Three men, two from Israel and one from Germany, have been charged in a massive securities fraud that cost investors over $100 million according to the SEC. Some people lost their entire life savings.
In a complaint just filed this week, the Securities and Exchange Commission alleges that Kai Christian Petersen of Germany and Gil Beserglik and Raz Beserglik (a father and son from Israel) fraudulently offered and sold unregistered binary options through several Internet-based brokerage firms operating under the names Bloombex Options, Morton Finance and Starling Capital. The brokerage firms functioned through a combination of websites and marketing which misled investors to invest in binary options.
To further their illegal scheme, the SEC says the defendants operated offshore call centers which “applied boiler room tactics to manipulate investors into depositing substantial sums of money toward the purchase of binary options.” The trio also created several international companies to collect investor funds and deposit them into overseas bank accounts. The monies were then misappropriated.
Of course, the websites, the brokerage firms and call centers never registered with the SEC as brokers and were never associated with an SEC registered broker or dealer.
The Commission says that unlike many other similar scams, the websites used by the three men were professionally designed websites, complete with convincing trading platforms. An uninformed investor would easily believe they were investing their hard earned money with legitimate financial firms. That is probably why the scheme lasted for three years and reportedly brought in over $100 million dollars.
[We again remind investors to always check with FINRA’s Broker Check system and the SEC’s Investment Adviser Public Disclosure site. Both offer easy to use online tools that are free. If the broker or his or her company isn’t registered, move on and contact the SEC!]
The websites lured investors with promises large profits. Investors were told that professional brokers and financial experts would trade binary options in their accounts. According to the complaint,
“After investors opened an account, the call centers then made materially false statements and engaged in other deceptive acts to complete the ruse. Call centers employees, for example, falsely held themselves out as experienced brokers and advisors who would help investors to trade profitably. They told investors that their clients typically made large sums by trading binary options, and told investors that they could withdraw their money (and profits) at any time. The call centers then encouraged investors to make large deposits, oftentimes from credit cards and retirement and savings accounts.
They also falsely told investors that they only made money when investors made money.
Unbeknownst to investors, Defendants only earned money if investors made large deposits and then lost their trades.
Defendants thus had but one goal in mind for investors who opened accounts at their broker firms: to convince those investors to continue depositing more and more cash into their accounts and cause them to lose their money by trading binary options. The [brokerage firms] in fact typically refused to permit investors to withdraw their money.
Despite the assurances on the websites and the promises made by the call centers, investors depositing money for trading typically lost all of their money.”
The SEC says that the three men all knew this would be the result.
As a result of their conduct, the three were able to obtain tens of millions of dollars of investor funds by fraud. Through their call centers and phony brokerage firms, they defrauded thousands of investors in the United States. Many Americans lost hundreds of thousands of dollars, and many lost their entire retirement and life’s savings.
What Are Binary Options?
Binary options are financial instruments with a value tied to the price of other financial assets such as securities or securities indices. An investor chooses whether the underlying asset’s price will be above or below a certain price at a particular time (e.g., will Apple stock be above $100 per share at 1 p.m. on a particular day).
The options are considered “binary” because they carry only two possibilities: the investor prediction is correct meaning the investor makes money (typically 170% of the amount invested) or their prediction is incorrect. When the latter occurs, the investor usually loses the entire amount invested. These options are sometimes referred to as “all-or-nothing options” or “fixed-return options.”
If you do the math, it is easy to see how the investor over time will almost always lose. It is also easy to see why the binary option brokers want the customer to lose.
If the investor’s prediction is correct, he or she makes 70%. If wrong, the loss is 100%.
Phony Claims by the Brokerage Firms
The brokerage firm websites made it appear that the investors were able to trade on real markets. They didn’t disclose investors were actually trading against the brokerage firms, who profited when the investors lost their trades. The brokerage firms offered, recommended, and sold binary options to investors without disclosing that the brokers profited when investors lost money trading the binary options they recommended and sold.
The SEC also says the brokerage firms misrepresented that investor funds were held in segregated accounts. For example, the Bloombex-Options website said,
“Client’s funds are held in a segregated account. Funds are used only for trading options through our website upon client’s instructions and are never used for any other cause. Our liabilities and exposures are professionally handled and we guarantee payouts of your profits based on our terms.”
According to the SEC, the investor funds were commingled and the brokerage firms seldom allowed payouts.
The government also says the brokerage firms “did not have the funds necessary to cover the liabilities they owed to investors because, contrary to the disclosure above, the Brokers used investor money to cover their expenses. These expenses included referral fees paid to affiliate marketers, fees to the Brokers platform providers, commissions for Call Center employees, website hosting and maintenance, and credit card processing fees.”
Finally, the government says that the brokerage firms made false and misleading claims. Here are some examples:
“Bloombex Options offers access to one of the world’s most profitable trading solutions, accompanied by a dedicated team of financial experts ready to assist you at every step on your way to success.”
“Trading at Starling Capital is as simple as it can be, thanks to one of the most intuitive platforms on the market and a team of Account Managers eager and available to guide you through the best strategies and the most profitable techniques to get your share of the Financial Markets.”
“Over the years Morton Finance has enriched the life of thousands of investors, empowering them to achieve their financial goals. We don’t just serve customers – we create power traders. Interested?”
According to the SEC, the brokerage firms were not licensed, the “brokers” working there generally had no training and most investors lost all their money.
To lure investors to deposit even more money, the brokerage firms would allow customers to win some initial small trades. They would also allow customers to make small withdrawals. The idea was to convince customers to feel comfortable and invest more money. Only then would customers find out they couldn’t withdraw their funds (if they even had any funds left.)
The SEC’s complaint was filed September 26th. No answer has been filed yet by the defendants. (We remind readers that allegations in a complaint – even a government complaint – are just that, allegations. Only the court can decide if the defendants are guilty of any wrongdoing.)
Binary options schemes have been around for a while. Many are fraudulent. According to the SEC, “Much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U.S. regulatory requirements and may be engaging in illegal activity. Investors should be aware of fraudulent promotion schemes involving binary options and binary options trading platforms.”
Despite these warnings and despite cases like the current scheme involving Kai Petersen, Gil Beserglik and Raz Beserglik, many people still think binary options are quick way of getting rich. It’s not impossible but the odds are certainly against you.
If a broker or investment advisor solicits you to invest in one of these schemes, think twice. We are not aware of any legitimate brokerage firms doing so but with the right disclosures, it is possible. Unfortunately, many of the brokers pushing these schemes aren’t registered and don’t disclose the risks.
The securities fraud lawyers at Mahany Law assist investors who have lost $100,000 or more from a legitimate, registered brokerage firm. If the brokers aren’t registered with the SEC or FINRA, we can’t help.
Using the present case as an example, the firms involved are all located offshore and none are registered. We suspect that none of insurance. Sadly investors will probably never recover all of their losses.
To learn more about our services, visit our investor fraud recovery page. Ready to see if you have a case? Contact us online, by email or by phone at 202-800-9791. We take investor and stockbroker fraud cases anywhere in the United States.