Australia’s Wolf of Wall Street Clobbered Amid Increased Focus on Market Misconduct
Australia’s financial regulators are in no mood to tolerate market abuse and misconduct, as evidenced in the punishment meted out to a rogue brokerage house with almost no compliance controls.
A culture reminiscent of The Wolf of Wall Street has landed an Australian brokerage a US$20 million penalty, its owner a fine of $400,000, and a warning from regulators that they are stepping up their pursuit of market misconduct offenses.
Forex Capital Trading Pty Ltd and its sole director Shlomo Yoshai engaged in “unconscionable conduct,” according to Australia’s federal court, with Justice John Middleton singling out the firm’s “systemic compliance deficiencies.” Justice Middleton described Yoshai as “incompetent and irresponsible.” Forex CT and Yoshai were ordered to pay more than $1 million in costs on top of the fines.
Yoshai was sanctioned for breaching director duties and fostering the business’s unconscionable conduct. In March the corporate regulator banned him from working in the financial services sector for a decade.
The firm’s clients were said to be vulnerable, in financial distress, and had little or no trading experience, often using credit or accessed superannuation savings. Clients lost a total of $56 million, all of which made its way to Forex CT’s accounts.
“The vast losses incurred by clients support the imposition of a significant pecuniary penalty,” Justice Middleton said.
The ruling is the latest multi-million dollar fine handed down to trading firms for poor compliance controls, and continues the trend of aggressively targeting behaviors that threaten the integrity of Australia’s financial system following a long-running government effort to clean up the markets.
Wheel Of Fortune
An investigation by the Australian Securities and Investments Commission (ASIC) uncovered an office culture dominated by sales, with bells rung whenever targets were hit. Games with cash prizes were played on the trading floor, with high-pressure sales tactics used to urge customers to deposit more funds while delaying withdrawals.
At times the company’s headquarters resembled a casino with management encouraging staff to play roulette, Wheel of Fortune, and dice games in the office for cash bonuses.
As part of their training, staff were taught that a client falling into a negative position with borrowed money was a good opportunity to persuade them to deposit more cash into their trading accounts.
Former account managers likened the environment to the brokerage house Stratton Oakmont from the movie, The Wolf of Wall Street.
Zero Tolerance Approach
In handing down his decision, Justice Middleton found that Forex CT had “systemic compliance deficiencies” and a “culture of non-compliance”. He said “the vast losses incurred by clients support the imposition of a significant pecuniary penalty.”
ASIC also pulled Forex C.T.’s Australian financial services license in May 2020, after the business had breached its obligations, leading to “unconscionable, misleading, and deceptive conduct.”
ASIC commissioner Cathie Armour said the size of the penalty was a reminder of the seriousness of the conduct, and that the regulator would pursue wrongdoing wherever it was found.
“If corporations disregard the law and their client obligations, ASIC will take action and the consequences can be severe,” Armour said.
A statement on Forex C.T.’s website informs visitors it no longer holds a license and ceased providing financial services in Australia. It states the firm’s investment platform has been decommissioned and it had ceased taking new customers as of July 27, 2020.
The size of the Australian market for over the counter retail derivatives has grown considerably over recent years, the regulator said, and that has coincided with a dramatic increase in misconduct complaints to ASIC. The regulator promised to take strong regulatory action to protect consumers of these products.
Criminal Fines and Penalties Up
Industry experts believe the case should serve as a warning to financial services firms in Australia that weak compliance controls will not be tolerated and that, despite the pandemic, there will be no let-up in the enforcement of bad actors in the market.
There are “no signs of ASIC slowing down its enforcement activity, particularly its pursuit of court-based outcomes” regardless of the situation with coronavirus, according to Edward Einfield of Allen & Overy.
The regulator secured a record number of civil penalties (totaling $119 million) imposed by the courts in its most recent reporting period (July-December 2020).
“The significant increase in the number of criminal and civil penalty proceedings commenced in 2020 highlights ASIC’s dedication to the ‘why not litigate?’ approach, driving cultural change through public denunciation and punishment through the courts,” Einfield said.
In February 2021, ASIC published a new policy that offers immunity to individuals from the market misconduct provisions when certain pre-conditions are met.
The policy provides immunity to the first individual who reports an undetected breach of the market misconduct rules, even if they were part of the misconduct, and requires their extensive co-operation in the investigation and any ensuing court proceedings. The immunity only applies to individuals, not corporations, and applies in respect of both civil penalties and criminal prosecution.
“If the policy is as successful in encouraging reporting as the cartel immunity policy adopted by the Australian Competition and Consumer Commission, we may see a significant increase in prosecutions for market misconduct,” said Jennifer Chambers, Partner at Jones Day law firm in Sydney.