A week before it begins the landmark prosecution of a leading Israeli binary options operative, the US government has set out in rare detail the process by which Israeli binary options fraudsters defrauded victims worldwide out of billions of dollars.
Binary options fraud flourished in Israel for about a decade before the entire industry was outlawed via Knesset legislation, in October 2017, largely as a result of investigative reporting by The Times of Israel that began with a March 2016 article entitled, “The wolves of Tel Aviv.” At its height, hundreds of companies in Israel were engaged in the fraud, employing thousands of Israelis.
Many of the fraudulent operatives have since moved their operations abroad, or switched to other scams, and the Israeli law-enforcement authorities have proved unwilling or unable to prosecute more than a handful of alleged offenders. By contrast, the US government is ratcheting up efforts to bring Israeli offenders to justice. In the US District Court in Maryland next week, the trial of one such significant suspect, Lee Elbaz, the former CEO of Israeli binary options company Yukom Communications, is scheduled to begin.
Elbaz was indicted by a US federal grand jury in March 2018, for allegedly participating in a scheme to “defraud investors in the United States and across the world.” She has been charged in the District of Maryland with one count of conspiracy to commit wire fraud and three counts of wire fraud, according to a press release by the US Justice Department. Each of these four charges carries a maximum penalty of 20 years in prison. Elbaz denies the charges.
According to the indictment, Yukom provided investor “retention” services for the binary options websites BinaryBook and BigOption. The indictment also alleges that Elbaz, together with her co-conspirators and subordinates, misled investors by falsely claiming that the company earned profits when the investor earned profits, when in fact the opposite was true. Elbaz and her co-conspirators also allegedly misrepresented the return on investment from BinaryBook and BigOption, as well as allegedly using aliases and claiming that they were calling from London, when in fact they were calling from Israel.
On Monday, the US Justice Department filed a “trial brief” summarizing the “legal and factual issues” relevant to the trial, which is scheduled to begin next Tuesday. Setting out in detail the means by which Elbaz allegedly fleeced her victims, the prosecution document constitutes a devastating insight into the cynical practices by which the fraudulent industry stole immense amounts of money from trusting victims around the world. The document confirms on behalf of the US government much of the reporting by The Times of Israel over the past three-and-a-half years, regarding the methods by which binary options fraudsters duped their victims.
‘Lying, misleading, defrauding’
In its opening “Overview” summation, the US government alleges that Elbaz and her co-conspirators defrauded tens of thousands of victims worldwide, including in the US, out of tens of millions of dollars: “From in or around May 2014 through in or around June 2017, the defendant, Lee Elbaz, directed a scheme to defraud binary options investors by lying to investors and misleading them about the nature of binary options trading and the defendant’s business. Among other things, the defendant lied to clients about the gains victims should expect to receive; historical rates of return binary options investors received; the alignment of financial interests between the defendant’s company and clients (i.e., wrongly telling investors that they only made money when clients made money); the education, credentials, and experience of the defendant and her employees; and even their names and location.
“The defendant directed the scheme and exercised significant oversight of the scheme, both on a strategic and day-to-day level by hiring and training employees to tell the same lies to clients over and over, in order to induce clients to send money,” the Justice Department alleges. “The defendant also trained her employees to engage in fraudulent tactics to prevent clients from withdrawing funds from their accounts. Through this scheme, the defendant and her co-conspirators defrauded tens of thousands of victims worldwide, including thousands here in the United States, and caused tens of millions of dollars in victim losses.”
This is how it worked
The US government then sets out how the fraud was perpetrated, describing how victims were approached, lured in, lied to, encouraged to make ever-greater deposits, and thwarted if and when they tried to withdraw their money:
“On a high level, the scheme to defraud worked as follows. The defendant and her co-conspirators purchased client leads from companies that advertised wealth-investment schemes online (with campaigns bearing names such as ‘Millionaire’s Club’). After a lead was purchased, a victim-client was solicited to make a small investment — such as $250 — as a way to entice them to open a binary options account. If a client made that initial small deposit, he or she was passed along to a different agent (known as the ‘retention agent’).
“The retention agent’s responsibility was first to obtain a significantly larger deposit — often thousands of dollars. To get that money, the agent would regularly contact the client by phone and email, pitching aggressive and fraudulent sales tactics, to encourage clients to invest more money. Conversely, when clients tried to withdraw money, the defendant and her co-conspirators would often use a variety of devices to prevent withdrawals, ranging from pretextual excuses to simply ignoring withdrawal requests.
