FOREIGN RELATIONS OF THE UNITED STATES, 1973–1976 VOLUME XXXI, FOREIGN ECONOMIC POLICY, DOCUMENT 63

63. Minutes of Secretary of State Kissinger's Principals and Regionals Staff Meeting¹

Washington, April 25, 1974, 3:13–4:16 p.m.

[Omitted here is discussion unrelated to international monetary policy.]

Secretary Kissinger: Now we've got Enders, Lord and Hartman. They'll speak separately or together. (Laughter.)

Mr. Hartman: A trio.

Mr. Lord: I can exhaust my knowledge of gold fairly quickly, I think.

Secretary Kissinger: Now, I had one deal with Shultz—never to discuss gold at this staff meeting—because his estimate of what would appear in the newspapers from staff meetings is about the same as mine.

Are you going to discuss something—is this now in the public discussion, what we're discussing here?

Mr. Enders: It's been very close to it. It's been in the newspapers now—the EC proposal.²

Secretary Kissinger: On what—revaluing their gold?

Mr. Enders: Revaluing their gold—in the individual transaction between the central banks. That's been in the newspaper. The subject is, obviously, sensitive; but it's not, I think, more than the usual degree of sensitivity about gold.

Secretary Kissinger: Now, what is our position?

Mr. Enders: You know what the EC proposal is.

Secretary Kissinger: Yes.

Mr. Enders: It does not involve a change in the official price of gold. It would allow purchases and sales to the private market, provided there was no net purchase from the private market by an individual central banker in a year. And then there would be individual sales between the central banks on—

Secretary Kissinger: How can they permit sale to the private market? Oh, and then they would buy from the private market?

Mr. Enders: Then they would buy.

Secretary Kissinger: But they wouldn't buy more than they sold.

Mr. Enders: They wouldn't buy more than they sold. There would be no net increase in gold held by the central banks that was held by the EEC. It could be held by others.

I've got two things to say about this, Mr. Secretary. One is: If it happens, as they proposed, it would be against our interests in these ways.

Secretary Kissinger: Have you accepted it or is this just a French proposal?

Mr. Enders: It's an informal consensus that they've reached among themselves.

Secretary Kissinger: Were they discussed with us at all?

Mr. Enders: Not in a systematic way. They're proposing to send over to Washington the Dutch Finance Minister and the Dutch Central Governor would talk to the Treasury.

Secretary Kissinger: What's Arthur Burns' view?

Mr. Enders: Arthur Burns—I talked to him last night on it, and he didn't define a general view yet. He was unwilling to do so. He said he wanted to look more closely on the proposal. Henry Wallich, the international affairs man, this morning indicated he would probably adopt the traditional position that we should be for phasing gold out of the international monetary system; but he wanted to have another look at it. So Henry Wallich indicated that they would probably come down opposing this. But he was not prepared to do so until he got a further look at it.

Secretary Kissinger: But the practical consequence of this is to revalue their gold supply.

Mr. Enders: Precisely.

Secretary Kissinger: Their gold reserves.

Mr. Enders: That's right. And it would be followed quite closely by a proposal within a year to have an official price of gold—

Secretary Kissinger: It doesn't make any difference anyway. If they pass gold at the market price, that in effect establishes a new official price.

Mr. Enders: Very close to it—although their—

Secretary Kissinger: But if they ask what they're doing—let me just say economics is not my forte. But my understanding of this proposal would be that they—by opening it up to other countries, they're in effect putting gold back into the system at a higher price.

Mr. Enders: Correct.

Secretary Kissinger: Now, that's what we have consistently opposed.

Mr. Enders: Yes, we have. You have convertibility if they—

Secretary Kissinger: Yes.

Mr. Enders: Both parties have to agree to this. But it slides towards and would result, within two or three years, in putting gold back into the centerpiece of the system—one. Two—at a much higher price. Three—at a price that could be determined by a few central bankers in deals among themselves.

So, in effect, I think what you've got here is you've got a small group of bankers getting together to obtain a money printing machine for themselves. They would determine the value of their reserves in a very small group.

There are two things wrong with this.

Secretary Kissinger: And we would be on the outside.

Mr. Enders: We could join this too, but there are only very few countries in the world that hold large amounts of gold—United States and Continentals being most of them. The LDC's and most of the other countries—to include Japan—have relatively small amounts of gold. So it would be highly inflationary, on the one hand—and, on the other hand, a very inequitable means of increasing reserves.

Secretary Kissinger: Why did the Germans agree to it?

