In latest crackdown, US goes after marketers of Israeli Internet fraud

The United States Securities and Exchange Commission and Commodity Futures Trading Commission both brought enforcement actions on September 27 against a group of 11 mostly American accomplices to a vast Israel-based investment fraud.

The defendants are accused of marketing fraudulent binary options to US customers on behalf of binary options brokers, most of whom were based in Israel. The joint actions of the two financial regulators are the latest in a series of more than ten US government enforcement actions against alleged binary options fraudsters since the SEC and CFTC filed complaints against the Israel-based company Banc de Binary in 2013.

Israel’s binary options industry, which was outlawed by the Knesset in October 2017, was estimated to employ thousands of Israelis and to steal some $10 billion a year from fleeced “investors” worldwide. Israeli prosecutors have yet to indict a single perpetrator of the fraud, many of whose practitioners continue to operate from Israel with impunity — albeit under a new guise.

All but four of the defendants in Thursday’s actions have agreed to settle with the two commissions and will pay a total of $8 million collectively in disgorgement of their allegedly ill-gotten gains as well as in penalties. The SEC and CFTC have filed complaints in Florida federal district courts against the other four defendants, Americans Tim Atkinson, Ronnie Montano, Jay Passerino, and Michael Wright.

The September 27 complaints shed light on a little-studied industry that acts as an accessory to online fraud, filling the inboxes of potential marks, skewing search engine results, and flooding social media feeds with false and misleading pitches for get-rich-quick schemes. This well-developed industry, known as “affiliate marketing,” boasts practitioners all over the world who are willing to aggressively hawk fraudulent and harmful online products for commissions as high as $350-$450 per victim. The actual online brokers then go on to fleece each victim out of a significantly higher sums, thus making the high commissions cost-effective.

Affiliate marketers receive a commission for selling a third party’s product over the Internet. While affiliate marketing can be used to sell legitimate products like books or non-fraudulent apps, the part of the industry that pays the highest commissions tends to hawk products like fake pharma, online gambling, fraudulent forex websites, and binary options.

As detailed in one of the SEC complaints, the defendants ran marketing campaigns featuring “professional videos that touted a free software trading program running on autopilot that was supposedly capable of generating large profits for investors who opened accounts on the instructions that followed the videos.”

Videos produced by the defendants were viewed millions of times and caused more than 50,000 people to open binary options accounts with fraudulent brokers, the SEC and CFTC complaints allege.

The people in the videos told viewers that they had made money trading binary options and now enjoy lavish lifestyles, and purported to show viewers real balances in live trading accounts.

“Yet what was depicted was entirely fiction,” said one of the SEC complaints.

“Paid actors pretended to be recent millionaires; fake testimonials claimed falsely that there was great wealth made by investing in, and using the free trading software to purchase, binary options; and fabricated photos showed only fictional account statements. The ‘live’ demonstrations of profitable trading were shams.”

The SEC posted examples online of some of the videos created by the defendants to lure binary options victims.

While none of the defendants in the SEC and CFTC actions are Israeli, one of the CFTC complaints mentions an Israeli company, without naming it.

In a section entitled, “Other relevant parties,” CFTC lawyers wrote, “Partner is an Israeli company with its principal place of business in Tel Aviv and two Israeli individuals who own the company and conduct its various business activities related to binary options. Partner has never been registered by the Commission in any capacity. Partner worked with Defendants on Defendants’ binary options marketing campaigns and made payments to Defendants related to those activities.

“For example, Partner supplied and/or procured the trading software advertised in Defendants’ campaigns and which customers used to trade their accounts. Partner also selected Brokers for Defendants’ campaigns and controlled the webpages on Defendants’ campaign websites which directed customers to various Brokers. By controlling those links, Partner was the actual, but undisclosed, intermediary which directed customers to various binary options Brokers.”

The CFTC does not name this “partner” because its policy prevents it from identifying specific individuals or entities in complaints unless they are also charged. However, in a series of exhibits presented by the CFTC in July in a related case against alleged affiliate marketer Michael Shah, the CFTC showed extremely large payments entering his bank account from several Israeli affiliate marketing companies including Boa Elite/Affilomania, BoostAff/Wise Group Media, and Clicksure. It is unclear whether the CFTC’s mention of the “Partner” refers to any of these three.

