Israel gave taxpayers’ money to key binary options firm to expand into China

While Israel’s top financial regulator was working on legislation to outlaw all Israeli binary options firms and the Prime Minister’s Office was urging a worldwide ban on the fraud-blighted industry, the Israeli government was giving taxpayers’ money to a company at the heart of binary options trading in order to help it expand abroad, The Times of Israel has established.

Government grants totaling some $270,000 were handed out to the Ramat Gan-based firm SpotOption between 2014 and 2016, with the payments continuing even after Israeli regulators banned binary options firms from targeting Israeli customers in March 2016. Regulators were at the same time working to shut down the entire industry because of vast fraud allegedly being perpetrated internationally by many of the 100-plus Israel-based binary options firms. Thousands of Israelis have been working in the fraudulent firms for much of the past decade, duping vast numbers of victims all over the world out of billions of dollars.

The Economy Ministry awarded the handouts to help SpotOption expand its operations to China, even though the ministry had been warned in advance that the binary options industry was blighted by fraud. Furthermore, the ministry failed for two years to publicize the grant, in breach of its legal obligations, until questioned about it by The Times of Israel. It then said its failure to publicize the grant was an oversight.

Signing into law the proposal prepared over the past year by the Israel Securities Authority, the Knesset last Monday unanimously voted to ban the entire Israel binary options industry.

The law, which will go into effect in late January, came about as a direct result of The Times of Israel’s investigative reporting on the fraud, which began with a March 2016 article entitled “The wolves of Tel Aviv: Israel’s vast, amoral binary options scam exposed.” The law gives all binary options firms the intervening three months to cease operations. After that, anyone involved in binary options is liable to be punished with up to two years in jail.

The government continued making grant payments to SpotOption even as the scale of binary options fraud was documented. Following specific questions from The Times of Israel into the Economy Ministry grant, however, SpotOption itself requested earlier this year that its government funding be stopped. The ministry had originally approved a grant of some $450,000 (according to an October 27, 2017, exchange rate of NIS 3.54 to $1). which was being doled out in installments scheduled through the end of 2017. By the time SpotOption asked the government to stop the grant payments, $270,000 of taxpayer funds had been given to SpotOption; the remaining approximately $180,000 has not been paid.

SpotOption supplies the trading platforms used by the majority of Israeli binary options firms, and is said to take a substantial commission from many of them. SpotOption, which described itself as the world’s “leading binary options platform provider,” told The Times of Israel last year when first queried about the grant that it had nothing to hide about its operations, that the Economy Ministry knew everything it needed to know about its work before awarding the grant, and that there was “another side to the coin” in the industry, with “brokers that work according to the law.”

During this summer’s Knesset committee sessions where the legislation to ban binary options was debated, SpotOption representatives stated that its platform is entirely kosher, said that the fraud is solely the responsibility of the client firms that use its platform, argued in vain that it should be exempt from any ban, and claimed that the legislation would constitute an unjust blow to Israel’s technology industry.

An FBI affidavit, issued ahead of the arrest last month of an Israeli binary options company’s CEO named Lee Elbaz, alleges by contrast, however, that SpotOption “worked together” with its client firms “to increase the likelihood that particular customers would lose money on trades” and to “insure that clients who were having a high success rate of winning trades would lose future trades.” SpotOption, the affidavit further alleges, engaged in “the adjustment of customer risk settings” and “the manipulation of the option returns.”

Despite its lobbying efforts, SpotOption’s binary options activities, as well as those of other binary options platform providers, are covered by the ban.

As reported by the UK’s Bureau of Investigative Journalism in September 2016 and in an in-depth profile of the company in the Israeli financial newspaper The Marker (Hebrew) last week, SpotOption was founded by Malhaz Pinhas Patarkazishvili, also known as “Pini Peter,” after he had been convicted of fraud, forgery and money laundering in Israel’s largest-ever bank theft, the Etti Alon Trade Bank affair. (Alon embezzled more than NIS 250 million — $70 million — and served 14 years in jail.)

Patarkazishvili was sentenced to a year in jail for the offenses, unsuccessfully appealed to the Supreme Court, but ultimately had his prison term commuted to six months’ community service by president Shimon Peres. Sentencing Patarkazishvili in 2005, the Tel Aviv District Court judge read out an impassioned warning against the dangers posed by the “national plague” of organized crime “that is spreading like a cancer” and “endangers our society.”