Mr. Enders: The Germans agreed to it, we've been told, on the basis that it would be discussed with the United States—conditional on United States approval.

Secretary Kissinger: They would be penalized for having held dollars.

Mr. Enders: They would be penalized for having held dollars. That probably doesn't make very much difference to the Germans at the present time, given their very high reserves. However, I think that they may have come around to it on the basis that either we would oppose it—one—or, two, that they would have to pay up and finance the deficits of France and Italy by some means anyway; so why not let them try this proposal first?

The EC is potentially divided on this, however, and if enough pressure is put on them, these differences should reappear.

Secretary Kissinger: Then what's our policy?

Mr. Enders: The policy we would suggest to you is that, (1), we refuse to go along with this—

Secretary Kissinger: I am just totally allergic to unilateral European decisions that fundamentally affect American interests—taken without consultation of the United States. And my tendency is to smash any attempt in which they do it until they learn that they can't do it without talking to us.

That would be my basic instinct, apart from the merits of the issue.

Mr. Enders: Well, it seems to me there are two things here. One is that we can't let them get away with this proposal because it's for the reasons you stated. Also, it's bad economic policy and it's against our fundamental interests.

Secretary Kissinger: There's also a fundamental change of our policy that we pursued over recent years—or am I wrong there?

Mr. Enders: Yes.

Secondly, Mr. Secretary, it does present an opportunity though—and we should try to negotiate for this—to move towards a demonetization of gold, to begin to get gold moving out of the system.

Secretary Kissinger: But how do you do that?

Mr. Enders: Well, there are several ways. One way is we could say to them that they would accept this kind of arrangement, provided that the gold were channelled out through an international agency—either in the IMF or a special pool—and sold into the market, so there would be gradual increases.

Secretary Kissinger: But the French would never go for this.

Mr. Enders: We can have a counter-proposal. There's a further proposal—and that is that the IMF begin selling its gold—which is now 7 billion—to the world market, and we should try to negotiate that. That would begin the demonetization of gold.

Secretary Kissinger: Why are we so eager to get gold out of the system?

Mr. Enders: We were eager to get it out of the system—get started—because it's a typical balancing of either forward or back. If this proposal goes back, it will go back into the centerpiece system.

Secretary Kissinger: But why is it against our interests? I understand the argument that it's against our interest that the Europeans take a unilateral decision contrary to our policy. Why is it against our interest to have gold in the system?

Mr. Enders: It's against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings—about 11 billion—a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We've been trying to get away from that into a system in which we can control—

Secretary Kissinger: But that's a balance of payments problem.

Mr. Enders: Yes, but it's a question of who has the most leverage internationally. If they have the reserve-creating instrument, by having the largest amount of gold and the ability to change its price periodically, they have a position relative to ours of considerable power. For a long time we had a position relative to theirs of considerable power because we could change gold almost at will. This is no longer possible—no longer acceptable. Therefore, we have gone to special drawing rights, which is also equitable and could take account of some of the LDC interests and which spreads the power away from Europe. And it's more rational in—

Secretary Kissinger: "More rational" being defined as being more in our interests or what?

Mr. Enders: More rational in the sense of more responsive to worldwide needs—but also more in our interest by letting—

Secretary Kissinger: Would it shock you? I've forgotten how SDR's are generated. By agreement?

Mr. Enders: By agreement.

Secretary Kissinger: There's no automatic way?

Mr. Enders: There's no automatic way.

Mr. Lord: Maybe some of the Europeans—but the LDC's are on our side and would not support them.

Mr. Enders: I don't think anybody would support them. Secretary Kissinger: But could they do it anyway?

Mr. Enders: Yes. But in order for them to do it anyway, they would have to be in violation of important articles of the IMF. So this would not be a total departure. (Laughter.) But there would be reluctance on the part of some Europeans to do this.

We could also make it less interesting for them by beginning to sell our own gold in the market, and this would put pressure on them.

Mr. Maw: Why wouldn't that fit if we start to sell our own gold at a price?

Secretary Kissinger: But how the hell could this happen without our knowing about it ahead of time?

Mr. Hartman: We've had consultations on it ahead of time. Several of them have come to ask us to express our views. And I think the reason they're coming now to ask about it is because they know we have a generally negative view.

Mr. Enders: So I think we should try to break it, I think, as a first position—unless they're willing to assign some form of demonetizing arrangement.

Secretary Kissinger: But, first of all, that's impossible for the French.

Mr. Enders: Well, it's impossible for the French under the Pompidou Government. Would it be necessarily under a future French Government? We should test that.

