‘Why so little?’ victim asks, as SEC settles $5m. Israel fraud case for $1.2m

Joe M., a 60-year-old retired IT consultant from the United States, never expected to become a victim of fraud. And when he lost $10,000 to Lbinary, an online brokerage he believed to be headquartered in England, he was surprised at how hard it was to recover his funds.

Joe, who asked us not to use his full name, was part of a Facebook group of amateur investors from all over the world who collectively invested in the financial product known as “binary options” through Lbinary’s website.

“It was 2014 and binary options were exploding all over the internet. It looked like a great investment with all these marketers they had promoting it,” he told The Times of Israel by phone.

But one weekend in November 2014, he said, dozens of members of the group watched in shock as Lbinary brokers remotely carried out trades on their behalf, losing repeatedly until all of the investors’ accounts were emptied of funds. Collectively, said Joe, members of his group lost over $100,000 they had put in. When they asked Lbinary for their money back, the company turned down their requests, he said, citing a stipulation in the contract that they had to trade 100 times the amount invested before they could withdraw their money. Later, Lbinary stopped answering investors’ phone calls, Joe recalled. Eventually, its website disappeared.

“Everybody lost everything,” Joe told The Times of Israel. “Some people put in huge amounts of money, at least to them they were huge amounts of money. One woman got evicted because of this. Another woman used her daughter’s college fund. So it was really sad.”

There were a few hundred people in the Facebook group, of whom 53, including Joe, decided to keep trying to get their money back. They contacted a law firm in Europe that said it was bringing a class-action lawsuit against Lbinary and its sister website IvoryOption, both of whose websites, the law firm said, had actually been run from Israel.

“The law firm said that they wanted to take our case. And I think they were only going to charge 15 to 20 percent commission. But then every few months, I would ask them how it’s going and they would just string us along and never do anything.”

That’s why, when Joe learned that the US Securities and Exchange Commission had brought a civil enforcement action last October against the two alleged Israeli owners of Lbinary.com and IvoryOption.com, charging them with defrauding investors out of over $5 million, Joe and other members of his group were hopeful.

“I haven’t given up in six years because I can’t stand the fact that we were taken advantage of, and I want the people behind Lbinary to pay for what they did,” he told The Times of Israel.

But when the SEC announced on August 31 that it had settled the case with Anton Senderov and Lior Babazara, the two Israelis allegedly behind the websites, requiring them to pay $560,000 in disgorgement and $350,000 civil penalty for each, without admitting any wrongdoing, Joe said he felt let down.

“I was expecting something in the millions,” he said.

Disgorgement refers to the repayment of ill-gotten gains obtained by defendants.

When he learned about the August 31 settlement, Joe sent an email to The Times of Israel: “The SEC went after them for swindling over $5 million from over 2,800 clients. So we don’t understand why the owners were ordered to disgorge only $560,000. We were hoping to recover all of our lost funds, but this number confuses and disappoints us. Will we only be getting a small fraction of our money back? I hope you can perhaps author a new article on this and get to the bottom of it.”

A crime with no Israeli punishment

The binary options industry flourished in Israel for a decade before it 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 employed thousands of Israelis who allegedly fleeced billions out of victims worldwide. The fraudulent firms would dupe victims 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.

Israeli prosecutors have yet to indict a single binary options suspect on charges of fraud, while the United States has indicted about two dozen, with seven convictions of Israelis, and taken civil enforcement actions against many others.

This has led to a situation where the only punishment any of these thousands of alleged Israeli internet criminals are likely to experience will be meted out by the US government. It is not the job of the United States to enforce the law against Israeli criminals. But to the extent that US institutions have gone beyond the call of duty to do so, these efforts make a greater impression the larger the disgorgement or the longer the sentence.

When the SEC and CFTC (the US Commodity Futures Trading Commission) reached an $11 million settlement with Israel-based Banc de Binary in 2016, it generated headlines around the world, the repercussions of which may have led the company to shut its doors less than a year later.

When the SEC in September 2019 charged Gil and Raz Beserglik with $100 million in alleged binary options fraud, it was reported in both Israeli financial newspapers and in the mass-circulation Israeli newspaper Ynet.

When binary options CEO Lee Elbaz was sentenced to 22 years in US federal prison in December 2019, the event was reported by almost all major Israeli news outlets, generating hundreds of comments on many of their websites. Many of these comments expressed respect for the US justice system and disdain for what commenters perceived as the relative laxness of Israeli law enforcement.

