The Kohli Fraud

One such financial fiasco was perpetrated by Charles Kohli (aka "Chuckles") from Princeton, New Jersey. Kohli engaged in limited currency trading with impressive success. Based on his initial experience and a series of formulas he derived from market observation, he embarked on a management venture. According to the case record, Kohli began managing funds for third parties. Again, he had success. He was trading through Prudential Securities, Inc. around 1989. According to Kohli, he stimulated the interest of Prudential representatives who encouraged him to expand the scope of his operations. Eventually, he formed a number of investment entities named Sigma, Inc., Geronimo, Inc., Vol Partners, L.P., and Savid Group. Kohli convinced approximately 400 investors to place more than $60 million under his management from 1989 through part of 1995.

As previously mentioned, correlations that guided investors during the 1980s changed in the 1990s. Perhaps Kohli's approach no longer applied or he simply became overexposed after experiencing a setback. There is a propensity to go into gambling mode by doubling up when times get rough. Whatever the reason, Kohli attempted to recover his losses by raising new money. He paid old investors with new deposits. The eventual result was a Ponzi pyramid. In the process, Kohli hired salespeople and estab lished extremely attractive offices that projected an image of legitimacy and success. Visitors would come into his trading room and hear the banter of currency terminology. They were shown fictitious account statements that were essentially irresistible. Even a professional currency trader was lured into investing substantial sums!

All the while, Kohli was never registered with the Commodity Futures Trading Commission, despite the fact that he traded on the U.S. futures exchanges. He was not an NFA member. Apparently, none of the investors investigated his credentials or registration status. More shockingly, he traded with some of the most reputable and well-known brokerage houses on the street including Dean Witter Reynolds, Inc., ING Securities Futures & Options, Smith Barney, Merrill Lynch, Pierce, Fenner & Smith, Inc., First Options of Chicago, Inc., Saul Stone & Company, LLC, Prudential, and others. All combined, these brokerage firms made millions in commissions as Kohli desperately struggled to earn back losses.

In the end, investors lost more than $40 million. Kohli was indicted and convicted of criminal fraud. He went to prison, but the investors never recovered a dime.

Although we may be quick to blame investors for not fully investigating Kohli, the rules of the NFA state under bylaw 1101 that members may not conduct business with nonmembers. The natural conclusion is that none of the firms should have allowed Kohli to trade since he was not an NFA member. Indeed, investors brought a class action against the brokerage firms that had so handsomely profited from Kohli's endeavors. Alas, the courts did not rule in favor of the investors. Even an attempt to bring the question before the U.S. Supreme Court was turned down.

So the lesson is, "Investors beware! Caveat Emptor." When reviewing the record of a potential manager/trader, ask for his or her NFA registration number. Call the NFA's toll-free information number and find out about any complaints, membership status, or pending disciplinary actions. Check with the Commodity Futures Trading Commission, too. It is your money; do not be timid about asking questions and fully checking out the individual. Certainly minor infractions can have explanations. Even the most honest and successful managers can accidentally break some rules. It is still your responsibility to weigh any negatives.

As an extra precaution, ask to see trading confirmations with the name of the clearing brokerage firm. This is true for futures and cash trading houses. Call the trading house and ask to verify that the trades were, in fact, placed. This may seem extreme, but false track records can be presented in many ways. Your investigation can be made simpler by looking up the activity in historical data or on charts provided by quote vendors. Take your time. Remember that the markets will always be around, but your money may not be if you get involved in a scam.

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