Stavro D’Amore was stunned by what he saw. The muscle-bound, McLaren-driving man who would become boss of derivatives broker Berndale Capital Securities was no stranger to flamboyant wealth in his home town of Melbourne, but this office in Tel Aviv was something else.
It was 2015 and spread out across three floors in a circular tower in the Israeli city’s high-tech precinct were more than 300 staff working for a man called Aviv Talmor, mastermind of online trading platform UTrade.
“When he walked onto a level they would stand up and clap him,” D’Amore, who was an executive in Talmor’s Australian business, told a Melbourne court in September. “I’d never seen that before.”
The lawyer examining D’Amore over Berndale’s collapse in 2018 shot back: “It sounds a bit like The Wolf of Wall Street?”
“It was bigger than that,” D’Amore said.
Every year, hundreds of thousands of ordinary Australians back themselves to invest in high-risk financial derivatives – financial products in which ordinary people can bet on the price movements in various markets, including indexes, commodity prices and currencies. Many brokers warn customers up front of the inherent risk in products like this.
Over the past 10 years the industry facilitating these trades has grown to more than 60,000 brokers, sales representatives and people working in client referral. In 2018, Australian licensed operators and their corporate representatives made $2 billion in revenue from more than 1 million customers, about 200,000 of them in Australia.
All these brokers hold licences issued by the Australian Securities and Investments Commission (ASIC). But in reality, the regulator has little oversight of the sector and little apparent interest in cracking down on its excesses.
A six-month investigation by The Age and The Sydney Morning Herald can reveal that despite their licences some of the operators in this industry, including Israeli “Wolf of Wall Street” Talmor, have not just bet against their customers and won; they have rorted them out of cash on an industrial scale. (D’Amore says he wasn’t involved with and isn’t responsible for Talmor’s rorts or others in the schemes, and D’Amore’s business Berndale operated independently of them after those accused left to set up a new business.)
Talmor’s business was part of a broader network controlled by another Israeli with deep Australian connections by the name of Yossi Herzog, who is now on the run from charges brought by the US Department of Justice. Herzog is accused of fleecing more than $200 million from unsuspecting customers, including Australians.
The true toll of these scams on Australian consumers might never be known. Many victims are embarrassed at being hoodwinked, or wrongly believe they simply lost money on bad bets.
It is a story that reflects poorly on the state of the Australian law and ASIC as a regulator. Now, for the first time, it can be told in full.
Betting up big
At the heart of the scam are complex financial products called contracts for difference (CFDs) and binary (or “all or nothing”) options. Both products allow ordinary people to bet on rises and falls in the price of indexes and assets, for example the value of the US dollar, iron ore or even shares.
With a CFD you might decide you would like to bet whether the price of BHP’s share will be trading above its current price in a day or a week’s time.
But rather than simply riding the market up and down in small increments, CFDs allowed customers to magnify their bets – until new rules were announced on October 26 – by as much as 300 times. This allowed investors to turn a $1000 bet into a $300,000 punt.
New caps limit the leverage to a maximum of 30 times for currencies and 20 times for shares, but those caps came too late for many.
Binary options, which are not banned in Australia, allow for micro-bets on movements in the price of a commodity, currency or index over the course of even a few minutes.
In a recent court case, one judge described these products as “financial heroin hits”. Many customers, despite the warnings, see their accounts quickly wiped out or their balances fall deeply into negative territory. According to ASIC data, in a single week in March this year retail customers of Australian-licensed CFD providers lost $428 million gross (or $234 million net).
But some schemes – such as those involving Herzog and Talmor – are much worse than simply high-risk; they are scams.
Between 2009 and 2018, from offices in the Melbourne suburbs of Caulfield North and Elsternwick, and on Collins Street and St Kilda Road, these businesses ran a vast array of rogue trading schemes. Customers were often told their brokers were top traders from the City of London or Wall Street. In reality, the employees tended to be young people in boiler rooms in Australia, Israel, the Philippines and Mauritius.
Customers were given fake trading strategies and told that if they followed them they would win big. But the strategies were designed to ensure customers lost as much as possible. Customers who turned the tables and won their bets were cut off, or targeted to ensure they too became losers.
Some working inside these schemes also had direct links to the Melbourne underworld and borrowed money to pay legal bills from notorious figures in that scene.
Austrian accountant Elfriede Sixt runs the European Funds Recovery Initiative, which has led to arrests around the world, including people linked to Herzog’s schemes. She estimates the profits obtained through crime gangs operating these schemes could stretch to €12 billion ($19.4 billion) internationally.
Speaking generally about the schemes she’s reviewed, Sixt questions whether anyone was ever trading at many of these so-called brokers.
“By following the money of several scams we realised that everything is fiction, as the deposits made by the victims are used for paying the service provider,” she says. “So the balances of the victim’s account have been pure fiction – the money was already gone.”