Establishing a market presence abroad

SpotOption won the Economy Ministry grant in 2014 from the ministry’s India-China fund, which provides financial aid to Israeli companies seeking to expand their operations to Asia. After a lengthy application process, the company was awarded NIS 1.605 million (about $450,000) over three years to set up an office in Hong Kong.

Documents seen by The Times of Israel show that ministry officials were warned that at least part of the binary options industry was fraudulent, and that there was a consequent risk of public and government backlash against the entire industry, but approved the grant anyway. The documents also show that the ministry was aware that due to lax regulation, SpotOption was unlikely to face any immediate difficulty establishing a business presence in China.

Established in 2011, the India-China Fund was designed to encourage Israeli businesses to expand their operations eastwards by offering financial aid to help them open offices in either country. Renamed the India-China-Japan fund in 2015 when it expanded to include companies working in Japan, the multi-million-dollar fund awarded grants to 33 companies seeking to expand to China, before being discontinued this year.

Of the 32 other companies that received the government handouts to set up offices in China, nine are electronics and robotics R&D firms, eight are in the field of bio/agrotech, and six are online startup developers. One other company is in the forex trading market while the rest are manufacturers of a range of different products from cosmetics to diamonds.Chani Alkobi, who administered the grant in 2014, told The Times of Israel that the aim of the fund was “to enlarge [Israel’s] market presence” in Asia and “increase [its] breadth of production.”

According to the terms of the grant, companies could be awarded up to NIS 2.1 million over three years depending on their needs, as decided upon by the Economy Ministry. In 2014, the ministry had a total budget of NIS 14.5 million (some $4 million) to be distributed as part of the fund.

Despite its legal requirement to publicize recipients of grants such as the one paid out to SpotOption, the Economy Ministry for two years did not include SpotOption on its public list of grant recipients (Hebrew). SpotOption, along with several other companies that received government funds, was added to the list only after The Times of Israel questioned the ministry about the grant. The ministry then said the omission was an oversight.

Even after the ministry belatedly acknowledged that SpotOption was receiving the grant, fund administrator Alkobi refused to disclose the amount of money the company was being given, claiming the ministry was prohibited from giving out financial details of recipient companies. With the assistance of the Movement for the Freedom of Information, however, The Times of Israel ascertained that the NIS 1.605 million sum was in fact publicly available information already published as part of a Finance Ministry database detailing all government grants.

The Economy Ministry later said in a statement to The Times of Israel that it awarded the grant to SpotOption because the company “met the requirements of the program, as defined by the guidelines of the ministry’s director general at the time, including those regarding corporate responsibility.”

With the help of the Economy Ministry grant, SpotOption opened an office in Hong Kong in August 2014. “Local representation is imperative for providing clients with the best service possible,” SpotOption’s then-CEO Ran Amiran said in a press release at the time. “Accessibility and availability are main factors when considering service, so our office in HK will ensure that we meet and surpass the criteria.”

Contacted by The Times of Israel last year, SpotOption declined to answer specific questions about the grant, but invited The Times of Israel to visit the company, and see and discuss all aspects of its operations. In a telephone exchange, Patarkazishvili said there was “another side to the coin” in the industry, and that “there are brokers who work according to the law.” He said that The Times of Israel, in its months of reporting on binary options fraud, had “made the industry look as if everyone is selling stories and lies.” He noted that there were major firms offering binary options in Europe and the United States.

Asked if Economy Ministry officials inquired into Patarkazishvili’s conviction in the Etti Alon case during the application process for the grant, the SpotOption founder said his criminal past had nothing to do with company and was irrelevant to the grant. He noted that the grant was given in accordance with ministry guidelines and there was no reason that SpotOption, as a binary options platform provider, should be barred from receiving the funding.

Nonetheless, after The Times of Israel had begun asking questions about the grant, SpotOption requested in January 2017 that the payments be stopped, the Economy Ministry acknowledged this week. That request was accepted by the ministry in February, with the company having received NIS 957,784 of the originally approved NIS 1.605 million.

Economy Minister Eli Cohen refused to comment this week on the fact that his ministry, before he became minister in January, was directly funding a company at the heart of Israel’s binary options industry even as the Israel Securities Authority worked to close the industry down.

