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United States v. Trademasters, USA, LLC

United States District Court, D. Nevada, Las Vegas Division

September 12, 2017

UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
TRADEMASTERS, USA, LLC and MIRKO SCHACKE, an individual, Defendants.

          ORDER GRANTING PLAINTIFF CFTC'S MOTION FOR SUMMARY JUDGMENT AGAINST SCHACKE, GRANTING DEFAULT JUDGMENT AGAINST TRADEMASTERS, and IMPOSING A PERMANENT INJUNCTION AND OTHER RELIEF

          GLORIA M. NAVARRO, CHIEF JUDGE UNITED STATES DISTRICT COURT

         This matter comes before the Court on Plaintiff's combined filing of a Motion for Summary Judgment against Defendant Mirko Schacke (“Schacke”) and Plaintiff's Motion for Default Judgment against Defendant TradeMasters, USA, LLC (“TradeMasters”). On August 15, 2016, Plaintiff, United States Commodity Futures Trading Commission (“Commission” or “CFTC”), filed a Complaint against Defendants TradeMasters, USA, LLC (“TradeMasters”) and Mirko Schacke (“Schacke”) (collectively “Defendants”), seeking injunctive and other equitable relief, as well as the imposition of civil penalties, for violations of the Commodity Exchange Act (“Act”), 7 U.S.C. §§ 1 et seq. (2012), and Commission Regulations, 17 C.F.R. §§ 1 et seq. (2015).

         Schacke answered the Complaint on September 14, 2016. After receiving briefs and conducting an evidentiary hearing, this Court entered an order of Preliminary Injunction on September 22, 2016. (Docket No. 37) Neither Schacke's Answer nor any other evidence presented to the Court creates a genuine issue of material fact regarding any of the allegations set forth in the Complaint.

         Defendant TradeMasters was served with a copy of the Summons and Complaint on August 24, 2016. TradeMasters has failed to appear or answer the Complaint within the time permitted by Fed.R.Civ.P. 12. Upon the Commission's motion, the Clerk entered a default against TradeMasters on November 4, 2016. (Docket No. 42) As such, the well-pleaded allegations of Plaintiff's Complaint are taken as true as against TradeMasters.

         The Court has reviewed and carefully considered the Complaint, the Plaintiff's Motions for Summary Judgment and Default Judgment, Statement of Uncontested Facts and Memorandum of Points and Authorities in Support of Plaintiff's Motions, including the Joint Appendix of Exhibits and the entire record in this case, and the Court being otherwise advised in the premises, it is hereby:

         ORDERED that the Commission's Motions for Summary Judgment against Defendant Schacke, Default Judgment against Defendant TradeMasters, and Requests for entry of a Permanent Injunction, Disgorgement and a Civil Monetary Penalty against both Defendants are GRANTED in all respects. Accordingly, the Court enters findings of fact, conclusions of law, and an Order of Final Judgment against both Defendants and for a Permanent Injunction, Disgorgement and a Civil Monetary Penalty (“Order”) pursuant to Section 6c and 6d of the Act, 7 U.S.C. § 13a-1 (2012), as set forth herein.

         I. FINDINGS OF FACT[1]

         THE COURT FINDS:

         A. The Parties

         1. Plaintiff, Commodity Futures Trading Commission, is an independent federal regulatory agency charged with the responsibility for administering and enforcing the provisions of the Act, 7 U.S.C. §§ 1 et seq. (2012), and the Regulations promulgated under it, 17 C.F.R. §§ 1 et seq. (2014).

         2. Defendant Trade Masters USA, LLC is a Nevada limited liability company. The firm was registered as a limited liability company on August 7, 2013, and has maintained a business address in Henderson, Nevada. TradeMasters is wholly owned and managed by co-Defendant Schacke, and during the relevant period Schake hired and supervised at least one salesman who solicited public customers to purchase TradeMasters' automated trading software. Trade Masters has never been registered with the Commission in any capacity.

         3. Defendant Mirko Schacke, a/k/a “Mick” Schacke, is an individual who resides in Antioch, California. Schacke is, and was the sole owner and manager of TradeMasters and, therefore, possessed and exercised control over TradeMasters. Schacke has never been registered with the Commission in any capacity.

         B. Defendants' Fraudulent Solicitations

         4. In mid-2013, Schacke bought a commodity futures trading software package off of the shelf, white labelled the product and called it his own TradeMasters trading software. He began marketing the TradeMasters product to the public through a website he developed, www.trademastersusa.com, which remained active until mid-September 2016. Schacke also used various social media devices such as YouTube and Facebook to market the TradeMasters software. Schacke sold his TradeMasters trading software via a “software license” within a range from $1500 to $20, 000. Schacke also charged customers a recurring “monthly access fee” of $250 to $1, 000, which entitled customers to “system setup, ” “training activities and updates, ” and ongoing personal trading support from Schacke. Schacke sold software licenses to, and collected monthly access fees from, 39 customers for a combined total of $168, 626.

         5. At various times from July 2013 through March 2016, Schacke maintained several personal trading accounts at futures commission merchants (“FCMs”) registered with the Commission. Schacke used the TradeMasters software to varying degrees when trading for his personal accounts. In the aggregate, Schacke's personal accounts had a negative 23.77% rate of return for 2013, a negative 19.00% rate of return for 2014, a positive 266.47% rate of return for 2015 and a negative 24.87% rate of return through March 2016. Overall, the accounts had a net profit of $8, 121.51 on a net investment of approximately $43, 000 from July 2013 through March 2016.

