The U.S. District Court for the Southern District of Florida ordered Systematic Alpha Management LLC and its owner Peter Kambolin to pay more than $2.8 million for defrauding commodity pool participants through an elaborate trade allocation scheme. The Commodity Futures Trading Commission announced the settlement on Tuesday, marking another significant enforcement action against fraudulent commodity trading operations.
Systematic Alpha Management, a registered commodity trading advisor and commodity pool operator, along with Kambolin, its owner and registered associated person, operated the fraudulent scheme from January 2019 through November 2021. The defendants systematically manipulated trade allocations to benefit themselves at the expense of their clients, ultimately defrauding pool participants of more than $1.2 million.
The court found that the defendants marketed Systematic Alpha Management as offering trading strategies in exchange-traded cryptocurrency and foreign exchange futures. They operated at least two commodity pools but executed those pool trades alongside trades for their proprietary accounts. After executing trades, they would allocate the results across accounts each day, consistently directing profitable trades to their own accounts while assigning losing or less profitable trades to the pools.
This practice violated CFTC requirements that customer trades be allocated fairly and equitably. The defendants also misrepresented to pool participants that the pools would primarily trade cryptocurrency and foreign exchange futures, adding another layer of deception to their fraudulent operation.
Under the consent order, the defendants must pay $1,208,503 in restitution directly to defrauded pool participants and $1,633,119 in disgorgement. Jersey City Partners LLC, a New York firm owned by Kambolin that received some of the ill-gotten gains, is jointly liable for $701,647 of the disgorgement amount.
The settlement includes severe restrictions on the defendants' future activities in the commodities markets. The court permanently barred both Systematic Alpha Management and Kambolin from registering with the CFTC or engaging in activities requiring registration. Additionally, they are prohibited from trading commodity interests for their own accounts for six years.
The case highlights the CFTC's ongoing efforts to protect commodity pool participants from fraudulent schemes. Commodity pools allow investors to pool their money for trading in futures and options markets, but they rely on honest allocation of trades and accurate representations from operators.
Kambolin's legal troubles extended beyond the civil enforcement action. In a related criminal case, the Fraud Section of the Department of Justice charged him in September 2023 with one count of conspiracy to commit commodities fraud based on the same conduct. He pleaded guilty to the criminal charges and received a sentence in January 2024 of two years in prison followed by 18 months of home confinement.
The criminal court also ordered Kambolin to pay $1.63 million in criminal forfeiture and $1.2 million in restitution, demonstrating the serious nature of his fraudulent activities. The parallel civil and criminal proceedings reflect the coordinated approach federal agencies take when addressing significant fraud schemes.
The CFTC's enforcement action serves as a warning to other commodity trading advisors and pool operators about the consequences of violating trade allocation requirements. The agency has made clear that it will pursue both restitution for victims and significant penalties against those who defraud pool participants.
Trade allocation fraud represents a particularly insidious form of market manipulation because it allows unscrupulous operators to guarantee profits for themselves while ensuring losses for their clients. The scheme undermines the fundamental trust that must exist between commodity pool operators and their participants.
The settlement requires the defendants to pay the full restitution and disgorgement amounts, ensuring that victims receive compensation for their losses. The CFTC will oversee the distribution of restitution funds to affected pool participants.
This case demonstrates the importance of regulatory oversight in commodity markets and the CFTC's commitment to holding bad actors accountable. The substantial monetary penalties, combined with the permanent bar from the industry, send a strong message about the consequences of defrauding investors.
The enforcement action also highlights the risks faced by investors in commodity pools and the importance of due diligence when selecting trading advisors. Investors should carefully review disclosure documents and understand how trades will be allocated before participating in commodity pools.
Moving forward, the permanent registration bars ensure that neither Systematic Alpha Management nor Kambolin can return to the commodity trading industry in any capacity requiring CFTC registration. The six-year trading prohibition further restricts their ability to engage in commodity markets for their own benefit.