That the Herzog group was able to operate this network for a decade out of Australia is a testament to some of the weakest regulation in the world, and an indictment of a regulator which had two opportunities in 2015 to stop the group but botched the investigations.
For three more years after 2015 the group continued offering some of the riskiest financial products available, and rorting millions from its clients.
Yossi’s Aussie Posse
In the 2000s, Herzog, a thirtysomething Israeli entrepreneur, got his start running trading academies that taught his countrymen about the foreign exchange market. As his business empire grew so did his prominence. His public face was one of an upstanding citizen who created wealth for thousands of staff and their families.
By 2009 he was heavily into the CFD and binary options trade and had expanded his horizons to Australia. Over the next decade he came to own and run a number of Australian trading groups – Forex Place, Forex TG, AGM Markets, Call Option and Edutrade Academy, among others.
One of these companies, AGM Markets, had huge plans, at one stage eyeing 300 Australian franchises through its online trading brand First Index. Herzog also seemed to like the place. In 2013 he visited Melbourne and in 2016 he tried to buy property in Southbank, only to be blocked by the Foreign Investment Review Board.
By the time D’Amore visited Aviv Talmor’s wolf’s den in Tel Aviv in 2015, Talmor had taken full ownership of Forex TG, a group first based in St Kilda Road and then later in Collins Street in the CBD. (While D’Amore was in business with Herzog and Talmor at Forex TG, there is no evidence or suggestion that he was involved in scamming customers.)
Herzog also did business in Australia with people linked to two other notorious trading schemes, iTrader and Titantrade.
When Australian investors put their money into these schemes, they may have realised they were using high-risk products but they did not know that their losses were engineered.
In 2018 US regulators acted. Herzog was accused of one of the biggest-ever online trading frauds in the world, and he and more than 15 staff at his company Yukom Communications were indicted on allegations that they had ripped off customers in the US, Europe, Asia and Australia to the tune of $US140 million ($192 million) between 2014 and 2017.
Herzog fled Israel before the US could serve him with extradition papers but the CEO of Yukom, Lee Elbaz, who described herself as a “f—ing money-making machine”, did not avoid arrest. She is serving a 22-year sentence after a jury in the US found her guilty of fraud.
The US Department of Justice says Yukom deliberately conspired to ensure its customers lost their money and if that didn’t work they refused withdrawals.
“It was the purpose of the conspiracy for the defendants and their co-conspirators to obtain the maximum deposit from investors and to take steps to ensure that investors lost the money in their accounts or were otherwise unable to withdraw funds — thereby enriching the defendants, their co-conspirators,” the charge documents against Herzog and more than 10 other staff working at Yukom say.
‘Kill your customers’
ASIC helped overseas regulators with investigations into Yukom but in Australia it has kept quiet about Herzog’s activities. It has never publicly commented on the help it provided the US investigation.
However The Age and Herald can reveal that, during Herzog’s near 10-year stint doing business in Australia, ASIC twice investigated his schemes.
Between 2015 and early 2016 it investigated Forex TG but did not shut the company down. Instead it allowed it to voluntarily suspend its licence in February 2016 and undertake a restructure after Herzog and Talmor had left the business in 2014, followed by Talmor in 2015.
D’Amore remained at Forex TG and was determined to restart the broker while playing by the rules.
By mid-2016, ASIC was assured of Herzog and Talmor’s departure and allowed Forex TG to lift its voluntary pause. D’Amore took over ownership of the group with a partner and changed its name to Berndale Capital Securities. With its licence reinstated and D’Amore at Berndale’s helm, he and his partner made millions and were following ASIC’s rules.
Just 2½ years later, in 2018, ASIC and liquidators to D’Amore’s business were investigating him for a range of director breaches, including potential dishonest conduct. He has not been charged with any offence. Talmor would be arrested and charged in Israel for fraud offences. Listed on Talmor’s indictment was Forex TG Pty Ltd.
D’Amore tells The Age and Herald: “Forex TG was a legitimate business when I was working there.”
Asked about his role as a senior executive at Forex TG while two people accused of fraud owned the business, D’Amore says: “I’m not responsible for other people’s conduct. I have not been made aware of the basis of any charges against them or the entities involved.”
In 2015 Herzog purchased the licence for his most destructive Australian company, Caulfield North-based AGM Markets, which operated the AlphaBinary and First Index websites. It was also briefly in ASIC’s sights though D’Amore and Talmor had no association with the new business. Using its licence he set up a new derivatives broker with a band of executives who had left Forex TG during the ASIC investigation. (D’Amore, working at the rebranded Berndale, had zero involvement in AGM Markets.)
ASIC suspended AGM Markets in March 2015 for seven months as it investigated the group and Herzog. It lifted the suspension in late September of that year despite having investigated the same group of people at Forex TG. AGM Markets was immediately back in business, selling derivatives to unsuspecting Australians and customers around the world.
Yet in 2018 ASIC told the Federal Court that AGM and two of its associated companies had burned through $30 million in Australians’ money. Herzog’s other company, Yukom, had “used sales and retention techniques similar to those employed by AGM Markets”, the regulator alleged.