Secretary Kissinger: If they have gold to settle current accounts, we'll be faced, sooner or later, with the same proposition again. Then others will be asked to join this settlement thing.

Isn't this what they're doing?

Mr. Enders: It seems to me, Mr. Secretary, that we should try—not rule out, a priori, a demonetizing scenario, because we can both gain by this. That liberates gold at a higher price. We have gold, and some of the Europeans have gold. Our interests join theirs. This would be helpful; and it would also, on the other hand, gradually remove this dominant position that the Europeans have had in economic terms.

Secretary Kissinger: Who's with us on demonetizing gold?

Mr. Enders: I think we could get the Germans with us on demonetizing gold, the Dutch and the British, over a very long period of time.

Secretary Kissinger: How about the Japs?

Mr. Enders: Yes. The Arabs have shown no great interest in gold.

Secretary Kissinger: We could stick them with a lot of gold.

Mr. Sisco: Yes. (Laughter.)

Mr. Sonnenfeldt: At those high-dollar prices. I don't know why they'd want to take it.

Secretary Kissinger: For the bathroom fixtures in the Guest House in Rio. (Laughter.)

Mr. McCloskey: That'd never work.

Secretary Kissinger: That'd never work. Why it could never get the bathtub filled—it probably takes two weeks to fill it.

Mr. Sisco: Three years ago, when Jean³ was in one of those large bathtubs, two of those guys with speakers at that time walked right on through. She wasn't quite used to it. (Laughter.)

Secretary Kissinger: They don't have guards with speakers in that house.

Mr. Sisco: Well, they did in '71.

Mr. Brown: Usually they've been fixed in other directions.

Mr. Sisco: Sure. (Laughter.)

Secretary Kissinger: O.K. My instinct is to oppose it. What's your view, Art?

Mr. Hartman: Yes. I think for the present time, in terms of the kind of system that we're going for, it would be very hard to defend in terms of how.

Secretary Kissinger: Ken?

Mr. Rush: Well, I think probably I do. The question is: Suppose they go ahead on their own anyway. What then?

Secretary Kissinger: We'll bust them.

Mr. Enders: I think we should look very hard then, Ken, at very substantial sales of gold—U.S. gold on the market—to raid the gold market once and for all.

Mr. Rush: I'm not sure we could do it.

Secretary Kissinger: If they go ahead on their own against our position on something that we consider central to our interests, we've got to show them that that they can't get away with it. Hopefully, we should have the right position. But we just cannot let them get away with these unilateral steps all the time.

Mr. Lord: Does the Treasury agree with us on this? I mean, if this guy comes when the Secretary is out of the country—

Secretary Kissinger: Who's coming?

Mr. Enders: The Dutch Finance Minister—Duisenberg—and Zijlstra. I think it will take about two weeks to work through a hard position on this. The Treasury will want our leadership on the hardness of it. They will accept our leadership on this. It will take, I would think, some time to talk it through or talk it around Arthur Burns, and we'll have to see what his reaction is.

Mr. Rush: We have about 45 billion dollars at the present value—

Mr. Enders: That's correct.

Mr. Rush: And there's about 100 billion dollars of gold.

Mr. Enders: That's correct. And the annual turnover in the gold market is about 120 billion.

Secretary Kissinger: The gold market is generally in cahoots with Arthur Burns.

Mr. Enders: Yes. That's been my experience. So I think we've got to bring Arthur around.

Secretary Kissinger: Arthur is a reasonable man. Let me talk to him. It takes him a maddening long time to make a point, but he's a reasonable man.

Mr. Enders: He hasn't had a chance to look at the proposal yet.

Secretary Kissinger: I'll talk to him before I leave.⁴

Mr. Enders: Good.

Mr. Boeker: It seems to me that gold sales is perhaps Stage 2 in a strategy that might break up the European move—that Stage 1 should be formulating a counterproposal U.S. design to isolate those who are opposing it the hardest—the French and the Italians. That would attract considerable support. It would appeal to the Japanese and others. I think this could fairly easily be done. And that, in itself, should put considerable pressure on the EEC for a tentative consensus.

Mr. Hartman: It isn't a confrontation. That is, it seems to me we can discuss the various aspects of this thing.

Secretary Kissinger: Oh, no. We should discuss it—obviously. But I don't like the proposition of their doing something and then inviting other countries to join them.

Mr. Hartman: I agree. That's not what they've done.

Mr. Sonnenfeldt: Can we get them to come after the French election⁵ so we don't get kicked in the head?

