January 27, 2019
By: Shelley C. Koltnow, Principal Consultant, IntraVires Health Compliance Consultants
Miller Beach, IN
INSIGHTS INTO A FRAUD – WHAT HAPPENED AT ROCK CAPITAL MARKETS?
On January 15, 2019, Thomas C. Lindstrom woke up, went to court, and under a plea arrangement with the U.S. Attorney’s Office in Chicago, pled guilty to one criminal count of wire fraud, ended a years-long investigation, and received a five-year, federal prison sentence (with a two-year supervised release afterward).
The Path to Perdition
Lindstrom’s path to a jail cell – and loss of his career, home, and livelihood – began in about 2014 with his decision to lie about trades he was making in “out of the money” (or OTM) Options on 10-year United States Treasury Bond futures (or “T-Note Options”). To be clear, out of the money options (OTM options) is an aggressive trading method, which can yield high profits but also carries an associated potential for great downside risk that should be handled only by “veteran or experienced option traders.” Lindstrom might have earned his investors’ and his employer’s trust by being a registered broker with the U.S. Commodity Futures Trading Commission (CFTC) since 1993, trading mostly in the complex world of options as a relatively well-known floor broker.
Civil Fraud Case
Lindstrom’s frauds were discovered in early 2015. In September 2016, the CFTC filed a civil enforcement complaint in the U. S. District Court for the Northern District of Illinois, charging Lindstrom with fraud in trading options on 10-year U.S. Treasury Note futures, or “T-Note Options.” The CFTC complaint alleged that “Lindstrom perpetrated a scheme to falsely inflate the value and profitability of his options position and lied about the quantity of options and the risk associated with his position [all in order] to defraud his employer, proprietary trading firm Rock Capital Markets, LLC (Rock Capital), into paying him $285,000 in draws to which he was not entitled.” The CFTC further alleged that due to Lindstrom’s frauds, Rock Capital Markets lost about $14 million, putting it out of business after more than two decades of operations as a small professional trading group. Lindstrom and the CFTC entered into a Consent Order last year that permanently enjoins Lindstrom from ever trading again – directly or indirectly – and requires him to make full restitution of the $14 million to his victims. He was also required to pay a civil fine of $855,000 to the CFTC for his misconduct.
Federal Criminal Case.
Also, in 2016, a Federal Grand Jury entered an eight-count criminal indictment against Lindstrom, arising from his fraudulent trading activity, as detailed in the CFTC Civil Case, above.
The indictment said Lindstrom drew $285,000 in compensation from Rock Capital to which he was not entitled on those fraudulent T-Note Option trades.
Last year, Lindstrom entered a plea arrangement with the U. S. Attorney’s Office, pleading guilty to one count of wire fraud, tied to an August 2014 wire transfer of $35,000 to him of wrongful compensation from Rock Capital. At sentencing, U. S. Judge Harry Leinenweber imposed the 5-year sentence, which is below the “recommended sentence” of 8 – 10 years, citing the “collateral damage on both sides“ of the case, including lost jobs at Rock Capital and the impact to Lindstrom’s family, with their dream home in foreclosure and Lindstrom headed to prison. Lindstrom’s attorney asked that Lindstrom serve his 5-year sentence in the medium security Federal prison in Oxford, Wis., where he could receive treatment for alcohol abuse.
“A good man who made bad decisions.”
Why did he do it? Lindstrom’s attorney told the court at sentencing that Lindstrom is “a good man who made bad decisions when his income could no longer keep up with [his expensive North Shore] lifestyle” in Winnetka, IL, which included his family’s “dream home, parochial school for his four children, and other [associated] expenses.”
Lindstrom spoke at his sentencing hearing, tearfully apologizing for his conduct by reading from his prepared statement that, “I simply couldn’t summon the courage to stop my awful conduct.” Lindstrom said he kept going with the bad trades because, “I was frightened by failure.”