         6. When selling the TradeMasters software, Schacke published performance results on the TradeMasters website claiming large profits. Schacke told customers that the performance results reflected on the website were actual trading but Schacke and TradeMasters have no support for these profit claims.

         7. The Defendants knowingly and recklessly made material misrepresentations or attempted to deceive members of the public they were soliciting to buy his TradeMasters software and he did so with scienter, including by misrepresenting on the TradeMasters website and by other means that:

a. the TradeMasters software was fully automated and could result in profitable trading for customers without “coaching” from Schacke;
b. hypothetical trading profits were actual trading profits;
c. that TradeMasters' “coaches” have more than 2 decades of active day trading experience when Schacke was the only “coach” and had no futures trading experience prior to marketing the TradeMasters software in June 2013;
d. a customer gained more than 500% in 2014;
e. a customer gained more than 40% “in only 10 weeks”;
f. “most users manage to generate a monthly income of 5 to $10, 000”;
g. some customers “quickly reached [income of] 15 to $30, 000 each and every month”;
h. a 300% return in just three months was earned by a “real customer”;
i. a video testimonial came from a purported “real customer” when the testimonia was from a paid actor who reported selected results from Schacke's proprietary account; and
j. reported profits were earned with new software Schacke began marketing at the end of 2014 when they were actually earned with the old TradeMasters softwar no longer made available to prospective customers.

         C. TradeMasters acted as a CTA and Schacke acted as an AP

         8. Section 1a(12) of the Act, 7 U.S.C. § 1a(12) (2012), defines a Commodit Trading Advisor (“CTA”), in relevant part, as any person who, for compensation or profit engages in the business of advising others, either directly or through publications, writings, o electronic media, as to the value of or the advisability of trading in any contract of sale of a commodit for future delivery made or to be made on or subject to the rules of a contract market.

         9. Regulation 1.3(aa)(3), 17 C.F.R. § 1.3(aa)(3), defines an associated person (“AP”), as any natural person associated with a CTA “as a partner, officer, employee, consultant or agent (or any natural person occupying a similar status or performing similar functions), in any capacity which involves (i) the solicitation of a client's or prospective client's discretionary account, or (ii) the supervision of any person or person so engaged.”

         10. Schacke continuously provided technical support to customers who were using the TradeMasters software by sending an email or posting online the daily or weekly settings for the markets being traded. Customers took the trade settings and applied them to their account without knowing what the settings meant or why Schacke had recommended them.

         11. At least two TradeMasters customers complained to Schacke that the TradeMasters trading software was not yielding the profitable results that were advertised and that they were, instead, losing money. Schacke agreed to try to recover the losses they experienced by personally executing trades for their trading accounts as an additional service for the same TradeMasters' monthly access fee. At Schacke's direction, the customers gave Schacke and TradeMasters their trading accounts' user name and password log-in credentials, including in one instance actually giving Schacke his computer, and Schacke traded for those customers' accounts. Schacke's IP address was the location used to enter trades for one of those customers' accounts.

         12. Schacke traded for a third customer with whom he had struck a deal to pay Schacke a percentage of the profits the customer earned while Schacke was personally executing trades for him.

         D. TradeMasters Failed to Provide Required Disclosures Concerning Testimonials

         13. TradeMasters displayed client testimonials on the TradeMasters website. As of February 13, 2016, the TradeMasters website contained at least five testimonials from purported customers who claimed that they made gains after using the TradeMasters software to manage their trading accounts. TradeMasters did not disclose anywhere on the TradeMasters website “that the testimonial may not be representative of the experience of other clients, ” or prominently disclose “that the testimonial is no guarantee of future performance or success.” Instead, the only disclaimer appearing on the website did not mention testimonials and was not located in proximity to the testimonials, but was on the bottom of a separate webpage that did not contain any testimonials.

         II. CONCLUSIONS OF LAW[2]

         A. Jurisdiction and Venue

         14. This Court has jurisdiction over the subject matter of this action and Defendants pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1, which authorizes the Commission to seek injunctive relief against any person whenever it shall appear that such person has engaged, is engaging or is about to engage in any act or practice constituting a violation of any provision of the Act or any rule, regulation, or order thereunder.

         15. Venue properly lies with this Court pursuant to Section 6c(e) of the Act, 7 U.S.C. § 13a-1(e), in that Defendant TradeMasters resides in this District and the acts and practices in violation of the Act have occurred within this District.

         B. Defendants Violated Sections 4b(a)(1)(A) and (C) of the Act, 7 U.S.C. § 4b(a)(1)(A) and (C) (2012)

         16. Section 4b(a)(1)(A) and (C) of the Act, 7 U.S.C. § 4b(a)(1)(A), (C)(2012), makes it unlawful for any person, in or in connection with any order to make, or the making of any contract of sale of any commodity for future delivery that is made, or to be made, on or subject to the rules of a designated contract market, for or on behalf of, or with, any other person:

(A) to cheat or defraud or attempt to cheat or defraud the other person;
***
(C) willfully to deceive or attempt to deceive the other person by any means whatsoever in regard to any order or contract or the disposition or execution of any order or contract, or in regard to any act of agency performed, with respect to any order or contract for or . . . with the other person[.]

         17. TradeMasters knowingly or recklessly made material misrepresentations to induce members of the public to purchase commodity futures trading software to use for commodity futures trading, including but not limited to misrepresenting that:

a. the TradeMasters software was fully automated and could result in profitable trading for customers without ...

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