Binary options are considered investments by some regulators but little more than gambling by others. In the United States the instruments are permitted within the confines of the applicable regulations. In other countries, such as Germany, they are banned. Whatever the view, all would consider them a highly risk investment. Viewed in that context, there can be no doubt that the Defendant in the Commission’s most recent enforcement action did more than just tip the odds in favor of the house. SEC v. Suleymanov, Civil Action No. 18-68545 (E.D.N.Y. Filed Dec. 3, 2018).
Mark Suleymanov offered binary options to the public over a period of four years beginning in early 2012. Operating under the business name SpotFN, Mr. Suleymanov offered and sold binary options to customers throughout the United States on a series of websites. Those included SpotFN.com, BinaryFN.com and OptionsMogul.com. Each website was controlled by Mr. Suleymanov.
The SpotFN site included what appeared to be educational materials from Binary Academics.com and AssetSignals.com. The products were supposedly designed to improve the investor’s performance. In fact the so-called educational sites encouraged investors to make more trades on the SpotFN platform.
The binary options offered by SpotFN were short term contracts tied to the price of stocks and stock indexes or other financial assets. The options offered and sold required an investor to choose if the given stock’s price, for example, would be above or below a specific price at a certain time. If the investor made a correct determination, he or she won a specified amount. If not, the investor received nothing.
Mr. Suleymanov represented that the binary options sold were legitimate, using the NASDAQ logo. Yet the binary options sold by SpotFN were not registered with the SEC despite the fact that options based on the value of a security or index of securities are defined as securities and thus must be registered.
The marketing for the options was based on a series of misrepresentations. Those included claims that there would be:
· Up to 88% returns;
· Clients will be able to have their investment accounts be self-sufficient;
· The point is to have investors be able to make withdrawals while equity built;
· SpotFN sought to have clients be able to attain a constant source of income; and
· The promoters were motivated to make clients successful.
In fact Defendant Suleymanov caused investor losses, according to the complaint. Not only were the returns not 88% in favor of the investor, Mr. Suleymanov manipulated the software that ran the options program so that the chance for investors to secure a favorable result were diminished. This was done in two ways. First, the basic model was set so that if an investor lost all of the investment was gone. In contrast if that person won the return was usually about 70 to 80%. Second, as Mr. Suleymanov told the software maker “’We use that [software setting to pay high rates of return] as a marketing tool to lure customers in for the first time, get them to deposit as much as possible, let them win . . . then once all their funds and wires come in, we then turn that feature into a positive for the platform . . . We are controlling the situation with them.’”
Defendant also manipulated the bonus money given to investors to virtually preclude them from withdrawing despite claims of “easy withdrawal.” Investors were not warned that bonuses money placed in their accounts had to be traded thirty times before SpotFM would approve withdrawals. Given the tilt in payouts in favor of the house it became virtually impossible to withdraw the bonus funds.
Finally, while investor funds were supposedly held in segregated accounts, in fact they were not. Rather, investor funds were co-mingled and at times used for the payment of expenses by Defendant. The complaint alleges violations of Securities Act sections 5 and 17(a) and Exchange Act section 10(b). Defendant Suleymanov agreed to the entry of a permanent injunction based on the sections cited in the complaint. The issues regarding disgorgement, prejudgment interest and a civil penalty will be considered by the Court. See Lit. Rel. No. 24364 (Dec. 3, 2018).
Program: The Fifth Annual Dorsey Federal Enforcement Forum will be held on December 5, 2018. The program, centered on a tech theme and SEC enforcement, includes a keynote address on artificial intelligence and its impact on the legal profession, panels analyzing critical issues facing SEC enforcement, the question of broker protocols, trends in investment adviser inspections, how to conduct an ICO and concludes with an address on cyber-security and internal controls. A holiday gathering follows. The program and registration for it and the party are here or separate registration for the holiday party only here.