Online broker JP Markets advertised on social media how easy it is for ordinary people to make big profits by trading highly-leveraged derivative instruments – showing video clips of people driving a new luxury car, travelling the world and attending parties on a big yacht – but court documents are now claiming that the company described successful traders as “toxic clients” and was searching for reasons to refuse to pay out their trading profits.
The Financial Sector Conduct Authority (FSCA) filed an urgent application to the high court for the liquidation of JP Markets after the firm continued to do business and continued to solicit funds from clients even after the FSCA suspended its licence to operate.
Justin Paulsen, founder and only shareholder of JP Markets, hit back saying that the firm is a victim of unethical traders that were colluding to profit unfairly, and that the term “toxic traders” is recognised terminology in the foreign exchange market.
At worst, there is confusion whether JP Markets needs an additional licence to operate, Paulsen stated in court documents in reply to the FSCA’s application to liquidate his firm. “The applicant has itself been guilty of failing to provide guidance and clarity in this regard,” he says.
The FSCA basically argues that the broker did not trade in financial markets at all.
No trading in financial markets took place, says FSCA
It says its investigation found that while clients believed they were trading contracts for difference (CFDs) on local and international markets, no trading in financial markets actually took place.
“The clients were not trading on an online decentralised global financial market; they were merely entering trades on a platform that was no more than an off-the-shelf software application that recorded these trades. In fact, clients were purchasing CFDs issued by JP Markets.
“Put differently, JP Markets was the counter-party to the CFDs,” says the FSCA in the court application.
“As such, JP Markets had a substantial interest in the transactions, a substantial risk and a substantial conflict with its clients.
“Any profit made by clients would result in JP Markets making a concomitant loss and being liable for paying the profits to clients. The converse applied if clients lost money.”
Not keen to pay out
Apparently JP Markets was not to keen to pay clients who made profits on their trading.
The court documents include an email Paulsen sent to the manager of the trading programme in Pakistan, asking if it was possible to change quoted prices to limit clients’ profits.
“I need help here. I don’t understand how this lady can make $8k every day. Can we increase the spread on her account only?” reads the email.
“Maybe we change her to a group that is not used and put the same spreads … other pairs but just change the mark-up and spreads of what she trades? Like increase the spreads of the Nasdaq and we use this for future clients too? So basically, we create a group with a higher spread for indices?? What do you guys think? Please look into this today so we can solve it asap.”
The FSCA says the manager of the trading programme, Saad Sidat, explained to investigators that the changes would reduce a client’s profit with the result that JP Markets would make more profit on the other side of the trade. He said that JP Markets referred to profitable traders as “toxic clients”.
Looking for a way not to pay
Sidat furnished the FSCA with an email he received from Kurt Paulsen, Paulsen’s brother and chief operating officer at JP Markets, that includes the following:
“I’m looking for a way to get rid of these toxic clients once and for all. I think our mistake was paying them out last time which encouraged them to come back but they seem to be picking up where they left off by killing our profitability and they doing it quickly.
“Attached, I have our client agreement, we need to find something in this agreement that protects us from refusing payment to these toxic clients.”
A bit further on Paulsen writes that “I know we looked at these accounts over and over but I cannot see how it’s possible that they can continue to be as profitable as they are”.
Sidat admitted to FSCA investigators that he had assisted JP Markets in creating a “toxic group” on the platform that used different margins and spreads in an effort to reduce trading profits made by clients in this group.
Paulsen says that Sidat’s testimony is purely hearsay as he did not furnish a sworn affidavit. He says in the court documents that the only reason for the damaging allegations is that the business arrangement between himself and Sidat has soured.
How ‘toxic traders’ operate
Internet articles about online forex trading indeed refer to toxic clients. Some are traders who make profit by trading on more than one trading platform simultaneously to profit from differences in prices between platforms.
The proprietors feel these arbitrage opportunities are unfair, because they allow traders to “prey” on platforms with substandard technology that do not update quotes as fast as they should.
Another problem is that traders would take bigger positions than market makers anticipate when the latter place offers on different platforms. Most articles on the subject offer the same example, of an institution offering to sell $10 million worth of currency and the offer is streamed over five platforms.
The platform operators argue that the so-called toxic traders know immediately that the offer is only for $10 million, but would trade on all the platforms and thus buy $50 million, profiting if the market moves in their favour.
Nobody says a word about the traders’ bigger losses if the huge global foreign exchange market moves in the other direction, or how the competing online platforms share this information, or why an institution would make such a mistake time and time again.
Buying time to refuse payments
Sidat also indicated that JP Markets created a “compliance” email after it received a withdrawal request from a client. The e-mail informed clients that their trades had been flagged and that the client would receive a response on their request within a couple of weeks.