Mr. Rush: I would think so.

Secretary Kissinger: I would think it would be a lot better to discuss it after the French election. Also, it would give us a better chance. Why don't you tell Simon this?

Mr. Enders: Good.

Secretary Kissinger: Let them come after the French election.

Mr. Enders: Good. I will be back—I can talk to Simon. I guess Shultz will be out then.⁶

Mr. Sonnenfeldt: He'll be out the 4th of May.

Mr. Enders: Yes. Meanwhile, we'll go ahead and develop a position on the basis of this discussion.

Secretary Kissinger: Yes.

Mr. Enders: Good.

Secretary Kissinger: I agree we shouldn't get a consultation—as long as we're talking Treasury, I keep getting pressed for Treasury chair-manship of a policy committee. You're opposed to that?⁷

[Omitted here is discussion unrelated to international monetary policy.]

---

¹ Source: National Archives, RG 59, Transcripts of Secretary of State Kissinger's Staff Meetings, 1973–1977, Entry 5177, Box 3, Secretary's Staff Meeting, April 25, 1974. Secret. According to an attached list, the following people attended the meeting: Kissinger, Rush, Sisco, Ingersoll, Hartman, Maw, Ambassador at Large Robert Mc-Closkey, Assistant Secretary of State for African Affairs Donald Easum, Hyland, Atherton, Lord, Policy Planning Staff member Paul Boeker, Eagleburger, Springsteen, Special Assistant to the Secretary of State for Press Relations Robert Anderson, Enders, Assistant Secretary of State for Inter-American Affairs Jack Kubisch, and Sonnenfeldt.

² Meeting in Zeist, the Netherlands, on April 22 and 23, EC Finance Ministers and central bankers agreed on a common position on gold, which they authorized the Dutch Minister of Finance, Willem Frederik Duisenberg, and the President of the Dutch central bank, Jelle Zijlstra, to discuss with Treasury and Federal Reserve Board officials in Washington. (Telegram 2042 from The Hague, April 24, and telegram 2457 from USEC Brussels, April 25; ibid., Central Foreign Policy Files)

³ Jean Sisco was Joseph Sisco's wife.

⁴ From April 28 to 29, Kissinger was in Geneva for talks with Soviet Foreign Minister Andrei Gromyko.

⁵ France held a Presidential election on May 19.

⁶ George Shultz's tenure as Secretary of the Treasury ended on May 8, when he was replaced by William Simon.

⁷ The summary attached to the front page of the minutes notes that "The Secretary is inclined to oppose the proposal on grounds of non consultation by the Europeans as well as on the proposal's merits. The Secretary agreed to talk to Arthur Burns in this sense."

https://history.state.gov/historicaldocuments/frus1969-76v31/d63

ATM and overdraft fees top $6 billion at the big 3 banks

Ever taken out cash from an ATM machine and gotten socked with a $3 fee (or worse)? You probably weren't thrilled about that.

Nobody likes those fees. Except banks.

America's three biggest banks -- JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo(WFC) -- earned more than $6 billion just from ATM and overdraft fees last year, according to an analysis by SNL Financial and CNNMoney.

That equates to $25 for every adult in the United States.

There's so much frustration over these fees that they have become a presidential campaign issue.

Hillary Clinton called ATM fees "usurious." Bernie Sanders vowed that if he's elected president, he will cap ATM fees at $2.

Consumers now pay over $4, on average, to withdraw their own money from an out-of-network ATM, according to Bankrate.

"In my view, it is unacceptable that Americans are paying a $4 or $5 fee each time they go to the ATM," Sanders said in a recent speech.

Big profits on fees

The outrage comes as Americans are finding out exactly how much banks really profit from those pesky ATM and overdraft fees. For the first time, banks were required to disclose this information publicly in 2015.

While ATM fees get the most attention on the campaign trail, overdraft charges are the most profitable for banks.

America's big three banks made over $5.1 billion last year from overdraft fees alone.

Banks aren't supposed to charge customers overdraft fees when they use an ATM to get cash unless the customer chooses or "opts in" to get the cash despite the fee.

A 2014 Pew study found more than half of the people who overdrew their checking accounts in the past year didn't remember consenting to the overdraft service.

Overdraft fees put people at 'serious risk'

"Consumers who opt in to overdraft coverage put themselves at serious risk when they use their debit card," said Richard Cordray, director of the Consumer Financial Protection Bureau.

The typical overdraft fee is $34, yet a CFPB study found that the majority of overdrafts occur on transactions of $24 or less.

