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David v. Alaron Trading Corp.

November 2, 2010

PAULINA GUIROLA DE DAVID, CORPORACION DE FIANZAS, CONFIANZA S.A., CARLO MAURO-RHODIO GUZMAN, JESUS ALBERTO QUIROA MONTEPEQUE ASESORES REGIONALES, S.A., DE C.V., CORPORACION DE INVERSIONS EN OPCIONES Y FUTUROS, S.A., ESBA S.A., JOSE MIGUEL GAITAN ALVAREZ, RICARDO RAMON MAZARIEGOS CATELLANOS AND MARIA VIRGINIA GAITAN DE MAZARIEGOS, JULIO ROBERTO PINEDA AVILA, FRANCISCO JAVIER PAZ PINEDA, JUAN FERNANDO PEREZ MARROQUIN, DIDIER PATRICK WURSTER, ALFREDO PRADANOS ALDIZAN, ALBA MARIA MARLENNE MEANY VALERIO DE HAGE AND NORMA LISSETTE HERNANDEZ SANCHEZ, AMUEL ANTONIO CHARUCO SAGASTUME, CORPORACION INTEGRAL DE INVERSIONS, S.A., PLAINTIFFS,
v.
ALARON TRADING CORPORATION D/B/A ) ALARON LATIN AMERICA, ALBERTO ALVAREZ, JOSE ("PEPE") ORTEGA, ) ALBERTO TARAFA, YET UNDETERMINED PRINCIPALS AND YET UNDETERMINED PERSONS, DEFENDANTS.



The opinion of the court was delivered by: Judge Robert W. Gettleman

MEMORANDUM OPINION AND ORDER

Plaintiffs, twenty foreign corporations and individuals, have filed a twelve-count amended complaint against defendants Alaron Trading Corporation ("Alaron") and its d/b/a Alaron Latin America ("Alaron LA"), along with three of Alaron LA's managers and employees, Alberto Alvarez, Jose "Pepe" Ortega, and Alberto Tarafa. The complaint alleges four counts under the Commodity Exchange Act ("CEA"),*fn1 in addition to various pendent state-law claims.*fn2 Defendant Alaron, joined by pro se defendants Alvarez, Ortega, and Tarafa, has moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendant Alvarez has filed an additional pro se reply to plaintiffs' response to defendant Alaron's motion to dismiss, presenting further arguments in support of defendant Alaron's motion to dismiss as it pertains to him. Defendant Ortega has moved to dismiss the complaint for lack of personal jurisdiction and improper venue, pursuant to Rules 12(b)(2) and (b)(3). For the following reasons, defendant Alaron's motion, joined by pro se defendants Alvarez, Ortega, and Tarafa, and supplemented by defendant Alvarez, is denied in part and granted in part. Defendant Ortega's motion to dismiss is denied.

BACKGROUND*fn3

Defendant Alaron is a Chicago-based futures commissions merchant ("FCM")*fn4 registered with the Commodity Futures Trading Commission ("CFTC"). Defendant Alaron LA, located in Miami, Florida, is a d/b/a and branch office of defendant Alaron. The individual defendants, all citizens and residents of Florida, were employees and managers of defendant Alaron LA: defendant Alberto Alvarez was its branch manager; defendant Jose "Pepe" Ortega was responsible for accounting and finance; and defendant Alberto Tarafa was the Latin American sales representative. Plaintiffs are foreign individuals and corporations who maintained accounts with defendant Alaron.

From January 2005 through August 2008, defendants allegedly operated a futures and options Ponzi scheme, along with defendant Alaron's Guatemala-based foreign introducing broker, Mercados de Futuros ("MDF"), and MDF's CEO and head trader, Raul Alfonso Giron Galves ("Giron").*fn5 In the second half of 2004, defendants Alvarez, Ortega, and Tarafa held a number of meetings with Giron to discuss the possibility of MDF's working as a foreign introducing broker for defendant Alaron. Through these meetings, and through reviews of MDF's trading activity, defendants learned that MDF planned to solicit investors for defendant Alaron by guaranteeing that investors would not lose any of their principal, and moreover that investors would earn a specified rate of return on investments. Defendants knew that because MDF could not, and did not intend to, deliver on these guarantees, the guarantees were deceitful; they also knew that the purpose of the guarantees was to induce plaintiffs' reliance on them. Defendants also learned that Giron and MDF planned to misrepresent their skill, experience, and expertise to investors.

