While Israeli law enforcement continues to ignore the country’s robust online fraud sector, the United States government has asked a Florida court to impose some $75 million in fines and penalties against a single alleged US-based binary options fraudster. The alleged fraudster, Michael Shah, worked in tandem with call centers in Israel, the Commodities and Futures Trading Commission motion charges, and steered his American and other financial victims to numerous binary options websites based in Israel.
The penalties sought in this case are the largest the CFTC has requested so far from an alleged binary options fraudster, and the scale of the damages sought from a single alleged crook hint at the colossal scale of the overall fraud.
Thousands of Israelis worked in the widely fraudulent binary options industry for the past decade, defrauding billions of dollars from victims worldwide. The entire industry was ordered banned in Israel last October after The Times of Israel reported on the fraud, but Israel has not prosecuted a single binary options fraudster, and many of the operatives continue to offer related fraudulent investment products both from Israel and overseas.
In a motion for summary judgment filed on Thursday July 12 against Florida-based online advertiser Shah and his company Zilmil Inc., the US government agency asked a Florida court to grant it a summary judgment — meaning, to rule that the facts are not in dispute, and that the case can be decided without the need for a jury trial. The CFTC asked that the court require the defendants to pay back $18,671,793.97 in allegedly ill-gotten gains, as well as a civil monetary penalty of $56,015,381.91.
In hundreds of pages of depositions and exhibits, also filed on July 12, the CFTC makes an extraordinarily detailed case against Shah, as well as against Israel’s binary options industry as a whole, in which Shah allegedly played a small but significant part.
The motion describes Shah and his company Zimil Inc. as the “mastermind of an extremely lucrative Internet scam involving so-called binary options.” The CFTC’s description of Shah’s alleged activities offers a rare glimpse into the world of shady affiliate marketing schemes, where online marketers promote everything from diet pills to investment scams, in return for large commissions, via websites whose ownership is murky.
The CFTC’s filing quotes numerous alleged statements by Shah to the effect that he knew that the binary options schemes he was offering were all scams, and that fraud was “ruining” the lives of the victims. Shah “acknowledged in chat messages and emails that the trading systems he promoted were fraudulent,” the CFTC states. “Shah acknowledged as well that the customers who attempt to trade binary options will not make money, and the customers’ funds will be misappropriated by the trading websites.” He referred to his trading system as “B.S.” and to the binary options websites as “scammers,” notes the CFTC. Nearly all of the binary options websites Shah promoted were based in Israel.
In one exchange quoted by the CFTC, when one of his associates “suggests that not all the trading systems are scams, Defendant Shah sets him straight and assures him that they are ‘100% … bs’.” In another comment quoted by the CFTC, “Shah crows about how he and his compatriots are … ‘ruining lives one ftd at a time’.” (Ftd refers to First Time Deposit — in this case, the first payment made by a victim allegedly about to be fleeced.)
Shah and his company “induced people to deposit money with illegal binary options trading websites” by “offering miracle software ‘trading systems’ with names like 2014 Millionaire, Binary Genetic, and Millionaire Money Machine.” They attracted their financial victims, the CFTC alleges, by sending spam with misrepresentations about the trading systems to millions of people, paying video producers to “make elaborate — and fraudulent — video testimonials promoting the trading systems,” and creating “dozens if not hundreds of web pages falsely extolling the virtues of the trading systems.”
In addition, states the motion, Shah relied on other Internet marketers, known as “affiliates,” to promote his trading systems and websites. Shah allegedly reached out to these affiliates through a website called Clicksure.com.
Affiliate marketers would then promote the products by creating a “sales funnel.” First, they would try to get web surfers to click on a link or watch a video produced by Shah that purported to reveal secrets to getting rich. The marketers did this by sending out mass emails, through SEO (Search Engine Optimization), and via other techniques.
If a web user watched the first video — which was often general and made grandiose claims about access to paths to wealth that the global elite don’t want ordinary people to know — they would be encouraged to watch a second video that specifically talked about trading binary options. The viewer would then be urged to leave his/her details or download the trading software and open a binary options account on an Israeli binary options website with a first-time-deposit of $250. As soon as a customer made a first-time deposit, the affiliate marketer received a commission of between $200 and $450.
Shah and his affiliate marketers in the United States worked in tandem with call center employees in Israel, the CFTC motion charges.
“In reality, the defendants’ trading systems were marketing tools designed to lead people ‘down the path’ of opening up an account with one of the binary options websites,” the motion states. “Ideally, the person will immediately make a deposit using a credit card through the binary options website. If the person fails to make a deposit, the defendants follow up with emails encouraging the person to deposit money with a ‘broker’ so they can start using the trading system. The binary options website operators also follow up to encourage the person to deposit money from their call centers in Israel. The call centers use high-pressure sales tactics to get people to deposit money,” states the CFTC motion.