“The majority of the government’s case will focus on the operations of a call center located in Caesarea, Israel and operating under the name Yukom Communications (‘Yukom’). Yukom’s employees were focused exclusively on the ‘retention’ work described above (i.e., soliciting larger additional deposits) and operated primarily under two different client-facing brands: BigOption and BinaryBook. The government anticipates that multiple cooperating witnesses from Yukom’s Caesarea offices will testify at trial, and each will acknowledge that employees solicited money from victim-clients through a multitude of lies. Each will testify that it was the direction from Yukom management that employees obtain money through false promises.
“As she acknowledged in her post-arrest interview, the defendant held various managerial roles at Yukom, ultimately holding the title Chief Executive Officer. When the defendant started at Yukom in 2014, Yukom was new and employed only a few agents to solicit money; by 2016, Yukom had expanded to over 100 employees. The growth in employees corresponded in a growth in investor funds collected. Videos taken inside Yukom, for example, show the defendant congratulating Yukom employees in December 2014 for collecting around $2.5 million net that month. A March 2016 video shows her encouraging her employees to target $9 to $10 million for that month.
Recordings of training sessions at Yukom feature managers practicing lies with new employees
“The government anticipates that cooperating witnesses will explain the tight control the defendant exercised over the company, and the long hours she spent on the call center’s floor. According to these witnesses, not only did the defendant hear employees make false statements, she encouraged and trained them to do so. Physical evidence corroborates this testimony. Recordings of training sessions at Yukom feature managers practicing lies with new employees. Emails sent to the defendant contain call scripts given to employees, in which employees are instructed to make up credentials (such as business degrees) and falsely claim to have high historical trading success rates. In other emails, the defendant forwards recordings of calls between employees and clients, where the employees falsely promise guaranteed profits and lie about their historical rates of return. Testimony and other evidence will establish the defendant circulated these calls to train employees about what she thought a ‘good’ call should sound like.
“While the defendant retained management over the Caesarea office, she was also involved in parts of the scheme elsewhere in the world. Testimony and documentary evidence will show that the defendant traveled to other offices in Mauritius and Ukraine, where she was responsible for ensuring employees there engaged in the same high-pressure and fraudulent sales techniques used in Caesarea. Similarly, jurors will learn that in mid-2015, the defendant helped the scheme expand through a new office in Tel Aviv, Israel, which operated under the brand ‘Numaris.’ Testimony from cooperating witnesses, corroborated by internal emails and text messages seized from the defendant’s phone, will show that the defendant was involved in hiring and training Tel Aviv employees. The evidence will establish that the Tel Aviv office employed the same scheme to take money from victim-investors and that the defendant celebrated the office’s success.”
Stacking the deck, with alleged help from SpotOption
Next, the US prosecutors detail the “fraudulent tactics” that were used to “stack the deck” against victim-investors. In its submission, the US government alleges that the Israeli firm SpotOption, which provided the software “platform” used by a large number of Israeli binary options firms, was central to the fraud, adjusting account settings for the investor-victims to make it less likely that they would make money. It says Israel Police, searching SpotOption’s offices on its behalf, seized emails to this effect “between the defendant, her co-conspirators, and SpotOption employees.”
SpotOption has consistently denied that it played any such role. As The Times of Israel revealed in October 2017, SpotOption was provided with taxpayer funding, in the form of government grants secretively awarded by the Economy Ministry, to expand its operations into China even as Israeli Securities Authority, alerted to the fraudulent binary options industry by The Times of Israel, was working on the legislation to ban it.
Detailing the “fraudulent tactics designed to undermine the clients,” the US government trial brief states as follows: “In her video-recorded post-arrest statement, the defendant falsely told FBI agents that she hoped her clients won while trading and that it was good for her when that happened. Similarly, the government anticipates that evidence at trial (including recorded calls) will establish that clients were falsely assured by account managers that their interests were aligned (through statements such as, “I make money when you make money”).
“In reality, testimonial and documentary evidence will show that the defendant and her co-conspirators were only paid commissions on net deposits — the difference between the amount victim-clients deposited into their accounts and the amount they withdrew. A client’s trading performance usually had no effect on any employee’s compensation, and good trading performances (which were rare) could only hurt Yukom’s compensation. Similarly, to prove the falsity and materiality of statements about aligned interests, the government will introduce evidence of actions the defendant and her co-conspirators took to prevent the clients (1) from winning while trading and (2) withdrawing money from their accounts.