"Consumers really need to look at the fine print," says Christopher Vanderpool, an analyst at research firm SNL Financial.

By law, people can opt out of ATM overdrafts at any time. That way they will not be able to take out money at an ATM if their account balance goes below $0. That said, banks can still levy a fee if someone's balance goes negative because a check is cashed or an automatic payment such as rent goes through and there aren't sufficient funds to cover it.

The CFPB study notes that if someone borrowed $24 for only three days and paid an overdraft fee of $34, that "loan" from the bank would carry a whopping 17,000% annual percentage rate (APR).

Fees are growing

Many large banks like Wells Fargo say they have put a lot of effort into clarifying their overdraft fees and helping customers make smart choices.

"Overdraft behaviors are becoming more managed by our people," said Ricky Brown, president ofBB&T (BBT) bank on an earnings call last year.

But the data for the first three quarters of 2015 doesn't back that up. It shows that overdraft fees grew every single quarter for the big banks.

CNNMoney estimated what the banks would collect on fees in the final three months of 2015. It's often the most profitable time of the year since people are doing more transactions around the holidays. Still, CNNMoney assumed that banks earned the same in the fourth quarter on fees as in the previous quarter.

The result is that JPMorgan took in $1.9 billion from customer overdrafts. Bank of America and Wells Fargo took in $1.6 billion each.

The CFPB is considering whether to implement additional rules on overdrafts.

Fees on the "regular Joe's" bank account made up about 4% of operating revenues for America's biggest banks last year, according to SNL Financial.

http://money.cnn.com/2016/01/14/investing/atm-overdraft-fees/index.html?iid=surge-story-summary

The Con Man and his Mentor

David Smith won’t soon forget his 38th-birthday party.

Standing on the grounds of an estate in Kingston, Jamaica, in front of a throng of some 200 investors in his foreign-exchange-trading fund, Smith listened sheepishly as his mentor and hero, Jared Martinez, compared him to Moses leading his flock to the promised land. “I wanted to buy something like the staff that Moses used to carry,” said Martinez, whose remarks have been preserved on video. “David has freed so many people down here,” Martinez told the crowd, referring to Smith’s 10 percent monthly returns. “David, we’d like to say thank you for being our Jamaican Moses.”

Smith, now 46, recalls the moment as fraught with mixed emotions, Bloomberg Marketsreports in its June 2015 issue. The charismatic Martinez, 59, who runs the oldest and largest trading school in the U.S. serving the lightly regulated $400 billion–a-day retail forex market, had grown into a trusted father figure for Smith. Under Martinez’s tutelage, Smith had succeeded in expanding his fund and increasing his personal fortune enough to afford a $2 million seaside mansion and a Learjet. Yet Smith knew he was no Moses. His fund was a fraud.

Three years later, in August 2010, U.S. prosecutors alleged Smith and his co-conspirators laundered more than $200 million of investor money through multiple U.S. bank accounts created by Martinez and two of his sons. Those transactions were the basis of 19 counts of money laundering and conspiracy against Smith, with Martinez and his sons identified as unindicted co-conspirators. Smith was also charged with four counts of fraud.

David Smith, now held in Turks and Caicos, is fighting extradition to the U.S., where he would serve out a 30-year prison sentence.

 

David Evans

Smith sees himself as a victim—a con man duped by another con man who proved more savvy. Smith met with aBloomberg Markets reporter in January in a detention facility on the Turks and Caicos island of Providenciales, a tourist mecca for beachgoers and snorkelers. He says he admitted guilt as part of aplea bargain with U.S. prosecutors filed in March 2011, expecting to testify against Martinez and his two sons, Isaac, now 31, and Jacob, now 34. He had already been convicted and sentenced to 6½ years in a Turks and Caicos prison and was hoping for leniency.

The Martinez family was never charged and in August 2011, a U.S. federal judge in Orlando sentenced Smith to a concurrent 30-year term. Smith is fighting extradition to the U.S. Martinez’s brokerage was fined $250,000 by the National Futures Association, a self-regulatory group, for failing to investigate Smith’s operation.

“Once I decided I’d plead guilty, there was no holding back,” Smith says, locked up just a few miles from the turquoise waters and seaside villa where he often entertained the Martinez family. “I went all the way. I did everything they asked me to do. I got nothing in return.”

Smith doesn’t deny that he committed a crime. He has confessed to defrauding some 6,000 people out of $220 million when his Ponzi scheme collapsed. He just thinks that if he has to take up residence in a U.S. prison, he should have gotten a reduced sentence in exchange for his cooperation.