The CFTC motion is accompanied by several transcripts of videos that Shah or his associates allegedly created to lure people to invest in allegedly fraudulent binary options.
In one such video, a narrator says, “Learn how the little-known secret thought experiment of a computer genius is quietly making a small circle of binary options nerds richer than rock stars. Keep watching this video to see how a bleeding edge neuroscience and a college student’s accidental discovery will let you siphon off almost abstract amounts of cash from the 4 trillion dollar a day financial markets…”
In another such video, for a trading system called “Stripped Down Binary,” a woman who claims to be a former stripper intones: “Surprised to see a woman in one of these videos? I thought you might be. So I guess it might also surprise you even more to learn that I’m an overnight binary options millionaire, and the craziest thing is I did it all with just one click…”
“These videos were a fraud,” states the CFTC motion. “The people who appeared in them were actors who had never traded binary options or used [Shah’s] systems… Everything said in the videos was from a script provided by Shah — a script that Shah would pay a copywriter to come up with.”
Almost all of the binary options websites that Shah promoted were based in Israel. These included LBinary, Global Trader 365, Vault Options, TraderXP, Trade Rush, Banc de Binary, CITrades, OptionRally, RBOptions, Bloombex Options, Redwood Options, BeeOptions, Amber Options, OptionsXO, and SpotFN, the CFTC stated.
The CFTC documents show bank transfers paid to Shah by Israeli individuals and Israeli-owned companies during the period July 2012-July 2017, including Affilomania Ltd. ($66,051), Banc de Binary ($881,703), Binary Investments ($212,990), Bloombex Ltd, ($6,250), Dolce Formula Ltd. ($64,966), GreyMountain Management ($43,975), MoneyNet ($2,373,999.47), Payoneer Inc. Clicksure ($8,283,237.68), YTF Trade Ltd ($1,328,856.38) and Zulutoys Ltd. ($68,850).
Michael Shah is not the first alleged binary options operative to be the target of US enforcement actions. 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.
All of the binary options companies mentioned above used Michael Shah’s marketing services, the CFTC asserts in its July 12 filing. In fact, the CFTC first learned of Shah’s activities when it was investigating a different binary options company, it states.
“In 2015, the CFTC’s Division of Enforcement was investigating two binary options websites, Vault Options Ltd. and Global Trader 365,” the motion states.
“During the course of the investigation, staff noticed payments totaling $367,200 from Targeted Marketing Solutions, a payment conduit for Vault and Global Trader 365 (“GT 365”). On October 30, 2015, staff subpoenaed Zilmil for documents relating to those payments and any work one for Vault or GT 365. Zilmil, through its then-attorney, John Cotton, produced emails and financial transfer documents between Zilmil and Vault and GT 365 showing that Zilmil was an independent marketer for GT 365, and that Zilmil was being paid commissions on the basis of first-time depositors (referred to as ‘FTDs’),” the motion adds.
When Shah realized he was under investigation, “well aware of the incriminating nature of his conduct,” the CFTC adds, “Shah promptly embarked on a campaign of witness tampering and document destruction.”
Shah’s lawyer, in a counter-motion for summary judgment, denied all the allegations and asserted that the CFTC lacks evidence to connect his client to binary options. In addition, he argued that the CFTC does not have jurisdiction over activities that take place outside the United States.
Over the last decade, Israel has become a global hub of investment scams, employing more than 10,000 citizens — many of them new immigrants and foreign-language speakers — in boiler rooms throughout the country, selling fraudulent binary options, forex, CFDs (contracts for differences) and cryptocurrency investments over the phone and internet to people abroad.
Victims are lured into investments under false pretenses, and the vast majority lose their money. When the victim protests, the “broker” more often than not disappears with the money.
Binary options fraud alone was estimated to be earning between $5 billion and $10 billion a year before it was banned by a Knesset law last October that took effect on January 26 of this year. Some binary options operatives have simply ignored the ban, continuing to offer the product from Israel, while others now sell fraudulent forex or cryptocurrency investments, and still others have moved their operations abroad to countries including Russia, Ukraine, Philippines, Panama, Poland, Albania, Bulgaria, Cyprus and Serbia.
The affiliate marketing industry promoting various types of online scams has existed in Israel for at least 15 years, and has at various times promoted products ranging from fake pharma and herbal supplements to forex, insurance scams, online gambling, Bitcoin and binary options.