Securities Regulation Daily Wrap Up, COMMODITY FUTURES—D. Colo: $3.5 million in penalties entered in series of judgments for commodities fraud, (May 1, 2018)

By Joseph Arshawsky, J.D.

The CFTC announced that default judgment was entered against Randall A. Vest and his holding company, Bulletproof Vest, Inc. in connection with commodity futures and off-exchange retail foreign currency (forex) fraud and misappropriation, according to filings in a federal court in Colorado. The court also entered final judgment on fraud charges against Madigan Enterprises, Inc., Bulletproof Vest, RAST Investor Group, LLC, and R2 Capital Group, LLC. In total, the court awarded $2,072,181.64 in restitution and $1,485,920 in civil monetary penalties, and issued permanent trading bans against all defendants.

According to the CFTC, in 2009, the three individual defendants—Mr. Madigan, Mr. Tomazin, and Mr. Vest—and their associated business entities formed a new business, R2 Capital for soliciting investors in a currency-trading pool. R2 Capital secured some $2.4 million in investment capital from four investors and began trading. Within a year, the pool had trading losses of about $1.2 million, but the defendants falsely represented to the investors that the business was making profits. The defendants then, without informing the investors, appropriated the remaining $1.2 million for their own personal use.

Misrepresentations. In March 2010, Madigan promised an investor that the pool would return 8 percent to 10 percent per month, despite knowing by that time that the pool had already lost several hundred thousand dollars in its initial month of trading. In October 2010, Madigan sent a prospective investor a document that claimed that the "year-to-date profit performance of [the pool was] 33 percent" when, in fact, the pool had lost nearly half its assets by that point. In a previous order, the court granted the CFTC summary judgment on those statements. Madigan also made representations that he invested $1 million of his own money in the pool, when in fact he did not. The court found the CFTC was entitled to summary judgment on this claim as well. The CFTC also obtained summary judgment based on trading statements made by Mr. Madigan.

Misappropriation. According to the complaint, Madigan and the other defendants misappropriated more than $1.2 million of pool funds by routinely diverting substantial sums from the R2 Capital and pool bank accounts to themselves and their holding companies until all but a few hundred dollars remained. The defendants allegedly spent these misappropriated funds on themselves, including paying the individual defendants’ own personal expenses. The complaint also charged the defendants with illegally commingling and misappropriating funds received from pool participants by transferring funds into the individual defendants’ personal bank accounts, among other things.

Default judgments. On March 2, 2018, the court entered final judgment against the Madigan Defendants, ordering them to pay, jointly and severally, $690,727.21 in restitution to defrauded pool participants, a $560,000.00 civil monetary penalty, and $31,812.35 in attorneys’ fees and costs to the CFTC as sanctions for refusing to respond to discovery during the civil litigation. The judgment also permanently bans the Madigan Defendants from trading in all markets regulated by the CFTC. On April 11, 2018, the court entered a default judgment against the Vest Defendants, ordering them to pay, jointly and severally, $1,381,454.43 in restitution and a $925,920 civil monetary penalty. The court also permanently banned the Vest Defendants from trading in all markets regulated by the CFTC.

The case is No. 1:14-cv-02182-MSK-KLM (Madigan and R2 Capital defendants) (Bulletproof Vest defendants).

Attorneys: Luke B. Marsh for the CFTC. Michael J. Davis (DLG Law Group LLC) for R2 Capital Group LLC, Rast Investor Group, LLC and Madigan Enterprises, Inc.

Companies: R2 Capital Group LLC; Rast Investor Group, LLC; Madigan Enterprises, Inc.

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