US court blocks precious metals trader

A United States federal court in Florida has frozen the assets of Hunter Wise Commodities in the US and other parties named in a lawsuit brought by the US Commodities Futures Trading Commission on 5 December, 2012. The court order also prohibits the defendants in the case from offering investments in physical metals to the retail public.  

The company’s Cayman affiliate Hunter Wise International Commodities continues to conduct business as usual, according to its managing director.  

US federal regulators allege that Hunter Wise conducted illegal, off-exchange commodity transactions and deceived customers in connection with finance transactions in precious metals. The commission’s complaint states that Hunter Wise and the other defendants claim to sell physical metals, including gold, silver, platinum, palladium and copper to retail customers in retail commodity transactions.  

Under the transaction, customers make a down payment of 25 per cent of the total purchase price. The defendants then allegedly claim to arrange loans for the balance of the purchase price, and advise customers that their purchased physical metals will be stored in a secure deposit, the commission stated in a news release.  

In an interview with The Journal in November 2012, Kyle Martin, the general manager of Hunter Wise’s Cayman affiliate Hunter Wise International, explained: “We provide leverage 4 to 1, so that [a dealer can] put down $25,000 and hold $100,000 worth of metal,” adding, “this makes us sort of unique in this industry.”  

In an advertorial in the Caymanian Compass on 31, October, 2012, Hunter Wise stated: “Both HWIC and our US affiliate Hunter Wise Commodities trade strictly physical gold, silver, platinum, palladium and copper in financed or cash transactions. The precious metals are stored in highly protected and insured vaults and clients have the option to take delivery of their holdings.” 

US federal authorities allege that the defendants do not purchase any physical metals, arrange loans for their customers to purchase physical metals or arrange for storage of physical metals for any customer participating in their retail commodity transactions.  

“Instead, all the transactions are just paper transactions,” according to the complaint, which further alleges that the “defendants do not own or sell metals to customers; customers are charged with storage and insurance fees on metals that do not exist; and are charged interest on loans, which are never made by the defendants”. 

Hunter Wise Commodities had taken in at least $46 million in customer funds since July 2011, the commission stated. 

Following a hearing on 22 February, Judge Donald Middlebrooks for the US District Court of Southern Florida found that the commission had shown a likelihood of success in proving the allegations of the complaint. 

In an order issued on 25 February, the judge said Hunter Wise had provided reports to customers which were misleading because they “created the illusion that actual commodities are being transferred into or out of their accounts, when in reality, no real metals are being transferred as a result of the transaction”. 

The order notes, “Hunter Wise does not actually buy, sell, loan, store, or transfer physical metals in connection with these retail commodity transactions. Instead, Hunter Wise records and tracks customer orders and trading positions, and then manages its exposure to these retail customer trading positions by using the customer’s funds to trade derivatives – such as futures, forwards and rolling spot contracts – in its own margin trading accounts.” 

The court order prohibits Hunter Wise Commodities and the other defendants from trading, soliciting orders, committing fraud or engaging in business activity related to contracts or transactions regulated by the CFTC. In the ongoing law suit, the commission is seeking a permanent civil injunction and other remedial relief, including restitution to customers. 

In a news release issued on 12 December, 2012, Hunter Wise Commodities categorically denied all accusations made against it by the commission. “The CFTC’s allegations are unfounded and misstate the nature of Hunter Wise’s business and its business relationship with other precious metals dealers,” the statement read.  

“The allegations made by the CFTC are inaccurate. We’ve been cooperating with the commission and we believe we have answered all of their questions,” said Ed Martin, president of Hunter Wise Commodities, who is personally named as a defendant in the law suit. “We absolutely stand behind the propriety of our business practices; we are absolutely confident the truth will emerge and that we expect to prevail.” 

When responding to the commission’s motion for an injunction, Hunter Wise Commodities had argued that an amendment made to the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, which came into force on 16 July, 2011, and included financed commodity transactions in the jurisdiction of the commission, did not apply to its business.  

The company also denied the allegations that it engages in leveraged or margined transactions or that it deals with retail customers. On its website, the company states it conducts business with independent dealers and institutional investors and it regards the independent dealers, which have been named as defendants in the law suit, as customers.  

The court rejected the argument stating in its order: “It appears that the independent dealer structure has been orchestrated by Hunter Wise to create separation between itself and its sales force, but it functions as a common enterprise to take advantage of and mislead the novice investor.” 

The Cayman affiliate of Hunter Wise Commodities, Hunter Wise International Commodities, launched last year in Cayman as an exempted* company, which means it is not allowed to conduct business with customers that are based in the Cayman Islands. 

Managing Director Kyle Martin said in response to whether his company continues to operate in the Cayman Islands: “Hunter Wise International Commodities, Ltd (HWIC) is a fully licensed Exempt Cayman Company conducting a legitimate business in the Cayman Islands. HWIC proceeds on the basis that its transactions are legal and represent the manner in which the industry has operated in the United States and around the world for well over 50 years.” 

Mr. Hunter said HWIC has obtained legal opinions confirming the legality of their transactions in the United Kingdom, Germany and Brazil. “The clients of HWIC have always been and will always be outside of the United States. That being said, HWIC will continue to conduct business as usual,” he added.
 

Editor’s note: This story has been changed from the original for clarity.