Federal judge orders commodities trader to pay nearly $500 million

Dirksen courthouse
Guards keep watch Thursday, Jan. 14, outside the Everett McKinley Dirksen U.S. Courthouse in Chicago.

By Steven Porter

Sanctions amounting to nearly half a billion dollars have been imposed upon an offshore commodity-pool operator who for years defrauded American investors, the U.S. Commodity Futures Trading Commission announced Wednesday.

The penalty is the result of a 2012 civil complaint filed by the CFTC against Nikolai Battoo and his companies BC Capital Group S.A., BC Capital Group International Ltd. and BC Capital Group Holdings S.A. The companies, now liquidated, were based in the Bahamas.

Battoo, a former Florida resident believed to be living in Switzerland, never responded to the suit, despite having been formally notified in 2013 of its filing, according to court records. His silence paved the way for a default judgment entered Monday by U.S. District Court Judge Edmond Chang in Chicago.

Describing some of the defendant’s corporations as “mere shells with no actual offices,” Chang’s 32-page order recounts numerous ways Battoo misled investors. He failed to disclose significant losses and repeatedly made misrepresentations, verbally and in writing, concerning the health of his clients’ investment portfolios, Chang wrote.

According to the order, after the decades-long Ponzi scheme perpetrated by Bernard Madoff was exposed in 2008, Battoo drafted a letter to investors, assuring them that the impact on their portfolios would be minimal despite “indirect exposure” to Madoff’s scheme “through a diversified hedge fund.” In reality, between 7 percent and 20 percent of each client portfolio Battoo managed was invested in funds that ultimately invested in the Madoff scheme, leaving investors far more exposed than Battoo had let on.

Then in 2011, Judge Chang went on, Battoo exaggerated the impact of MF Global Inc.’s bankruptcy on his client portfolios, using the misinformation to justify withholding investor funds.

The defendant owes his victims more than $294.2 million in restitution, and he must relinquish $49 million in dirty money plus $147 million in civil penalties to the U.S. Department of the Treasury, Chang ruled.

Michael Gorham, an industry professor of finance and director of the Center for Financial Innovation at the Illinois Institute of Technology Stuart School of Business, said civil penalties represent a core component of the CFTC’s enforcement division.

“The idea is to punish people who break the law and to create a deterrent for others who might be thinking about it,” Gorham said.

Even if it proves challenging to track Battoo down and extract payment from him — the CFTC’s announcement warned victims that they may not get their money back — the judgment sends “a big message to the whole investment world,” Gorham added.

After the civil complaint was filed in 2012, a judge froze Battoo’s assets and appointed Robb Evans & Associates LLC as a receiver to manage the involuntary liquidation of the defendant companies.

The CFTC does not earn a share of the penalties imposed, nor does it handle collections, spokesman Dennis Holden said, noting that his agency’s actions are separate and distinct from those taken by the Securities and Exchange Commission.

Battoo is permanently banned from direct or indirect trading in the exchanges CTFC regulates. Such lifetime bans are appropriate, Judge Chang wrote, when the defendant “poses a threat to the integrity of the markets.”

Photo at top: Guards keep watch Thursday, Jan. 14, outside the Everett McKinley Dirksen U.S. Courthouse in Chicago. (Steven Porter/Medill)