Naftali Bennett, who served as economy minister at the time the grant was approved, said he had no knowledge of the grant and no direct involvement in its approval. “During Minister Bennett’s time as minister of economy the office awarded many grants, and invested time and resources, in order to help numerous Israeli companies, both locally and abroad. It goes without saying the minister was not actively involved in each decision,” a spokesperson for Bennett told The Times of Israel on Wednesday.

The office of Prime Minister Benjamin Netanyahu, who served as de facto economy minister from November 2015 to August 2016, declined to comment on the grant or on whether he thought it appropriate for the binary options industry to receive taxpayer money. In October 2016, in response to The Times of Israel’s reporting, Netanyahu called for the entire binary options industry to be banned worldwide.

The beating heart of the binary options industry

After his involvement in the Etti Alon affair in 2002, Patarkazishvili’s career appeared to take off. Media accounts reveal that by 2007 Patarkazishvili was the CEO of a high-tech company, EIM Telecom, that had won a lucrative contract to develop a telecommunications network in Kazakhstan. That September, Patarkazishvili was quoted telling Israel’s Globes business daily that the deal, which he had personally signed with Kazakhstan’s communications minister, was expected to bring in $10 million a year. “This is the first time that an Israeli company is responsible for the overall development of an internal and external communications network of a country in Central Asia,” he said.

Up until mid-2017, Israel’s corporate registry showed Patarkazishvili registered as SpotOption’s director, but six months ago he transferred all of his shares in the company, some 90 percent of the total stock, to his wife Limor Patarkazishvili, making her the current main shareholder. According to the registry, Limor Patarkazishvili is now one of four directors managing the company.

Until recently, by SpotOption’s own account, it provided the trading platforms used by about 250 binary options firms worldwide — a 70 percent market share, it said. The company also stated last year that the mobile trading app it customizes to sell to individual binary options firms, or brokerages, has had 5 million downloads. But with the entire industry under pressure from authorities both in Israel and abroad, SpotOption has had to downsize and now only provides platforms to about 60 companies, The Marker report claimed.

Any entrepreneur who wanted to open a binary options company, or brokerage, as they are known in the industry, would approach a platform provider such as SpotOption or its competitors. SpotOption would often take a commission on the broker’s earnings, sometimes 12.5 percent. SpotOption offered accounting, payment processing services, affiliate tracking and even profit and loss statements to the broker. When a customer trades on any binary options site that uses its platforms, SpotOption is able to monitor the activity. SpotOption also performs a function for companies that it calls “risk management,” which it has described on one of its websites as involving the monitoring of all open options for all brokers 24/7, and engaging in “asset pricing” in such a way as to help “eliminate risk.”

At its height, binary options was estimated to bring in $5 billion-$10 billion a year. Hundreds of firms have operated from Israel, employing thousands of Israelis, defrauding customers all over the world.

Fraudulent Israeli binary options companies ostensibly offer customers worldwide a potentially profitable short-term investment. But in reality — through rigged trading platforms, refusal to pay out, and other ruses — these companies fleece the vast majority of customers of most or all of their money. The fraudulent salespeople routinely conceal where they are located, misrepresent what they are selling, and use false identities.

Several brokerages using SpotOption’s trading platforms were convicted of fraud and/or accused of illegal activity by regulators around the world, even as the Israeli government continued making grant payments to SpotOption to expand its operations. In July 2016, for instance, a US Federal Court ordered two Israel-based binary options brokers that used the SpotOption platform, Vault Options Ltd. and Global Trader 365, to pay more than $4.5 million for illegally soliciting and defrauding US customers. The two firms were charged a $3 million civil monetary penalty as well as $1.6 million in restitution to their defrauded customers. The court found that not only did these two companies solicit US customers without a license, but that they also deliberately defrauded customers out of at least $1.6 million in 22 states.

France applied similar fines to Banc de Binary, which also used SpotOption’s platform.

Cherrytrade, Onetwotrade, Optionrally, RBoptions, Lbinary, Bigoption, Finpari, Magnum Options and IvoryOption are among brokers using SpotOption platforms that have been the subject of investor warnings from regulators in Canada, Australia, Hong Kong and elsewhere.