Ten years ago, Martinez accepted Smith as a student at his forex-trading school outside Orlando. Martinez then followed Smith to his native Jamaica to sell classes to his investors. In classic Ponzi-scheme fashion, Smith used money from new investors to pay off his existing clients, much of it laundered through Martinez-controlled accounts, according to prosecutors. Smith contends Martinez outsmarted prosecutors by claiming he and his sons had no knowledge that they were laundering money for Smith. Martinez and his two sons declined to comment for this story. “I really felt this man was genuine, that he loved me like a son,” says Smith. “He just threw me under the bus.”

Smith’s plea agreement describes wiring more than $100 million of investor funds from Turks and Caicos to I-Trade FX, a brokerage firm he owned in Florida with the Martinez family. Cash flowed through JPMorgan Chase, Bank of America, and other banks before circling back to the Caribbean. Almost no foreign exchange was traded.

“It was a huge washing machine,” says Assistant U.S. Attorney Bruce Ambrose, who prosecuted Smith for money laundering. Yet he didn’t seek to indict Martinez family members he identified as co-conspirators. Ambrose would not explain why. The U.S. Attorney’s office later issued a statement to Bloomberg Markets saying it stands by its decision not to prosecute the family, saying Smith did not fully cooperate. Moreover, “the statute of limitations has long since expired for charging anyone who may have been involved in criminal activity with Mr. Smith,” it said.

Law enforcement agents from the U.S., Jamaica, and Turks and Caicos say that the Martinez family actively participated in Smith’s criminal enterprise, and they were stunned that U.S. prosecutors never charged the father and sons.

“It was a great case,” says Louis Skenderis, a special agent with the U.S. Department of Homeland Security, who spent three years investigating the family’s role in helping Smith move cash in and out of the U.S. “We brought David to Florida as a witness against the Martinezes, and he agreed to plead guilty as part of the deal.”

“I think David Smith is just a pawn,” says Janice Holness, executive director ofJamaica’s Financial Services Commission, interviewed at her office in Kingston. “Smith is a crook and got what he deserves, but there are bigger fish. He’s taking a fall for these people, including Jared Martinez.”

Smith turned to Martinez, founder of a forex-trading school, after his fund tanked. He says Martinez was like a father to him.

 

Reed Young

Martinez has said that’s simply not true. “It’s difficult to be falsely accused of anything,” he said in an October 2011 press release, two months after Smith was sentenced. “And it is unfortunate that we were perceived to be guilty by association.”

Martinez, whose Florida license plate reads “FX Chief,” says he has earned millions of dollars trading and running forex classes at his Market Traders Institute, which he founded in 1994 and which employs 115 workers. Dozens of telemarketers hawk his classes. He says he’s taught 30,000 students a formula for making consistent profits with MTI’s Ultimate Traders Package, which sells for $7,995. Yet, in an interview withBloomberg Markets last year, Martinez estimated no more than half his customers make back trading what they spend on their MTI tuition.

Martinez also said the retail forex industry is cleaner now than it was a decade ago. “Ten years ago, it was the Wild West,” he said. “Ponzi schemes were running rampant.” (See “The Currency Casino,” December 2014.)

Smith, dressed in blue gym shorts and a baggy gray T-shirt in the Providenciales police station, described how he turned from a legitimate if failed forex trader to a criminal who put all his hopes in one friendship. He grew up in a middle-class family in Kingston, the son of two high school science teachers. When he was 24, Smith took a job as a trader for a financial firm called Jamaica Money Market Brokers. While working there, he also earned a B.S. in business from Nova Southeastern University’s Jamaica campus. Two years later, in 2003, Smith was let go from the firm for what its marketing manager Kerry-Ann Stimpson describes as a breach of the firm’s “core values.” She declined to elaborate.

Smith set up a forex-trading company in 2005 called Olint, short for Overseas Locket International. Olint didn’t start out as a Ponzi scheme, he says. Smith just wasn’t very good at trading. “I lost a lot of money,” he says. “I could have declared losses and given back what was left, but I didn’t want to do that.” Instead, according to his plea agreement, he told clients that Olint accounts were earning returns averaging 10 percent a month. When the word spread, money from middle- and upper-class Jamaican investors poured in.

The losses, though, were piling up. “I stopped trading totally and started looking for education,” Smith says. Searching the Web, he discovered Martinez’s MTI. Smith flew to Orlando in April 2005 to take MTI’s four-day course, which promised to show students how to predict currency-trading patterns with “technical analysis”—reading and interpreting charts of, say, the dollar versus the euro’s past behavior.