AGM’s chief executive Yossi Ashkenazi was banned from working in financial services for eight years over AGM’s breaches of its licence. The Melbourne man says he has never been implicated in Herzog’s wrongdoing. “I was not part of Yukom,” Ashkenazi says. The Age and Herald are not suggesting he was aware of Herzog’s alleged frauds.
ASIC’s public story is that AGM Markets operated for around six months from late 2017 until 2018 under Herzog’s direction, but documents filed by the company with ASIC show it had been selling high-risk derivatives and options from as early as October 2015. It employed sales staff and had contact with executives from Yukom who travelled to Australia at that time.
A market insider says it’s likely ASIC has underestimated the impact that AGM and other Herzog companies had in Australia. OT Markets, another linked company based in Elsternwick – which operated for a year out the same office as a Herzog company – made $100 million in just six months.
In a court case against AGM and OT Markets launched in 2018, ASIC alleged the groups used boiler room-style call centres and high-pressure sales tactics to harass customers. A court found OT Markets intentionally recommended trading strategies designed to ensure customers lost big. OT Markets account managers were told to “kill your customers”. (Neither D’Amore nor Ashkenazi were involved in running OT Markets.)
ASIC conducted reviews of the derivatives industry in 2010 and 2012 following increasing customer complaints. In 2015, a review of 55 of the 65 licensees selling high-risk products found “a high degree of non-compliance across nearly all AFS [Australian Financial Services] licensees reviewed”.
Since 2017 a quarter of the industry, or 16 of the 60 current licensees, have been subject to regulatory action, according to ASIC. These groups had $1.34billion in client funds. Since 2016, five licences have been cancelled.
But compared to action by other countries, ASIC has been timid. In Britain, the US, Europe and China, binary options are banned and there are leverage limits on CFDs and/or restrictions on the sale of those products to retail investors.
In Israel, where some of these schemes first emerged due to its booming tech industry, “aggressive” action was taken a number of years ago to shut down almost the entire online trading sector, which had become overrun by rogue operators. Israel bans selling illegal products to anyone, not just Israelis.
“It was, I think, an unprecedented move because normally the [Israeli Securities Authority] does not limit products, it allows the client to make risky investments,” says ISA General Counsel Amir Wasserman from his office in Jerusalem.
But these crackdowns overseas have meant a number of these companies moved to Australia and sought AFS licences.
ASIC admits this confers an air of respectability which is then used heavily in such companies’ marketing. It also allows people in countries where this kind of trading is banned to circumvent those restrictions and bet on money markets through Australian-licensed entities.
Yet ASIC’s oversight of these groups’ day-to-day activities is limited. Operators just need to show the regulator they have at least $1 million or 10 per cent of annual revenue (whichever is greater) set aside to protect customers’ money. They also have to file audited accounts drafted by their accountant of choice.
Former ASIC senior executive and Hayne Royal Commission adviser Pamela Hanrahan has slammed ASIC for taking too long to tackle the problem.
“ASIC should devote more staff and effort to its licensed population,” says Hanrahan, a professor of commercial law and regulation at UNSW. “Unlicensed cowboys are always a problem and it is always a game of whack-a-mole. But licensing these entities sends a message to consumers that they are safe and supervised.
“This is damaging our standing internationally. If ASIC needs more resources it should reallocate them or make the case for additional funding.”
ASIC defends its record on this front, saying it has taken a number of enforcement actions against retail derivatives providers and its 2020-21 business plan prioritises enforcement. It also says new powers allowing it to ban products only came into effect in April 2019.
“ASIC’s enforcement actions against retail OTC derivative issuers have resulted in a number of civil penalties and court orders to freeze client funds, reinforcing ASIC’s commitment to reducing client detriment and protecting retail client monies.” It says the $75 million penalty against AGM Markets and its related parties will be a deterrent for other rogue operators.
ASIC moved on the sector in October, announcing long-awaited leverage caps on CFDs – a policy flagged in August last year before it became held up in consultations with industry.
When releasing that new policy, ASIC acknowledged it was out of step with its international counterparts, saying: “It brings Australian practice into line with protections in force in comparable markets elsewhere.”
But despite initially planning to ban the most dangerous of these products, binary options, ASIC held off. It says it is still consulting with the industry and points to the difficulties British regulators had in bringing in similar restrictions.
ASIC’s belated attempts to shut down this multibillion-dollar market will come too late for customers of Herzog and his network. It will also come too late for customers of Stavro D’Amore’s Berndale Capital Securities – a group born out of the Herzog network which, for a time, was the fifth-biggest broker in Australia. Even though Berndale’s customers may not have been scammed in the brazen way Herzog’s were, they were still lured into investing in high-risk products with inadequate oversight.
And that business too would end in tears.
Read part two of the investigation in The Age and The Sydney Morning Herald this weekend.
Source: Thanks smh.com