FILED. 1. At all times relevant to this Complaint, TBL was a commodity trading advisor

Transcription

1 NATIONAL FUTURES ASSOCIATION BEFORE THE BUSINESS CONDUCT COMMITTEE FILED lrrt. ^ 4^rn i,ui\ J U IUIU In the Matter of: NATIoN#J}lB5ru;lNoixArIoN THE BARBASHOP LLC (NFA ld #355704), ano NFA Case No. 10-BCC-017 RONALD T. BARBA (NFA ld #55777), Respondents. COMPLAINT Having reviewed the investigative report submitted by the Compliance Department of National Futures Association ('NFA'), and having found reason to believe that NFA Requirements are being, have been or are about to be violated and that the matter should be adjudicated, this Committee issues this Complaint against The Barbashop LLC ('TBL) and Ronald T. Barba ("Barba" or"ronald Barba"). ALLEGATIONS JURISDICTION 1. At all times relevant to this Complaint, TBL was a commodity trading advisor ('CTA) NFA Member located in Greenwich, Connecticut. 2. At all times relevant to this Complaint, Barba was the sole listed principal and an associated person ("AP") of TBL, and an NFA Associate.

2 BACKGROUND 3. TBL became registered as a CTA NFA Member in June TBL currently employs five other APs besides Barba. 4. At the time of NFA's most receni audit of TBL in February 2010, TBL offered two managed account programs to customers: the "Barbashop Program" ("Program 1"); and the "lnstitutional Investment Program" ("Program 2"). Approximately 125 accounts traded pursuant to Program 1 and six accounts traded pursuant to Program 2. TBL also managed approximately ten accounts of family and friends of TBL personnel ("family and friends accounts"). 5. In April 2009, this Committee issued a disciplinary Complaint against TBL and Barba charging TBL with, among other violations, failing to rnaintain an adequate internal performance calculation and accu rate books and records; using a disclosure document that contained inaccurate and grossly inflated performance information; and - along with Ronald Barba - failing to supervise. 6. TBL and Ronald Barba agreed to settle the 2009 disciplinary se by agreeing to pay a $20,000 fine, adopt and implement written compliance procedures of a corrective nature to address the deficiencies cited in the Complaint, and employ - for a period of three years - an experienced futures professional to calculate and oversee the presentation of performance and rate of return information in TBL's disclosure documents and promotional material. An NFA Hearing Panel issued a Decision on June 22, 2009, approving TBL and Ronald Barba's settlement agreement and incorporating its terms, including the requirement that TBL hire an outside party acceptable lo NFA to calculate and oversee

3 performance presentations in TBL's disclosure documents and other promotional material. NFA commenced an audit of TBL on February 16, NFAs audit found that TBL failed to comply with the Decision in the 2009 disciplinary case, used a materially misleading and inaccurate disclosure document, failed to maintain written confirmation of the nominal account size agreed to by customers' and used misleading promotional material. These deficiencies are alleged in detail below. APPLICABLE RULES NFA Compliance Rule 2-5 provides, in pertinent part, that each Member and Associate shall comply with any order issued by any NFA hearing panel. o NFA Compliance Rule 2-9(a) provides that each Member shall diligently supervise its employees and agents in the conduct of their commodity futures activities for or on behalf of the Member. Each Associate who has supervisory duties shall diligently exercise such duties in the conduct of that Associate's commodity futures activities on behalf of the Member. 10. NFA Compliance Rule 2-'t3 provides, in pertinent part, that any Memberwho violates any of Commodity Futures Trading Commission ('CFTC) Regulations 4.1,4.7,4.12 and 4.16 through 4,41 shall be deemed to have violated an NFA requirement. 11. CFTC Regutation 4.31 provides, in pertinent part, that a CTA must provide a prospective client with a disclosure document that contains all of the information