When Martinez, who was born on the Blackfeet American Indian reservation in Montana, learned that Smith ran his own investment firm, he and Isaac approached Smith about forming a partnership, Martinez later told regulators. In February 2006, Smith invested $1 million to help fund I-Trade FX, the Martinez family’s new Florida-based forex brokerage.

Smith’s operation in Jamaica, run from a shopping mall storefront in downtown Kingston, was bustling. Olint was organized as an exclusive private club that accepted only new investors referred by members. Early investors received monthly e-mailed statements showing returns as high as 12 percent. To manage withdrawals, Smith says, he would decide returns to be paid each month. He would drag out payments during periods when requests for withdrawals increased. If plenty of new money was coming in, he would lower the return for that month. If withdrawals were rising, he would increase it in an effort to hold on to investors.

In March 2006, Smith’s scheme nearly unraveled. Following a tip by an investment banker, police and agents from Jamaica’s Financial Services Commission executed search warrants at Olint’s office, hauling off documents, cash, and computers, including a Bloomberg terminal. A cease-and-desist order banning Olint from opening new accounts soon followed from the FSC.

Smith invited nervous investors to pull out even though he knew he didn’t have enough to pay everyone. The gambit worked, quashing press reports that Olint was a Ponzi scheme. “The money flew back in,” quickly tripling Olint’s assets, Smith says. “If I’d gotten requests for another $1.1 million, I couldn’t have paid it,” he says.

Advertising in Jamaican newspapers, Martinez invited investors to learn the same forex-trading skills he taught Smith.

No criminal charges were filed against Smith in Jamaica. That might have to do with the money he was spreading around the island in campaign contributions for local politicians—many of whom were also investors. Smith gave away more than $8 million of client money, according to court documents, including $5 million to the Jamaica Labour Party and $2 million to its rival, the Jamaican People’s National Party, which now controls the government. While the JLP says only its candidates received contributions from Smith, the PNP acknowledges receiving direct contributions.

Peter Bunting, the investment banker who brought the case to the attention of the police and who now serves as Jamaica’s national security minister, says Olint investors represented a who’s who of Jamaica, including politicians, businessmen, and judges. “The enmeshment with the official system was very substantial,” Bunting said at his Kingston office in February.

Olint needed to find an alternative to the Jamaican bank accounts that had been used to receive investor deposits, according to Smith’s plea agreement. A week after the cease-and-desist order, Martinez and his son Isaac, who served as president of the brokerage, asked the NFA to license I-Trade FX. The regulator awarded I-Trade a brokerage license in August 2006, and Smith began transferring funds to the firm.

Martinez, meanwhile, began conducting forex-trading seminars in Jamaica, capitalizing on the island’s buzz around Smith and Olint. Dominic Azan, who became MTI’s Jamaica sales manager, still remembers the electricity he felt in the summer of 2006 listening to Martinez onstage, his audience in thrall, as he talked up the trading success of MTI graduates. Azan felt reassured about the $1 million he and his family had invested in Olint— nearly all of which was later lost. “Who didn’t want to be part of it? Here’s the guru, the FX Chief himself, the guy who taught David how to trade,” says Azan, who recalls admiring Martinez’s Breitling watch collection and gleaming Rolls-Royce.

Martinez made the most of his opening: “TURN $2,000 INTO $10,000 in Twenty Days. Learn How!” urged an MTI advertisement in a Jamaican newspaper in September 2006. Students lined up for classes paid for by Smith: Olint paid $1.9 million to MTI for investors’ seminars, according to a report prepared for the Turks and Caicos government by PricewaterhouseCoopers. The result was a faithful following who believed so deeply in Smith and Martinez that they were willing to entrust their life savings to the pair. Smith says there is no doubt Martinez was aware of his scam. “He knew the money wasn’t being traded, and yet I was paying people 10 percent a month,” says Smith. “He knew it was a lie.”

Martinez later testified before the NFA that he was aware of David’s regulatory problems in Jamaica and had had more than 500 conversations about them. Still, he said he found nothing suspicious about Smith before the Ponzi scheme collapsed in 2008. “We did a substantial amount of due diligence,” Martinez told the NFA, which began a probe of I-Trade FX in 2007. He said he never asked to see proof of Smith’s returns. “Some people, especially Jamaicans, they can be very offended by that,” he explained.