In May 2016, SpotOption itself was fined €10,000 ($11,600) by the Cypriot financial authority Cysec for not “employing appropriate and proportionate systems, resources and procedures” in its trading platforms and for failing “to act fairly, honestly and professionally, in accordance with the best interests of its clients,” according to a statement released by the regulator. Responding to the decision, a SpotOption spokesperson told the LeapRate forex news site that the fine “refers to a temporary malfunction of the pricing engine of a newly introduced product in May 2014. The company took all necessary actions to rectify the price engine malfunction and to prevent such events recurring in the future.”

Last month, SpotOption was accused by the FBI of conspiring to commit fraud when the US law enforcement authority arrested Lee Elbaz, 36, the CEO of Yukom Communications Ltd, when she disembarked from an airplane at JFK airport.

The publicly available affidavit explaining the cause for her arrest accused Elbaz and other Yukom employees of making false statements about the safety of binary options investments; of falsely promising high returns; of telling investors they would be able to withdraw money when this was not the case; of lying about the location and qualifications of “brokers” assisting victims; of failing to disclose that binary options brands and brokers only make money when investors lose money; and of failing to disclose that her company and/or SpotOption were manipulating the outcomes of trades.

“Individuals who have worked in the binary options industry — including a former SpotOption employee — reported that SpotOption is physically based in Israel,” the affidavit states, “even though the ‘Contact Us’ portion of its website shows contact information for locations in the United Kingdom, Hong Kong and Cyprus, with no mention of Israel.”The FBI said in its affidavit that it had requested accounting documents for Binarybook.com (one of Yukom’s brand names) from SpotOption. “The trading of binary options is facilitated by ‘platform providers’ including a company called ‘SpotOption,’” reads the September 14 affidavit, “which has referred to itself on its website as ‘today’s leading technology platform provider.’”

The FBI went on to allege that SpotOption adjusted “customer risk settings” to manipulate the outcome of trades. The FBI was able to subpoena emails from Google and saw correspondence between Lee Elbaz and SpotOption in which they allegedly conspired to rig investors’ trades, the affidavit states.

Loophole in the law

SpotOption was a central presence at the August 2017 Reforms Committee meetings that deliberated the bill to ban the binary options industry. Representatives of SpotOption urged legislators to exempt their company from the ban.

The representatives from SpotOption argued that the firm merely provides technology to binary options websites and that the bill should be changed so that its activity is not banned. Representatives of the Justice Ministry and the police said that platform providers, without naming SpotOption, do in fact play a direct role in the operation of the binary options websites, receive a percentage of transactions, and should be covered by the ban.

Coalition chairman David Bitan (Likud) unsuccessfully tried to revisit the finalized version of the bill at an August 7 Knesset committee meeting. A source who asked to remain anonymous told The Times of Israel that day that Bitan himself stated that a family prominently involved in SpotOption leads the Georgian faction of the Likud Central Committee and that he needs its support to maintain his position in the Likud party.

“I have had it up to here with the law against money laundering,” Bitan told fellow lawmakers at the Reforms Committee meeting after failing to exempt SpotOption. “You can’t even do anything in this country anymore.”

In a bombshell speech at the August 2 meeting of the committee, Israel Police Superintendent Gabi Biton said Israeli crime kingpins were behind the binary options industry and that organized crime in the country has been massively enriched and strengthened as a result of law enforcement’s failure for many years to grasp the vastness of the problem.

Biton vowed: “We will use all the tools at our disposal to uproot this phenomenon.”

With binary options outlawed by the Knesset, SpotOption’s website now advertises its “autonomous trading technology” and declares that “the future of online trading is here.” SpotOption now describes itself as a “leading derivative trading technology provider,” and offers platforms for “simplified forex,” CFDs and something called “Japanese Ladder.”

The original draft of the bill to ban binary options would also have required all Israeli online trading companies to obtain licenses in the countries where they operate. But this draft was watered down in behind-the-scene consultations, including with representatives of some of the very industries the legislation was designed to ban, thus creating a loophole through which binary options firms, by retooling their financial products, may continue to prosper.

However, the final text of the law passed last week does allow the finance minister to add additional financial products to the ban, in consultation with the Israel Securities Authority and subject to the approval of the Knesset Finance Committee.

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