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Screenshot of a breaking news alert e-mail from Q2 2017
InstitutionalLiquidity LLC (ILQ) has been issued with a $225,000 penalty by the National Futures Association (NFA) subsequent to an investigation which resulted in a complaint being entered against the company some seven months ago.
Yesterday, the NFA announced that pursuant to a settlement offer submitted by ILQ, along with the executives concerned, Mark Krier, James Pieron and Jason Tanner, NFA’s Hearing Panel ordered ILQ, along with Mssrs. Krier, Pieron and Tanner, jointly and severally, to pay a fine of $225,000 to NFA.
The NFA ILQ accepted the agreement of ILQ and its directors to pay restitution in the amount of $123,152.32 to ILQ customers.
In addition, the Hearing Panel ordered ILQ to withdraw from NFA membership within 120 days from August 13, 2014 (December 11, 2014) and thereafter never reapply for NFA membership or principal status with any NFA Member. In addition, ILQ was ordered to pay restitution in the amount of $123,152.32 to ILQ customers within fifteen days of August 13, 2014 (by August 28, 2014).
In April this year, ILQ announced its intention to exit the US market, a decision which occurred during the investigation which was being conducted by the NFA resulted in a complaint being entered against ILQ on December 31 last year, subsequent to which the NFA asserted that ILQ as a corporate entity and NFA member, along with Mr Tanner and Mr Krier failed to cooperate promptly and fully with NFA in an NFA investigation. The complaint also charged ILQ and Mr Pieron with failing to supervise.
On February 19, 2014, ILQ, along with Mssrs. Krier, Pieron and Tanner filed answers to the complaint in which they denied the material allegations contained therein, which also asked for the committee to dismiss the case with prejudice, as well as inferring that the NFA wrongfully sought sanctions against ILQ and its executives.
One of the main factors which prompted the NFA to probe into the commercial activities of ILQ was that the regulator had serious concerns relating to the corporate structure of the company, as well as the NFA having conducted investigations into the provenance and business activities of a number of the company’s key figures, including the assertion that at the time that the NFA’s investigation began in March 2013, ILQ had approximately 1,300 customer accounts and over $13 million in total customer liabilities.
Since 2011, ILQ has relied extensively on Harrison Associates, owned by Harald McPike, to support the company’s operations and meet minimum net capital requirements. The NFA understood that by the end of last year, Harrison Associates had a liability of more than $38 million through subordinated loans agreements (SLAs) granted to ILQ. ILQ was formerly known as I Trade FX LLC when the firm was owned and operated by Jared Martinez and his sons, Jacob and lsaac Martinez.
Since then, The NFA inquiry has established beyond doubt that there is no undisclosed party associated with the principals of ILQ, and that Mr. McPike, or his firm Harrison Associates has the financial capabilities to fund ILQ, as well as there was no suspicious activity in connection with Mr. McPike ‘s capital infusions into ILe and FWHMcP never has had any relationships with convicted fraudster Trevor Cook or the Martinez family.
The defenses to the NFA’s claims with regard to this matter which was concluded yesterday is that the NFA has known ILQ, Mr Pieron and Harald McPike since 2010, and has known Mssrs Tanner and Krier since each became NFA employees in 2007. Mr. Pieron also is an owner and principal of ILe. On March 18,2013, the NFA requested financial information as to Mr. McPike and ILQ, and within 24 hours, the information as to ILe was produced to the NFA.
While cooperating with the NFA, the respondents Harrison Associates and Mr. McPike could not produce the information which the NFA requested regarding Harrison Asscociates or Mr. McPike himself since none of the four entities party to the NFA complaint had possession, custody or control of the requested information. The respondents were not employees or control persons of Harrison Associates or Mr. McPike, as Mr. McPike solely controlled the information.
ln April 2009, an NFA Hearing Panel fined I Trade $250,000 for failing to implement an adequate anti-money laundering system by not sufficiently investigating irregular activity in several customers’ accounts to determine if the firm should have filed suspicious activity reports, a matter with which American regulators are becoming increasingly concerned with post implementation of the Dodd-Frank Act.
According to NFA documentation, the NFA’s Appeals Committee affirmed the Hearing Panel’s Decision as to I Trade in January 2010, and also found that lsaac Martinez failed to exercise his supervisory duties, in violation of NFA Compliance Rule 2-36(e), and ordered him to pay a $50,000 fine.
A central figure in the suspicious activity at I Trade was David Smith, a former I Trade principal who controlled several of the I Trade accounts that were the focus of NFA’s disciplinary case against the firm. Mr Smith was notorious for operating a Ponzi scheme to which 6,000 investors in Florida and the Caribbean fell victim, resulting in customer losses of $220 million. The NFA at the time stated that in August 2011, a federal judge in Orlando, Florida, sentenced Mr. Smith to 30 years in prison, after he pled guilty to charges of fraud and money laundering.
ln May 2009, while NFA’s disciplinary case against I Trade was pending, the firm ceased operating and stopped holding customer funds, even though its FCM registration and NFA membership statuses remained intact. A few months after the disciplinary case ended, I Trade was sold to Navitas Investments LLC. Navitas was formerly known as Institutional Liquidity Holdings LLC, but changed its name to Navitas in August 2010. Navitas changed the firm’s name from I Trade to ILQ in August 2010, and ILQ resumed holding forex customer funds under its new ownership on April 29, 2011.
The NFA’s complaint further asserted that the regulator had been concerned about ILQ’s capital position for some time. In August 2012, NFA published that it had come to the regulator’s attention that ILQ’s daily FX filings displayed a significant increase in capital charges on its uncovered FX inventory, which greatly impacted the firm’s excess net capital (ENC).
In order to demonstrate this, the NFA recorded that from July 31 , 2012 to August 9, 2012, the company’s total capital charges more than doubled, rising from just under $900,000 to over $2.3 million. However, as of August 9, 2012, ILQ’s net capital only amounted to slightly more than $233,000, while the firm’s liability to forex customers totaled almost $20 million.
NFA shared its concerns about ILQ’s financial situation in an August 15, 2012 letter addressed to Mr. Krier and asked the firm to submit daily net capital computations until further notice so NFA could ensure the firm remained in compliance with NFA Financial Requirements. Under this circumstance, it is displayed on the back-office system as an account standing at zero, therefore is legal. However for clients, this means having to pay the spread twice unless they use MetaTrader 4′s ‘close by’ function. As a direct result of this, the NFA insisted that ILQ no can longer offer clients the ability to hedge, which became effective on January 31 this year.
Quite clearly, the exit from the US market by ILQ this year did not put a stop to the NFA proceeding with the case, and the resultant ban of the company and its directors from operating within NFA’s jurisdiction shows that the American regulatory authorities have sought to fully put an end to this practice.
The full case details can be read here.