Regulators have suggested Martinez should have known better. “Advertised returns of the magnitude Smith claimed are often fraudulent,” the NFA wrote in an April 2009 ruling. “I-Trade should have questioned them.”

Smith fled Jamaica’s regulatory heat in the summer of 2006, relocating 400 miles (644 kilometers) northeast to Turks and Caicos, where he used investors’ money to buy his family’s waterfront home on Providenciales. He also set up two new investment clubs to raise cash, which he wired to I-Trade in Florida.

In March 2007, the Martinez family opened JIJ Investments, a hedge fund incorporated in Florida as “an alternative depository” outside the purview of the NFA, according to Smith’s plea agreement. “Unindicted co-conspirators are the listed directors of the firm,” according to the criminal complaint. JIJ Investments’ directors were Jared, Isaac, and Jacob.

The Martinez family wired $76 million from I-Trade to its JIJ accounts at JPMorgan, Bank of America, and Wachovia Bank, later purchased by Wells Fargo. Each wire transfer was described as money laundering in the criminal complaint against Smith. None of the banks was accused of any wrongdoing.

While Smith operated from Turks and Caicos, the families remained close, according to NFA testimony by Isaac, who often stayed at Smith’s island house. “His kids called me Uncle Isaac,” he said. “I would fly with him on his private jet.” Smith says he and Isaac enjoyed deep-sea fishing for yellowtail snapper. Isaac told the NFA that he never knew about Smith’s illegal activities.

The good times ended in July 2008 when the Turks and Caicos police executed a search warrant at Smith’s home and office in Providenciales. Olint and its victims were the talk of the island.

Dominic’s father, Khaleel Azan, says he and Martinez often dined together. He says he appealed to Martinez in late 2007, when he couldn’t withdraw the family’s $1 million from Olint. “Jared told me, ‘I promise, we have over $100 million from David. I’ll make sure you get your money.’” But the family’s investment was lost.

Chris Walker, an obstetrician in Orlando, says Martinez introduced Smith as 'the best student he's ever had.'

Jeffrey Salter

Chris Walker, an Orlando obstetrician, also lost more than $1 million investing with Olint, and his father, Kenneth Walker, lost $1.5 million—his life savings. Chris Walker met Smith at a forex-trading seminar conducted by Martinez in Jamaica. He recalls Martinez ushering Smith up onto a podium in front of hundreds of attendees, at a hotel in Ocho Rios. “Jared introduced David like the Messiah, as the best student he’s ever had,” says Walker. He says he poured more cash into Olint after the seminar. “Jared is a very effective salesman,” Walker says.

Walker later sued Smith, as well as Martinez and his sons, in Florida state court, alleging fraud, but says he gave up after running out of money. “It boggles my mind why the Martinez family did not get indicted,” he says. “Why aren’t the co-conspirators behind bars?”

Smith was arrested in February 2009. In April 2009, I-Trade was fined $250,000 by the NFA for failing to sufficiently investigate suspicious activity by several customers, including Smith. A month later, I-Trade shut down, though Martinez’s forex school is still in business. In 2010, Isaac, as president and compliance officer of the firm, wasfined an additional $50,000 for failure to supervise. Jacob, meanwhile, was bannedfrom the industry for three years in 2012 and ordered to pay a $150,000 fine should he seek to return to the industry.

Smith didn’t get off so easily. In 2010, he was convicted of Ponzi-related crimes in Turks and Caicos. In March 2011, he pleaded guilty in a federal court in Orlando, resulting in his 30-year prison term.

“I’m really shocked the Martinez family has escaped U.S. prosecution for a massive money-laundering exercise,” says Mark Knighton, the retired head of the Turks and Caicos financial crimes unit, who ran the island’s investigation of Olint. “We certainly had the evidence.”

On Jan. 23, in a surprise to the U.S. Department of Justice, Smith was released two years early from his Turks and Caicos prison cell. He spent that night with his wife, Tracy, and their four children, ages 5 to 13. It was the first time in four years the family had been together. “I am enjoying the moment right now,” he said in a telephone interview amid the excited screams of his kids. “I don’t know when they’re going to come and get me.”

Less than 24 hours later, Smith was taken back into custody at the request of the Justice Department. The U.S. will present its case for extradition at a hearing on Providenciales on June 5. It could be a long time before David Smith goes home again.

This story appears in the June 2015 issue of Bloomberg Markets.

http://www.bloomberg.com/news/articles/2015-05-11/currency-con-man-says-he-got-by-with-some-help-from-famous-friend

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