Apparently, this was a ruse to give JP Markets time to come up with an excuse not to honour the payment request.
Sadat told the FSCA that the firm would try to get rid of toxic clients by refusing withdrawal requests when they unexpectedly continued to trade profitably in the toxic group.
Legislation makes provision for brokers to issue over-the-counter CFDs and thus enter trades as principals with their clients, if they are registered and licensed as such.
JP Markets was initially authorised as a financial services provider (FSP) by the FSCA when it started its operations in 2016.
However, the Category 1 licence only allowed the firm to give advice and offer non-discretionary intermediate services in respect of derivative instruments. The FSCA suspended the licence a week ago after investigating complaints by clients.
“The FSCA received more than 100 complaints,” Gerhard van Deventer, head of investigations at the FSCA, told Moneyweb.
Three core complaints
The court documents state that JP Markets’s clients complained that the firm failed to pay out money, that clients suffered losses due to interruption of the trading platform, and that JP Markets manipulated prices.
“For an operation like JP Markets to actually be the issuer/counter-party to the CFD is illegal, unless it holds an over-the-counter derivative product provider licence issued by the FSCA. Such a licence will enable an entity to issue CFDs and other derivatives, but it will only be issued to applicants that can pass the stringent requirements put in place to protect clients,” says Van Deventer.
“These requirements inter alia relate to managing the massive risk associated with being an issuer of a geared product like a CFD. There is also the problem of the self-evident conflict of interest that exists in this situation.”
Van Deventer says there are a lot of trading platforms available on the internet, many of them totally illegal. “Even when considering legitimate trading platforms [where the FSP is merely the intermediary] the concern is still that many clients are seduced into trading on the platforms who do not have the experience or knowledge to do so safely. It is a matter of suitability of the product,” he says to explain the FSCA’s action against JP Markets.
The FSCA investigation has revealed several bank accounts linked to JP Markets at different banks holding more than R258 million.
The FSCA obtained preservation orders against the accounts, with Van Deventer saying that it is unclear at this stage what the value of claims against the company will amount to.
Another contravention …
The court documents reveal that JP Markets claimed to have deposited approximately R50 million of its own money into these accounts, which in itself is in contravention of regulations that require separation of clients’ funds.
The application to the court concludes that JP Markets failed to render financial services fairly, honestly and with due diligence and that it failed to avoid or disclose its conflicts of interest to its clients properly. In addition, JP Markets did not comply with the suspension order issued by the FSCA.
JP Markets did not reply to questions from Moneyweb, save for two emails that saying that our requests had been forwarded to the relevant people. Telephone calls went unanswered, with the recorded message still touting JP Markets as a broker operating with FSCA authority.
Darren Hanekom, attorney acting for JP Markets, supplied the answering affidavit to the FSCA’s application to Moneyweb.
One of the noteworthy arguments in the court document is Paulsen’s contention that payments are made on time and that JP Markets has paid out more than R1 billion in clients withdrawals during the last three months.
Still, a lot of clients complain about JP Markets, taking to social media to voice their frustration.
A Facebook page titled ‘JP Markets exposed by their clients’ lists several pages of complaints about the trading platform – from profits being reversed and problems with withdrawals to unauthorised trading and allegations of price manipulation.
One user posted graphs that compared prices from two different trading platforms which show a huge discrepancy between the two systems. The price of the CFD on the JP Markets platform shows a huge sudden fall.
Difference in price between trading platforms
The administrators posted on Thursday that: “JP Markets and their attorneys have resorted to bullying and intimidation tactics and have issued us with a threatening letter demanding to have this page shut down by close of business today.” Apparently the administrators were threatened with a defamatory lawsuit.
In addition to everybody calling JP Markets a scam and its owner a crook, the Facebook page posted pictures of Paulsen doctored to show him in handcuffs and wearing an orange overall.
Unhappy clients also started a petition to shut down the firm. A petition on Change.org, started by Danny Trolip, calls on the FSCA to shut down JP Markets. It had garnered 3 273 signatures by Friday afternoon.
“Justin Paulsen is insulting the intelligence of traders, and taking us for fools. There has never in the history of systems [been a case] that a system takes more than a week for an upgrade,” reads the call for the petition. “Something is very wrong at JP Markets.”
Meanwhile, Paulsen says the FSCA does not understand the market it is supposed to police, while the FSCA says it is concerned that people who do not have the necessary experience are seduced into trading on platforms and in highly-geared instruments that are totally unsuitable for their requirements, the very essence of the FSCA’s mandate.