“One tactic the defendant used to undermine clients was known as putting a winning client on ‘high risk.’ SpotOption, an entity that hosted the platform (in effect, the software and trading data) on which BinaryBook and BigOption trading accounts operated, also controlled client ‘risk settings.’ If a client was identified inside BinaryBook and BigOption as trading successfully, the defendant would contact SpotOption and arrange for the client’s account settings to be adjusted such that it was less likely future bets would win. By stacking the deck against the client (without informing the client of the changes), the defendant prevented scenarios where clients would try to withdraw winnings.
“Similarly, the defendant took significant actions to prevent clients from withdrawing any money (including their own deposits) from the accounts. For example, when the defendant anticipated a particular client might withdraw money, the defendant would instruct co-conspirators to place long-term trades into that client’s account, a technique referred to as ‘exposing the client.’ After placing the trade, the account manager would tell the victim-investor that he or she was ineligible to withdraw any money until the trade expired.
“Another way to prevent client withdrawals was a technique known as ‘bonus’ deposits, in which the defendant or a co-conspirator would credit a trading account with a purported ‘bonus.’ After placing the bonus in the client’s account, the defendant and her co-conspirators would inform the client that the bonus had terms-and-conditions that required an extremely high number of trades (often twenty-to-thirty times the bonus ‘value’) to be placed before any money in the account could be withdrawn. Testimony at trial will confirm that ‘bonuses’ were a common way to prevent withdrawals.”
Elbaz ‘admitted’ that 95% of clients lost
Elbaz was arrested by the FBI in September 2017 when she landed at JFK airport on her way to visit friends in the United States. In a post-arrest FBI interview cited in the “trial brief,” Elbaz “admitted that 95 percent of clients who sent money to BinaryBook and BigOption lost money, and falsely claimed that she disclosed this fact to victim-clients.
“The defendant also acknowledged that she used an alias while working at Yukom (which she called a ‘stage name’) and that Yukom employees were paid a commission based on net deposits — client deposits minus withdrawals,” the trial brief states. “The defendant falsely denied that bonuses were just a tool to prevent clients from withdrawing money and told investigators that any client who requested a withdrawal could get their money back, unless the client was subject to bonus turnover requirements. The defendant also falsely denied ever requesting a change to a client’s risk settings to increase the likelihood that a client would begin losing trades. Finally, the defendant also falsely claimed that she was unaware of managers encouraging Yukom employees to lie to clients.”
The “trial brief” names several co-conspirators, including Yossi Herzog, Yakov “Kobi” Cohen, Ori Maymon (aka “Patrick Accardo”), Elad Bigelman (aka “Michael Goldberg”), Nissim Alfasi (aka “Nick Onasis”), Ronen Roytman (aka “Alexander Goldman”), Liora Welles (aka “Lindsay Cole,” “Lindsay Taylor,” and “Lindsey Wells”), Yair Hadar (aka “Steven Gold”), Shira Uzan (aka “Emily Laski”), and Austin Smith (aka “John Reid”).
Herzog, Alfasi, and Bigelman were among 12 alleged binary options operatives, indicted by the US in February, whose indictments were only made public last month, all of them associated with BinaryBook.com and BigOption.com. The US alleges that Herzog, who was questioned by the FBI in Israel in January 2018, was the owner of a Mauritius-based company called Linkopia, as well as Israel-based Yukom Communications; it alleges that Alfasi was an employee of Yukom Communications and brand manager for BinaryBook; and it alleges that Bigelman was an employee of Yukom Communications and brand manager for BigOption.
Herzog’s lawyer said in a statement last month that his client “has just learned of the charges filed against him in the US a few days ago. He denies the allegations and intends to fight them and any extradition procedure, if commenced. At no point in time was he involved in any fraudulent scheme.”
At a September 20, 2017 detention hearing, Elbaz’s lawyer Jonathan Lopez defended his client, arguing that Yukom Communications was a legitimate business. “They do a lot of things in this complaint to make in look like this is some Nigerian boiler room or some sort of lottery scam. That is none of these things. It is a legitimate business, legal type of business in Israel as well as here.”