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News Release: 00-05
GRAY DAVIS, Governor
Date: 03/22/00
WILLIAM KENEFICK, Acting Commissioner
State Announces Crackdown on Foreign Currency Scams
"Opportunity of a Lifetime" Evaporates into Thin Air
San Francisco, March 22, 2000 — The Department of Corporations announced today that it has taken enforcement action against 24 entities and 74 individuals throughout California for the illegal and fraudulent offer and sale of foreign currency investments. The sweep is the fourth in as many years, as foreign currency investment scams have proliferated.
Central to the department’s enforcement sweep includes a civil action filed in San Francisco County Superior Court, seeking an injunction, asset freeze and the appointment of a receiver over Y&T Inc., doing business as Tokyo International Investment, Ltd.; and the San Francisco "Associated/Sales Office" of Eastern Vanguard Forex, a British Virgin Islands company controlled by Hong Kong-based Eastern Vanguard Group Ltd. Also named in the action were five related entities and 12 individuals.
The action alleges "egregious conduct and blatant disregard for the laws of California" by the defendants in promoting an "elaborate foreign currency trading scheme" in which hundreds of customers invested an estimated $25 million in the last eight years. Investors were typically solicited over the Internet, in the San Francisco Chronicle, the Chinese language Sing Tao Daily News, the Vietnamese language periodical Mo and through seminars soliciting new investors for training and employment as "Account Executives."
Investors, mostly from the Asian Community, were encouraged to invest in foreign currency trading with their own money and to bring in friends and relatives based on promises that investments in foreign currencies were "relatively low risk, legal and profitable. . . the opportunity of a lifetime." According to the complaint, investors were not told that high interest and commissions were being charged against their accounts, or that the defendants were taking positions opposite to that of investors on each trade. Investors often gave "discretionary" trading authority to Account Executives, employed by the defendants who were actually receiving bonuses for churning their customer’s accounts and margin trading at up to 100-1 margin, which is extremely risky.
Many foreign currency brokers in effect make their own market by setting prices and taking positions opposite to their customers, making the opportunity for fraud readily available. Brokers frequently have no federal or state licenses and don’t bother making any trades at all, but simply create fictitious account statements and steal the money. Those operating on the Internet may be using false identities and may be operating from anyplace in the world.
The department warns investors that foreign currency investments are extremely risky because most of the investments are allegedly made in overseas markets such as Hong Kong where it is nearly impossible to verify whether any trading is actually taking place. It is also difficult to obtain financial records where foreign currency trading is often done in an informal "interbank" exchange in which small investors can only participate through the accounts of brokers or banks.
The department’s civil action seeks an asset freeze, temporary restraining order, civil penalties of up to $25,000 per violation and the appointment of a receiver "to ensure that restitution can be made to victims." State regulators describe the scheme as a "blatant and ongoing pattern" of violations of the state commodities, securities and finance lenders laws. Some defendants were subject to a Securities and Exchange Commission injunction and Arizona Securities Division orders, and the transactions were illegal in California under the state’s commodities, securities and finance lending laws.
In the statewide sweep, the department also issued 10 Desist and Refrain Orders against 13 entities and 56 individuals in Northern and Southern California for violation of the state’s commodities and securities laws. The department obtained stipulations to cease illegal operations against five entities and three individuals, and the department assisted the district attorneys in bringing criminal cases in Santa Clara and San Francisco counties.
The Department of Corporations is California's Investment and Financing Authority, reporting to the Business, Transportation and Housing Agency and the Governor. The Department is responsible for the regulation, enforcement and licensing of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending and residential mortgage lending. For further information or to obtain a complaint form, see the Department's Web site at www.corp.ca.gov.
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