The United States Commodity Futures Trading Commission (CFTC) has marked some progress in its action against a number of individuals and firms involved in a large-scale fraudulent binary options scheme evolving around Israel-based Yukom Communications.

On September 30, 2021, one of the founders of Yukom – Yakov Cohen, failed to dismiss the case against him. Judge Andrea R. Wood of the Illinois Northern District Court issued a Memorandum Opinion and Order denying the defendant’s motion to dismiss.

This means that Cohen will have to respond to the CFTC complaint.

Let’s recall that the CFTC has brought this suit against defendants for allegedly engaging in a fraudulent options trading scheme in violation of the Commodity Exchange Act (CEA), 7 U.S.C. § 1, et seq., and regulations promulgated thereunder, 17 C.F.R. § 1, et seq. The CFTC claims that the following defendants targeted customers in and outside the United States through this scheme: Yukom Communications Ltd, Linkopia Mauritius Ltd, Wirestech Limited d/b/a BigOption , WSB Investments Ltd. d/b/a BinaryBook, Zolarex Ltd. d/b/a BinaryOnline, Yakov Cohen, Yossi Herzog, Lee Elbaz, and Shalom Peretz.

Defendants Yukom, Linkopia, Wirestech, WSB, Zolarex, Herzog, Elbaz, and Peretz have all failed to appear in this case, and so the Court has entered default against them pursuant to Federal Rule of Civil Procedure 55(a).

Only Cohen has appeared to defend the CFTC’s action. He sought dismissal of all claims against him pursuant to Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6).

According to the order signed by Judge Wood on September 30, 2021, and seen by FX News Group, Cohen’s motion was denied.

In this case, the CFTC alleges that sometime prior to 2014, Cohen and Herzog, who are both Israeli citizens, founded Yukom, which was incorporated and based in Israel, and Linkopia, which was incorporated and based in Mauritius. In 2014, Cohen and Herzog founded WSB, Wirestech, and Zolarex, all incorporated outside the United States and serving as nominee companies for Yukom’s options brands BigOption, BinaryBook, and BinaryOnline.

Together, Yukom, Linkopia, Wirestech, WSB, and Zolarex allegedly comprised a common enterprise that engaged in fraudulent and off-exchange binary options trading. According to the CFTC, Cohen and Herzog control all of the Yukom Enterprise’s employees, bank accounts, and websites. Cohen, in particular, is alleged to have personally interviewed and hired certain brokers and other individuals to work for the Yukom Enterprise. He is also generally alleged to be one of the “controlling persons of the Yukom Enterprise” who directed it to engage in the unlawful acts.

On March 26, 2014, Defendants started offering binary options contracts to retail customers, including customers in the United States, through the Yukom Enterprise. The binary options the defendants sell are not offered on a board of trade or other regulated exchange. Furthermore, most of the Yukom Enterprise’s customers are not eligible contract participants.

Defendants do not operate like other regulated options traders because, instead of connecting their customers to legitimate binary options exchanges (i.e., matching buyers and sellers), Defendants take the opposite position of their customers on each trade. Thus, while Defendants represent that their financial interests are aligned with those of their customers, they actually profit when their customers lose money.

The CFTC alleges that the defendants make a number of fraudulent statements to solicit and maintain customers, including misrepresenting basic facts about the Yukom Enterprise.

The complaint asserts five Counts against all Defendants for violations of the CEA and CEA Regulations:

• Count One alleges that Defendants have engaged in commodity option fraud in violation of 7 U.S.C. §§ 6c(b), 13c(b) and 17 C.F.R. § 32.4.
• Count Two alleges that Defendants have engaged in swap fraud in violation of 7 U.S.C. §§ 6(c)(1), 9(1), 13c(b) and 17 C.F.R. § 180.1(a)(1)–(3).
• Count Three alleges that Defendants have entered into the trade of illegal, off- exchange commodity options in violation of 7 U.S.C. §§ 6c(b), 13c(b) and 17 C.F.R. § 32.2.
• Count Four alleges that Defendants have engaged in illegal, off-exchange retail swaps in violation of 7 U.S.C. §§ 2(e), 13c(b).
• Count Five alleges that Defendants have accepted orders for commodity options contracts and swaps without being registered with the CFTC and from customers who are not eligible contract participants, in violation of 7 U.S.C. §§ 6d(a)(1), 13c(b).

Cohen argues that the CFTC’s allegations of fraud fail to meet the heightened Rule 9(b) standard because they do not plead any facts against him with particularity.

The Court, however, found that it is clear from the complaint that the CFTC conducted a thorough pre-filing investigation into the Yukom Enterprise. It has identified specific fraudulent statements; provided details about how Defendants have benefited from the fraud financially; and described how Defendants manipulate their customers to make money. Again, the information required under Rule 9(b) varies based on the facts of the case.

Here, the CFTC alleges that Defendants have perpetrated a massive, years-long fraudulent scheme. Therefore, it is appropriate that the complaint offers a detailed overview of Defendants’ entire operation rather than describing with specificity certain instances of fraud committed over the years. Keeping in mind Rule 9(b)’s “twin demands of detail and flexibility”, the Court found that the complaint’s allegations raise a plausible inference of fraud and provide Defendants with fair notice of the grounds for the CFTC’s claims.

The Court must also consider whether the complaint successfully states a claim against Cohen as a controlling person by alleging that he exercised control over “the specific actions constituting the fraud.” The CFTC alleges that Cohen (along with Herzog) controls and provides content for the Yukom Enterprise’s websites and that those websites contain false statements about the business.

The complaint also alleges that Cohen is responsible for hiring and controlling the enterprise’s brokers, who Defendants hold out to customers as having more financial experience than they actually do. The Court found these allegations sufficient to tie Cohen to the fraud for purposes of 7 U.S.C. § 13c(b).

The Court concluded that Counts One and Two state valid fraud claims against Cohen as a controlling person of the Yukom Enterprise. The motion to dismiss was therefore denied with respect to Counts One and Two.

Further, the complaint alleges, among other things, that Cohen has co-owned, co-operated, and controlled each entity comprising the Yukom Enterprise; that Cohen has never been registered with the CFTC; that none of the entities making up the Yukom Enterprise have ever been registered with the CFTC; and that the entities making up the Yukom Enterprise have engaged in off-exchange commodity options trades and swaps with U.S.-based customers who are not eligible contract participants. The complaint also alleges that Cohen hires and controls the brokers who actually enter into contracts with customers.

The Court concluded that these allegations, taken together, allow for the reasonable inference that Cohen is liable for violating the CEA’s prohibitions against off-exchange, unregistered trading.

The complaint also gives Cohen fair notice of his alleged involvement in the wrongdoing by pleading that he owns and operates all the entities that make up the Yukom Enterprise and controls their employees. Accordingly, Cohen’s motion to dismiss was denied with respect to Counts Three, Four, and Five.

Cohen must file an answer to the CFTC’s complaint within fourteen days.