New York Securities Lawyer Blog
The Securities and Exchange Commission (“SEC”) issued public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) (the “Order”) against EZTD Inc. (“EZTD”). Israeli-based EZTD, a brokerage firm, offers binary options to US customers. According to the Order, EZTD sold securities while not regulated to do so and made certain misleading or materially false statements on its subsidiary websites “eztrader” and “globaloption” regarding the profitability and risks associated with investing in binary options.
The Order states that EZTD willfully violated Sections 5(a) and 5(c) of the Securities Act and Section 15(a)(1) of the Exchange Act, and Sections 17(a)(2) of the Securities Act. The charges brought by the SEC against EZTD relate to EZTD (1) selling securities over the internet without registering the securities, (2) failing to register as a broker-dealer while selling securities, and (3) misleading investors by failing to disclose that there was a significantly greater potential for investors to lose money than to turn a profit. Additionally, the Order notes that only 2.8% of EZTD’s customers turned any kind of profit and EZTD misstated or omitted the true financial risks associated with investing in the firm’s binary options.
Binary options are derivatives, meaning that they are not actually bought or sold as an asset themselves, but rather are a fixed wager on the outcome of an underlying security. Usually this bet takes the form of a wager on whether or not the price of an asset will rise or fall below a specified price by the time the binary option expires. Winnings are predetermined, usually 80% of the initial bet, and losses generally result in forfeiture of the entire bet. The time frame for these binary option derivative trades is short, with many of the options offered allowing 60 second time frame wagers. A binary option does not give the owner the right to purchase or sell the underlying asset upon which the binary option is contingent, or to purchase or sell the binary option itself.
Companies offering binary option trading platforms have exploded in recent years, with the bulk of them located in Israel and Cyprus. Frequently, members of the binary options industry pay to have internet search results mislead investors when they type questions such as “are binary options legitimate?” into their search engine. The first few search results will display websites purporting to warn you about “scam” binary options, and recommending safe binary option sites. However, upon further investigation, many of the “helpful” sites themselves are affiliates of the binary options industry.
Buried within the misleading search results are the Commodity Futures Trading Commission’s (CFTC) warning of “[f]raudulent schemes involving binary options and their trading platforms. These schemes allegedly include refusing to credit customer accounts, denying fund reimbursement, identity theft, and manipulation of software to generate losing trades.” Additional investigation may reveal the Financial Industry Regulatory Authority’s (FINRA) warnings which state that “binary options are all-or-nothing propositions. When a binary option expires, it either makes a pre-specified amount of money, or nothing at all, in which case the investor loses his or her entire investment. Trading binary options is made even riskier by fraudulent schemes, many of which originate outside the United States.”
Without admitting or denying the findings in the Order, EZTD agreed to forfeit $1.5 million in revenues obtained from US-based customers, and pay a $200,000 penalty. EZTD has also halted any trading from US based accounts, and ceased soliciting US customers. The SEC also warned that they expected similar orders to follow, and cautioned investors to beware of fraudulent schemes in the binary options industry.
The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud. If you are a victim of fraud, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.