Firm Charged With Misleading Investors About Binary Options Profitability

The Securities and Exchange Commission today announced that an Israeli-based firm must pay more than $1.7 million for misleading investors into trading binary options over the internet, and the agency warned that other firms may be out there actively trying to do the same thing.

Binary options generally have an all-or-nothing payout structure in which investors bet on the increase or decrease in value of a company stock or other securities serving as the underlying asset.  The options contract expires after a fixed time period, and if an investor’s prediction was wrong then all of the investment can be lost. 

According to the SEC’s order issued today against EZTD Inc., not only did the firm fail to register the binary options or register as a broker-dealer to legally sell the investment to U.S. investors in the first place, but it failed to disclose on its trading platforms that there was significantly greater potential for investors to lose rather than earn money.  EZTD instead made statements that extolled the profitability of trading binary options, calling it a “highly profitable trading platform” and “an extremely lucrative avenue for individuals who are looking to see an increase in income.”

The SEC’s order finds that less than 3 percent of the approximately 4,000 U.S. investors who opened accounts with EZTD actually made any profit on their investment.

“EZTD’s revenues were largely derived from customer trading losses, yet EZTD emphasized the profitability of trading in binary options,” said Stephanie Avakian, Deputy Director of the SEC’s Division of Enforcement.  “Companies dealing in binary options must disclose more than general statements about investment risk so investors in these instruments understand that the odds are stacked against them.”

The SEC today issued an investor alert detailing red flags that signal binary options fraud and warning investors to never put in more money in an attempt to win back money they lost, which was not an issue in the EZTD matter.  The alert reminds investors that they may not have the full protection of the U.S. securities laws when they purchase binary options from an unregistered firm that isn’t subject to SEC oversight.  Investors can quickly and easily check the credentials of people selling investments and determine whether they are registered by using the SEC’s investor.gov website.

“We continue to receive numerous investor complaints involving binary options websites,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “If you have trouble withdrawing your money from an online binary options trading platform, be aware that you may be the victim of a scam and should not give the platform any more money.”

The SEC’s order against EZTD finds that it violated Sections 5(a), 5(c) and 17(a)(2) of the Securities Act of 1933 and Section 15(a)(1) of the Securities Exchange Act of 1934.  Without admitting or denying the findings, EZTD agreed to forfeit approximately $1.5 million in revenues obtained from U.S. customers and pay a $200,000 penalty.  EZTD no longer sells binary options in the U.S. market.

The SEC’s investigation was conducted by Deborah R. Maisel with assistance from Stuart Jackson in the agency’s Division of Economic and Risk Analysis.  The investigation was supervised by Jennifer S. Leete.