Similarly, the CFTC and SEC complaints do not specify which Israeli broker websites the victims of these allegedly fraudulent marketing schemes ended up trading with. However, documents in the CFTC case against Shah, whom the most recent defendants worked with, specified such brokers as Banc de Binary, Lbinary, Optionrally, Traderush, and RBoptions.

Disappearing with the money

A binary option is an option contract whose payoff depends on the price of another asset, like gold, wheat, or Apple stocks. If the holder of the option guesses correctly about the direction that the price has moved at the time of expiry, he earns a predetermined amount of money, and if not he loses the money “invested” in a particular trade.

In the case of the Israeli binary options industry, however, companies offering these contracts were largely fraudulent. They would dupe victims worldwide into believing that they were successfully investing and earning money, encouraging them to deposit more and more into their accounts, until the company eventually cut off contact with the investor and disappeared with all or almost all of their money.

The Knesset outlawed the binary options industry in October 2017, in part as a result of enormous pressure experienced by representatives of the Israel Securities Authority at meetings of the International Organization of Securities Commissions (IOSCO). However, since the ban, Israeli law enforcement has failed to indict a single binary options fraudster.

Industry insiders have told The Times of Israel that Israel’s binary options industry slowed down briefly at around the time the ban was enacted but has since resumed its activity with full force, now selling fraudulent forex, CFDs, and cryptocurrency products in lieu of binary options.

Whistleblowers who attempted to raise the alarm with the Israel Police and Israel Securities Authority in recent months told the Times of Israel that law enforcement officials seemed to brush them off.

Binary options were brought to Israel over the last decade by veterans of the online gambling industry (including Israeli expatriates) from the United States, Canada, and Germany on the one hand, and organized crime figures from the former Soviet Union on the other. An article in Forbes Russia describes how Western gaming professionals poured into Russia in the 1990s, bringing their expertise and methods while cross-pollinating with the local semi-criminal industry.

Since 2008, Israel has had a very liberal tax policy that allows new immigrants to neither report nor pay taxes on their income from abroad, including from shell companies, for ten years. The existence and persistence of this law led Israel’s former Tax Authority Chairman to describe the country as “one of the world’s most generous tax havens.”

This law, combined with Israel’s lax law enforcement, may have encouraged criminals to immigrate to Israel and make the country their base of operations. Such criminals joined forces with local criminals, employed thousands of Israeli citizens in fraudulent operations, and created a criminal subculture that shows no signs of being contained.

So far, the only country to take punitive action against Israel-based binary options fraudsters is the United States. In 2016, Israeli binary options firm Banc de Binary agreed to pay $11 million in restitution and fines to the SEC and CFTC. In July 2016, a United States Federal Court ordered two Israel-based binary options websites, Vault Options, Ltd. and Global Trader 365, to jointly and severally pay a $3 million civil monetary penalty and $1,587,731 in restitution to their defrauded customers. However, the companies’ Israel-based owners never showed up in court.

In July 2017, the CFTC filed a civil complaint against Jason B. Scharf of California (formerly of Israel) and his alleged co-conspirators for illegally obtaining $16 million through the website Citrades among others. In May 2018, a US grand jury indicted Lee Elbaz for alleged binary options fraud carried out through the websites BigOption and BinaryBook. The former CEO of Israeli binary options company Yukom Communications, 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 June 2018, the FBI and IRS arrested an American man, Jared J. Davis, and charged him with operating the websites OptionMint, OptionKing, and OptionQueen from US soil. Although based in the US, Davis used the SpotOption platform, which operated from Israel.

In July, the United States government asked a Florida court to impose some $75 million in fines and penalties against alleged binary options marketer Shah, who worked in tandem with call centers in Israel, and allegedly steered his American and other financial victims to numerous binary options websites based in Israel.

The SEC’s most recent investigation into the fraudulent affiliate marketers is being conducted by Jason Anthony, Michael Fuchs, and Deborah Maisel, and supervised by Jennifer Leete. The CFTC Division of Enforcement staff members responsible for the fraudulent affiliate marketers case were Allison V. Passman, Brigitte Weyls, Joseph Patrick, Susan J. Gradman, Scott R. Williamson, and Rosemary Hollinger.