The CFTC has announced that a Northern District of Illinois federal judge issued a default judgment against a collection of commodities dealers and companies. The defendants were charged with operating a fraudulent offshore binary option scheme.

The defendants in the CFTC action included four Israeli citizens who participated in the fraud, and five alter-ego corporate entities of Yukom Communications.

All but one of the defendants failed to oppose the CFTC’s lawsuit and those found liable now must collectively pay $112.9m in restitution as well as a $338.7m monetary penalty.

Fraudulent binary options offerings

Binary options, specialty derivative contracts that either pay a fixed monetary sum or nothing, have been compared to gambling and are often linked to fraudulent financial operations around the world. The most common application of a binary option is one where investors track the price movement of an underlying commodity in an all-or-nothing bet.  

Yukom Communications, which operated subsidiary websites BigOption and BinaryBook from 2014 to 2019, intentionally solicited vulnerable investors such as retirees to participate in binary options transactions, encouraging them to invest by allegedly lying about historical return rates and the professional backgrounds of its employees.

And when the fraud participants secured money from investors, they often made it impossible for investors to withdraw their funds. 95% of customers lost all the money they entrusted to Yukom, and many lost their entire life savings.

The CFTC first initiated its lawsuit against Yukom-related entities 2019. In a parallel criminal action against central fraud participant Lee Elbaz that year, investigators described a widespread culture of intentional deceit where it was “fun to defraud.”

Defendants imprisoned and at large

Elbaz was ultimately sentenced to 20 years in prison for wire fraud and ordered to pay $28m in restitution. Criminal co-defendant Yakov Cohen pleaded guilty and was sentenced to five and a half years in prison and ordered to pay $7 million in restitution. He was the only one to respond to the CFTC’s lawsuit.

The two remaining defendants, the alleged linchpins of the fraudulent operation, remain at large.

Rule violations

The defendants were accused of violating the following provisions of the Commodities Exchange Act:

Section 4c(b), covering off-exchange options transactions;

Section 6(c)(1), covering fraud in commodities transactions generally;

Section 4d(a)(1), requiring a future commission merchant’s registration with the CFTC.

and Section 2(e), covering ineligible participants.