exchange Commission ('SEC') with dual enforcement authority to commence enforcement actions against illegal Forex-boiler rooms that defraud the general public. The article concludes with the necessity to develop a flexible regulatory framework that will not hinder existing legitimate Forex transactions, but will allow the CFTC and SEC to take swift and decisive action against illegal Forex boiler-rooms that defraud the general public.

Keywords: derivatives, fraud, CFTC, securities, SEC, boiler room, small investors, forward contract, futures contract