4 required under CFTC Regulation 4.35 no later than the time the CTA delivers to the prospective client an advisory agreement. 12. CFTC Regulation 4.35 provides that a CTA's disclosure document must include the actual performance of all accounts directed by the CTA and each of its trading principals. 13. NFA Compliance Rule 2-29(bX1) provides that no Member or Associate shall use any promotional material which is likely to deceive the public. 14. NFA Compliance Rule 2-29(b)(2) provides that no Member or Associate shall use any promotional material which contains any material misstatement of fact or which the Member or Associate knows omits a fact if the omission makes the promotional material misleading. 15. NFA Compliance Rule 2-34(bxl) provides, in pertinent part, that, for partiallyfunded accounts, a Member CTA must either receive from a client or deliver to a client a writien confirmation that contains the nominal account size agreed to by the client and the CTA. GOUNT I VIOLATION OF NFA COMPLIANCE RULE 2-5: FAILING TO ABIDE BY THE TERMS OF THE DECISION IN THE 2OO9 DISCIPLINARY CASE REQUIRING TBL TO EMPLOY- FOR A PERIOD OF THREE YEARS - AN EXPERIENCED FUTURES PROFESS]ONAL TO CALCULATE AND OVERSEE THE PRESENTATION OF PERFORMANCE AND RATE OF RETURN INFORMATION IN THE FIRM'S OISCLOSURE DOCUMENTS AND PROMOTTONAL MATERIAL. 16. The allegations contained in paragraphs 1 through I are realleged as paragraph The Decision in the 2009 disciplinary case required TBL and Barba to employ an experienced futures professional, acceptable to NFA, to calculate and oversee 4

5 the presentation of performance and rate of return information in TBL's disclosure documents and promotional material. TBL and Barba were required to employ this individual for a period of three years. 18. TBL and Barba hired Cortland Capital Market Services LLC ("Cortland") to calculate TBL's performance. However, they did not seek NFA's approval of Cortland as required by the Decision in the 2009 disciplinary case. Notwithstanding their failure to obtain NFA's approval of Cortland, it appears that Cortland was qualified to calculate TBL's performance, 19. Although TBL and Barba employed Cortland, they did not begin to use any of Cortland's performance calculations until several months after the date they were required to do so under the Decision in the 2009 disciplinary case. Even when TBL and Barba began using Cortland's performance calculations, they only used some of Cortland's figures. All additions, withdrawals, and incentive and management fees for Programs 1 and 2 were calculated not by Cortland but by IREDACTEDI, who is an AP of TBL. According to [REDACTED], he only used Cortland's net profit and loss figures in calculating performance. Yet, it appears that [REDACTED] did not even use Cortland's net profit and loss figures in calculating the November 2009 performance for Programs 1 and 2 and, instead, calculated these figures himself. 20. Furthermore, TBL and Ronald Barba did not engage Cortland or any other outside party to do the performance calculations for the "family and friends" accounts. The performance for these accounts was prepared in-house entirely

6 by IREDACTED] and his calculations were not reviewe d or approved by an acceptable outside party. 21. As the foregoing allegations reveal, TBL and Ronald Barba failed to fully abide by the terms of the Decision in the 2009 disciplinary case requiring them to employ an outside party, acceptable to NFA, to calculate TBL's performance. Moreover, in failing to abide by the Decision in the disciplinary case, TBL allowed {REDACTEDI to cafculate the performance calculations for Programs 1 and 2 and the "family and friends" accounts and, as alleged below, [REDACTED] calculations were materially inaccurate in a number of respects. 22. By reason of the foregoing acts and omissions, TBL and Ronald Barba are charged with violations of NFA Compliance Rule 2-5. COUNT II VIOLATION OF NFA COMPLIANCE RULE 2-13: USING A MISLEAD]NG DISCLOSURE DOCUMENT THAT CONTAINED INACCURATE PERFORMANCE INFORMATION, 23. The allegations contained in paragraphs 1,3,4,7 and 10 through 12 are realleged as paragraph TBL solicited for subscriptions to its trading programs using a materially inaccurate disclosure document, dated September 1,24O9. Although NFA noted no apparent material deficiencies with the composite performance disclosed for Program 1, NFA noted material deficiencies in a number of the monthly and annual rate of return calculations for the Program 2 composite performance capsule as well as material deficiencies in the performance capsules for several of the "family and friends" accounts.