Despite this knowledge, defendant Alaron agreed to take on MDF as a foreign introducing broker and agent. As the years passed, and MDF never produced a profit in these accounts, defendants continued to work with MDF to solicit and trade new accounts with the same deceitful guarantees. Defendants and MDF intentionally hid from plaintiffs the fact that the trading accounts were not making profits. Further, after plaintiffs opened their accounts, defendants engaged in excessive trading in them and charged unreasonable fees and commissions. Defendants and MDF shared the profits from the inflated commissions.

Defendants, along with MDF and Giron, undertook three strategies to propagate and support their scheme: 1) a joint marketing effort; 2) an excessive trading and commission sharing agreement; and 3) concealing trading losses from plaintiffs.

A. Joint Market Effort

MDF and defendant Alaron jointly solicited plaintiffs at various conference presentations, both abroad and in Miami. Defendant Tarafa, with the knowledge and agreement of the other defendants, regularly traveled to Guatemala and other Latin American countries to participate in promotion and marketing events with MDF and Giron. At these events, defendant Tarafa falsely assured plaintiffs that defendant Alaron worked with only the very best trading advisors, and that Giron was one of the five best trading advisors in Latin America. Defendants also sponsored events for investors at defendant Alaron LA's office in Miami, at which defendant Tarafa, often joined by defendants Alvarez and Ortega, made the same fraudulent representations. In reasonable reliance on defendants' omissions and misrepresentations, plaintiffs opened accounts with defendant Alaron and gave MDF and Giron power of attorney to trade on a discretionary basis.

B. Excessive Trading and Commission Sharing Agreement

MDF and Giron conducted all trading in plaintiffs' Alaron accounts on a discretionary basis. Defendants agreed with MDF to charge plaintiffs a grossly inflated commission of $42 per round turn contract (i.e., a purchase and sale of one futures contract)-almost three times the standard rate. Defendant Alaron received half of the commission fees.

Further, defendants encouraged MDF to increase trading in plaintiffs' accounts by providing MDF with a monetary incentive: defendants agreed to reduced their fees by $1.00 for every additional 1,000 turns per month. After defendants introduced this incentive, their business with MDF grew from 1,000 to 4,000 turns per month. Defendants knew that plaintiffs' accounts were not realizing profits, but still encouraged MDF and Giron to increase trading.

C. Concealing Trading Losses from Plaintiffs

In the course of trading on plaintiffs' behalf, MDF and Giron aggressively traded and consistently lost money. To conceal the losses, they misleadingly increased the "cash value" in plaintiffs' accounts by selling options with high cash value but significant ongoing risk. This increased risk, in addition to the additional commissions charged for the transactions, sharply reduced the net liquidating value of plaintiffs' accounts. MDF and Giron then improperly instructed plaintiffs on how to interpret the monthly account statements defendant Alaron sent to plaintiffs. MDF and Giron informed plaintiffs that the "cash value" indicated realized profit, and instructed plaintiffs to ignore the "net liquidity" portion. In fact, "net liquidity" reflected the account's true value, whereas "cash value" reflected the amount of cash on deposit in the account and did not account for any open positions against which the cash value was being held.

Defendants knew that, as an additional measure to conceal the losses in plaintiffs' accounts, and to facilitate monthly incentive payments to MDF, MDF provided fraudulent monthly statements to customers. Defendants Alvarez and Ortega arranged to have the illusory profits taken from plaintiffs' accounts and transferred to a third-party Miami bank account that Giron and MDF instructed plaintiffs to open. Plaintiffs paid MDF incentive fees based on these illusory profits.

Plaintiffs discovered the scheme in August 2008, when MDF shut down amid media reports that the Guatemalan government was conducting a criminal investigation into MDF's trading activities.

DISCUSSION

I. Defendant Alaron's Motion to Dismiss

Defendant Alaron, whose motion is joined by pro se defendants Alvarez, Ortega, and Tarafa, has moved to dismiss plaintiffs' complaint pursuant to Rule 12(b)(6), because: (1) plaintiffs' allegations of fraud (Counts I-VIII, XI) fail to meet Federal Rule of Civil Procedure 9(b)'s heightened pleading standards; (2) plaintiffs have failed to allege that defendant Alaron owed them a fiduciary duty, and therefore cannot state a claim for breach of fiduciary duty (Count IX); (3) plaintiffs' allegation of failure to supervise is conclusory (Count X); and (4) plaintiffs have failed to properly allege unjust enrichment (Count XII). ...


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