“American justice hurts, doesn’t it?” read one such comment on the Calcalist website.

“Extradite all the [binary options operatives] to the US and let them sit in jail there, not here where prison is like a sanatorium… Twenty-two years is too short for someone who stole from elderly people,” read another.

Still selling online investments

Israeli court records indicate that Lior Babazara lived in a modest apartment in the  Tel Aviv suburb of Holon before founding Liantech in 2013. The second defendant, Anton Senderov, is the son of a Russian immigrant to Israel who was also involved in the online trading industry.

One prominent employee of Lbinary, according to his own LinkedIn profile, was Gia Janashvili. Janashvili’s LinkedIn profile shows him working as an “intern” at Lbinary from June 2014 to August 2014.

The Liantech call center was initially managed by another Georgian man named Soso, several sources told The Times of Israel.

Since the period described in the SEC complaint (January 2014 through August 2017), the two defendants have been operating call centers selling CFDs (contracts for differences) and other investment products, with Israeli court filings showing they were still active in the industry as recently as 2019.

In a text message exchange included in one such court filing, someone named Yoni reflects on the state of the online trading industry in Israel, which he says is struggling, but not because of any sort of Israeli government crackdown.

“I am in daily contact with a lot of brokers and if you think there is someone out there who has it easy, you are wrong! The situation in our industry is tough. No one can get payment processing, everyone is in this daily chase after Internet traffic. If there’s a day that an affiliate that sent 100 leads all last week suddenly doesn’t send any because Facebook starts making problems for him, I can’t take responsibility for that,” the person named Yoni wrote.

Did the US Supreme Court just make the world safer for fraudsters?

Why does the settlement in the Lbinary case appear to be so low, with the two men allegedly behind the company required to pay only about $1.2 million out of the $5 million they allegedly defrauded from victims?

The Times of Israel put this question to Bill Martin, a former senior counsel at the SEC who is currently an attorney at the O’Melveny & Myers law firm.

Martin said the SEC may have taken several factors into consideration, including the strength of the evidence and the challenges of enforcing judgment overseas.

“The SEC’s complaint alleged that the two men committed securities fraud and obtained over $5 million. But if the case had proceeded to trial, any judgment would have depended on whether the evidence shows that these two individuals were actually responsible for that amount of money. Plaintiffs often need to evaluate the strength of their evidence and other factors to decide whether to settle for less than they believe they are due,” Martin said.

Martin said another factor the SEC may have considered was that the two men were in Israel and could have tried to avoid paying altogether.

“Even if the SEC won a judgment for $5 million, they would still need to enforce it to obtain those funds,” said Martin.

“How would the SEC do that? They would need to find out what assets these individuals have, and work through the Israeli legal system to try to enforce in Israel a judgment from a U.S. court. I don’t know what that entails in Israel specifically. But as a general matter, it can be very challenging and time-consuming to enforce judgments abroad,” he said.

The Times of Israel asked Martin whether the US Supreme Court’s June 22 decision in a recent case known as Liu vs. the SEC could have had any effect on the size of the disgorgement the SEC was able to obtain.

On June 22, the Supreme Court said the SEC could continue to demand disgorgements, but only of the wrongdoer’s net profits and not all the money they obtained fraudulently, because some of that money may have already been spent on business expenses.

“A disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under §78u(d)(5),” wrote Judge Sonya Sotomayor.

Martin said it was too early to tell what kind of effect Liu vs. the SEC will have on judgments obtained by the SEC.

“Each year, the SEC publishes enforcement statistics, including the number of cases that are filed and the amount of judgments obtained. When those statistics are published after the end of this fiscal year, it may be possible to analyze those to draw some conclusions about the impact of Liu.”

Joe M., the man who says he lost $10,000 to Lbinary, told The Times of Israel that while he is disappointed with the outcome of the SEC lawsuit, he hopes this is just the beginning of further action by the US government.

“So I’m hoping that besides the SEC, the FBI and the Department of Justice continue with this. I mean, the SEC dealt with the financial piece. But what about the criminal piece? I’d like to see the people who created Lbinary go to jail.”

He also added a lesson he’d like to share with the public: “You can’t trust anyone on the internet, especially when it comes to giving them money, because they can be anywhere and be anyone they want to be.”