To halt alleged widespread fraudulent practices by firms selling London commodity options through "boiler-room" telephone operations across the nation, a federal regulatory agency plans to take aggressive enforcement action against such firms soon, according to government sources.
The Commodity Futures Trading Commission, which has been frustrated in its two-year-long effort to tame the high-flying comodity options sector is considering a new battle plan in the wake of negative publicity and some critisms about its alleged failure to stop these firms from doing business.
CFTC Commissioner John V. Rainbolt II has estimated that London options sales amount to at least $200 million or as much as $300 million annually, or about 2 per cent of the $2 trillion-plus-total volume of commodity market transactions in the U.S.
Details of the plans under considerations are expected to be disclosed shortly.
After annoucing the move, CFTC Chairman William T. Bagley said, "I know of no other way dramatize the problem publicly - to clean up options once and for all."
But, he continued, "this means we don't audit the Merill Lynches or the Huttons or the Shearson Hayden Stones anymore. We won't be able to handle the workload that Congress mandated for us and concentrate on options, too."
The problems such an "abdication" could cause, Bagley said, are myriad: whether any will arise as a result of this move is problematic.
Recent development in its two-year-long battle against one firm in particular, Lloyd Carr Co., also indicate that the agency is on the threshold of a major move against that company.The Boston based Lloyd Carr, one of the largest commodity options firms with offices in a dozen cities and a sales force between 600 and 1,000 hasbeen the target of half a dozen administrative and court action by the agency relating to its allegedly fraudelent sales pratices. The CFTC has refused to register the company or its salesmen to do business.
Court actions brought the commission against the company in three different federal jurisdictions met with little success until last month, when a federal court judge in Michigan granted a Preliminary injunction against the company and its partner. Chief Judge Noel Fox ordered the company to halt all fraudulent or deptive sales practices, to open its records to CFTC auditors and not to destroy any records or company materials.
The practices of Lloyd Carr salesmen have been the subject of dozens of newspaper articles and came under scrutiny in a recent segment of CBSTV's "60 Minutes."
CFTC officials said they were heartened by the reception given their arguments before a federal appeals court in Boston last week, in which they asked the court to order the firm to stop doing business since it is not registered as a commodities merchant.
"We expect to hear some good news there shortly - something we can enforce and put an end to this," a commission official said yesterday.
The official said a New York federal appeals court ruling last week that ordered the agency to give Lloyd Carr a new hearing on its registration application was not a stumbling block in its overall case against the company. "We'll give them a hearing, I guess. That's what the court ordered," a source said. "But that really has nothing to do with the substqntibe fraud cases we've got against them."
The source said the agency was looking at pursuing the Michigan case further. "They've destroyed records, both of which they are barred fhey've destroyed records> both of which they are barred from doing under Judge Fox's order," he said, declining to discuss what further action they would take as a result.
The Office of Management and Budget recently for approved the agency's request for a supplemental budget of more than $1 million to pay for the administrative and manpower costs of its proposed program to permit options trading on U.S. exchanges, he said. Commission officials are scheduled to defend the request to Congress Feb. 22, he said.
The proposed domestic options program would be easier to regualte than the present systems, the CFTC has said, because the exchanges as well as the agency would register, monitor and discipline the traders involved. One of the difficulties with the present commodity options traded in London is that the CFTC has no jurisdiction over the clearinghouse operations or actual execution of the orders in London.
To provide some customer protection on London options contracts, the CFTC imposed a controversial segregation of funds rule, which requires options firms to place in a U.S. escrow account 90 per cent of the margin money required in London. The rule, which was an effort to put small, undercapitalized companies out of business since they would have to put their own assets in the escrow accounts, resulted in a lengthy court battle between the CFTC and options dealers. This fall, the Supreme Court upheld the validity of the segregation rule.
A recent internal CFTC memo on options regualtion noted that the commission's small staff - 455 total nation-wide and less than 50 on the enforcement staff - has virtually been over-whelmed by the dimensions of the problem.
The memo noted that the four CFTC staffers handling reparation cases have been deluged with more than 800 consumer complaints, 75 per cent of which concern options sales; a strike force has been assigned to the Miami/ft. Lauderdale, Fla., area to halt a proliferating options sales operation there; 14 options sales companies have been put out of business due to CFTC actions; injunctions have been granted against 60 firms and individuals for options sales violations; 40 active options investigations are continuing; 30 to 40 new companies and 8,000 to 9,000 salesmen in this sector have been registered by the commission, but hundreds of other are doing business in violation of the agency's registration requirement.
The memo said its consumer hotline for options questions has handled nearly 15,000 calls in its first year.
The commission stresses in its materials on commodity options that it is not attempting to wipe out an entire market, but rather to alert consumers.
"Fast-talking pitchmen with little experience in the options business read mimeographed statements (over the telephone) and use high-pressure techniques. They convince customers not knowledgeable in the art of commodity options trading to buy on impulse - luring them with promises of big profits that are sometimes even said to be 'guaranteed'."
As Rainbolt has explained, "we're not saying 'don't buy commodity options,' and we're not trying to put reputable option dealers out of business. There are knowledgeable people who have made some attractive profits. But we have learned through our enforcement efforts that there are some unsavory elements operating in heretofore unregulated business and a lot of customers have lost millions of dollars as a result of fraud and unethical sales techniques."