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Law360 (July 8, 2020, 5:35 PM EDT) -- The U.S. Commodity Futures Trading Commission's first enforcement action over conduct tied to the COVID-19 crisis targets a self-proclaimed forex "master trader" who told clients his trading profits were bolstered by the pandemic.
The agency filed a complaint in Texas federal court on Tuesday alleging that James Frederick Walsh of Florida used platforms like YouTube and Craigslist to market himself as a successful forex trader generating high returns using "legal, inside information" about the direction forex markets would move.
Even after receiving a cease-and-desist letter from the Texas State Securities Board, Walsh continued soliciting clients — including an undercover TSSB investigator — with promises that the forex markets were "recession proof" and a "safe haven" from the economic turmoil induced by the COVID-19 pandemic, the CFTC alleges.
Unlike the U.S. Securities and Exchange Commission, which has deployed a slew of trading suspensions and enforcement actions in response to the crisis, the CFTC had primarily addressed the novel coronavirus' effects on financial markets with targeted relief and customer advisories, until Tuesday's lawsuit.
"We continue to actively monitor our markets to seek out bad actors using the COVID-19 crisis as a basis for investment scams," agency enforcement director James McDonald said in a statement Wednesday. "There is never an appropriate time to prey on innocent people's fears, and we will aggressively pursue those who do."
The civil suit claims Walsh of Boca Raton, Florida, solicited clients using social media, emails, phone calls and text messages for a trading scheme he claimed to operate known as the "Master Account Client Trading Program." Walsh purported to place trades in two "master accounts" that were mirrored by subaccounts holding investor funds, and told clients that he took a 40% cut of all trading profits and placed the remainder back into their subaccounts.
In a YouTube video from September 2019, Walsh falsely claimed that he was netting 8% to 11% returns per month on his clients' accounts and had "live feeds" that allowed him to "trade with the banks" that "move the market 80% of the time," the CFTC alleges.
At no point did Walsh disclose that he didn't have any U.S.-based forex trading accounts, or discretionary authority to trade on behalf of others, or authorization under the Commodity Exchange Act to trade forex on behalf of U.S. clients, as he was operating an unlawful business venture and could not guarantee any profitable trading, according to the enforcement action.
The TSSB began investigating Walsh and his purported master trading program in November 2019 by having an agent pose as a prospective client and until April 2, Walsh explained his trading system to the investigator and offered to trade forex on his behalf in exchange for compensation.
The state securities regulator sent Walsh a cease-and-desist letter in February, and received an email from him on Feb. 18 stating that he had agreed to comply with the letter. But less than a week later, Walsh again told the still-undercover TSSB agent that he would willing to trade forex on his behalf, the CFTC alleges.
By March, Walsh began telling the undercover agent that forex markets were insulated from losses and indeed increasingly profitable due to the COVID-19 pandemic, the suit claims.
In a March 15 email referenced in the complaint, Walsh said, "This business is the only one that I know that is 'recession proof' you just have to be on the banks side as they win 94% of the time regardless of the problems in the rest of the [w]orld! and the bank charts I work with give me that information."
The regulator alleges Walsh continued to make these representations to the undercover agent through April 2. The TSSB filed an emergency cease-and-desist letter the following day against the man they said was alternatively known as Jim Walsh or "Stormy" Walsh.
"Walsh's claims that he generated profits trading forex on behalf of clients were false, as were his statements about the forex markets being 'recession proof' or a 'safe haven' from the economic distress resulting from the COVID-19 global pandemic, or otherwise wrongly downplaying the risks associated with trading forex," the CFTC said.
The CFTC is seeking an injunction freezing Walsh's operation and an order for him to disgorge any profits, make full restitution to his clients and pay monetary penalties.
Contact information for Walsh was not available Wednesday.
The CFTC is represented in-house by Tobias Fischer, George Malas, Timothy M. Mulreany and Paul G. Hayeck.
Counsel information for Walsh was not yet available.
The case is CFTC v. Walsh, case number 1:20-cv-00725, in the U.S. District Court for the Western District of Texas.
--Editing by Michael Watanabe.
For a reprint of this article, please contact reprints@law360.com.