7 25. tn addition, NFA found that TBL did not properly record additions and withdrawals. For example, for one of the Program 2 accounts, TBL failed to properly record a $300,000 leduction in the account's trading level as requested by the customer at the end of May Instead, TBL allocated part of the trading level reduction to May 2009 and part to June 2009, instead of allocating the entire reduction to May 2009 when the customer requested it. 26. For one of the "family and friends" accounts, TBL overstated the rate of return for November 2008 by 13.33%. TBL showed the rate of return for this account as negative 23.54o/o in November 2008, whereas, according to NFAs calculations, it was actually negative 36.87%. The reason for the overstatement of the rate of return is that TBL allocated a $10,000 withdrawal that occurred in October 2008, between October and November 2008, showing part of the withdrawal in October and part in November instead of allocating the entire withdrawal to October 2008, when the withdrawal actually occurred. NFA noted similar problems in several other "family and friends" accounls. 27- NFA also found at least one instance where realized and unrealized gains and losses were misstated for Program 2 accounts, Specifically, NFA noted for December 2008, TBL repofted the net performance of one of the Program 2 accounts as $281,847.84, whereas NFA calculated this account's net performance for December 2008 as $173, , TBL also improperly recorded realized and unrealized gains and losses in the 'Tamily and friends" accounts. For example, for one of the "family and friends" accounts, TBL overstated performance for May 2005 by $31,726. As a result, 7

8 TBL showed performance for this accounl as o/o in May 2005, whereas NFA calculated it as o/o - an overstatement of 't 90.03%. This overstatement of the May 2005 performance had a ripple effect which caused the net asset value ofthe account to be overstated from May 2005 to June NFA also found similar problems in another "family and friends" account 29, By reason of the foregoing acts and omissions, TBL is charged with violations of NFA Compliance Rule count lll VIOLATION OF NFA COMPLIANGE RULE 2.34(b): FAILING TO MAINTAIN WRITTEN CONFIRMATION OF THE NOMINAL ACCOUNT SIZE AGREED TO BY CUSTOMERS AND TBL. 30. The allegations contained in paragraphs 1, 3, 4, 7 and 1 5 are realleged as paragraph TBL failed to keep complete documentation supporting nominal account size changes requested by Program 2 customers. During audit fieldwork' NFA requested all supporting documentation for the nominal account size changes for the life of one of the Program 2 accounts. However, TBL was only able to provide NFAwith suppofting documentation for some, but not all, of the months this account was open. For example, the firm had no supporting documentation for September 2008, when the firm's performance spreadsheet reflected an increase of $17,556 in the nominal account size of this account. Moreover' based on documentation that TBL received from the customer, it appears that, as ot May 21,2009, TBL should have decreased ihe nominal account size for this account by $300,000, but only decreased it by $75,000.

9 32. By reason of the foregoing acts and omissions, TBL is charged with violations of NFA Compliance Rule 2-34(b). count lv VloLATloN OF NFA COMPLIANCE RULES 2-29(bX1) AND (2): USING DECEPTIVE AND MTSLEADING PROMOTTONAL MATERIAL. 33. The allegations contained in paragraphs 1,3,4,7,13 and 14 are realleged as paragraph The performance shown on TBL's website, [ had the same deficiencies as those alleged in paragraphs 24 through 28 of Count ll with respect to TBL's disclosure document. Therefore, NFA incorporates paragraphs 24 through 28 of Count ll herein by reference. In addition, the performance on TBL's website included rate of return flgures for Programs 1 and 2, which were not calculated in a manner consistent with CFTC Part 4 Regulations. In this regard, NFA reviewed rates of return for Program 1 for the period of June 2009 to December 2009 and noted that TBL did not propedy adjust for incentive fees that had been accrued but had not yet been deducted from customers' accounts. 35. For example, in one of the Program 1 accounts, NFA noted a $3, incentive fee was accrued in June However, according to IREDACTED], TBL forgave $2, of this incentive fee and made an adjusting entry to its spreadsheets in December 2009 (when $977 of the June 2009 fee was collecied) instead of adjusting the June 2009 incentive fee. This improper adjustment affected rates of return for this account from June through December Furthermore, NFA noted similar improper adjustments in more than half of the

10 accounts which traded pursuant to Program 1, which had a material effect on the rates of return for the Program 1 composite performance. 36. By reason of the foregoing acts and omissions, TBL is charged with violations of NFA Compliance Rules 2-29(bxl) and (2). COUNT V VIOLATION OF NFA COMPLIANCE RULE 2-9(a): FAILURE TO SUPERVISE, 37. The allegations contained in paragraphs 1 through 7, 9, 17 through 21, 24 through 28, 31,34 and 35 are realleged as paragraph 37, 38. NFA Compliance Rule 2-9(a) obligates each Member and each Associate with supervisory responsibilities to diligently supervise the Membe/s employees in all aspects of their futures-related activities, including sales practices. 39. Ronald Barba is the only listed principal of TBL and is responsible for supervising the activities of TBL's APs and administrative support staff. Ronald Barba was named as a Respondent in the 2009 disciplinary case and thus had notice of the deficiencies relaiing to the manner in which TBL calculated pedormance in its disclosure documents and promotional material. 40, Ronald Barba was also the individual who executed the settlement agreement on behalf of TBL in the 2009 disciplinary case. That settlement obligated TBL and Ronald Barba to adopt and implement written compliance procedures which were of a corrective nature and addressed the deficiencies cited in the 2009 disciplinary case; and employ - for a period of three years - an experienced futures professional to calculate and oversee the presentation of performance 10

11 and rate of return information in TBL's disclosure documents and promotional materiai. 41. lt is apparent from the foregoing allegations that Ronald Barba failed to adequately supervise TBL's operations to ensure that the firm complied with NFA Requirements and, specifically, to ensure that TBL abided by the terms of the Decision in the 2009 disciplinary case including the requirement that TBL employ an experienced futures professional to calculate performance for TBL's managed accounts y reason of the foregoing acts and omissions, TBL and Barba are charged with violations of NFA Compliance Rule 2-9(a). PROCEDURAL REQUIREMENTS ANSWER You must file a written Answer to the Complaint with NFA within thifi days of the date of the Complaint- The Answer shall respond to each allegation in the Complaint by admitting, denying or averring that you lack sufficient knowledge or information to admit or deny the allegation. An averment of insufficient knowledge or information may only be made afier a diligent effort has been made to ascertain the relevant facts and shall be deemed to be a denial of the pertinent allegation. The place for filing an Answer shall be: National Futures Association itl#,;, ll"*"n Docketinq@nfa.futures,orq Facsimile: 'l

12 Failure to file an Answer as provided above shall be deemed an admission of the facts and legal conclusions contained in the Complaint. Failure to respond to any allegation shall be deemed an admission of thal altegation. Failure to file an Answer as provided above shall be deemed a waiver of hearing. POTENTIAL PENALTIES. DISQUALIFICATION AND INELIGIBILITY At the conclusion of the proceedings conducted as a result of or in connection with the issuance of this Complaint, NFA may impose one or more of the following penalties: (a) expulsion or suspension for a specified period from NFA membership; (b) bar or suspension for a specified period from association with an NFA Member; (c) censure or reprimand; (d) a monetary fine not to exceed $250,000 for each violation found; and (e) order to cease and desist or any other fitting penalty or remedial action not inconsistent with these penalties. The allegations in this Complaint may constitute a statutory d isqualification from registration under Section 8a(3XM) of the Commodity Exchange Act. Respondents in this matter who apply for regishation in any new capacity, including as an associated person with a new sponsor, may be denied registration based on the pendency of this proceeding. Pursuant to the provisions of CFTC Regulation 1.63 penalties imposed in connection with this Complaint may temporarily or permanently render Respondents who are individuals ineligible to serve on disciplinary committees, arbitration panels and 12

13 governing boards of a self-regulatory organization, as that term is defined in CFTC Regulation NATIONAL FUTURES m/rvh/barbashop Complalnt, &

14 AFFIDAVIT OF SERVICE l, Nancy Miskovich-Paschen, on oath state that on June 30, 2010, I served copies of the attached Complaint, by sending such copies in the United States mail, first-class delivery, and by overnight mail, in envelopes addressed as follows: The Barbashop LLC 640 West Putnam Avenue Greenwich, CT Aftn: Ronald T. Barba, President Ronald T. Barba 2 Gatefield Drive Greenwich. CT Jeffrey D. Barclay, Esq. Schuyler, Roche & Crisham One Prudential Plaza Suite 3800 Chicago, ll Subscribed and sworn to before me on this 30th day of June Notarv Public i NorAFr fthjo, lif le C llt ols SStCt EPES f :rydr3 14