Three top officials of one of the largest firms dealing in London commodity options in the United States were arrested in Boston yesterday on federal contempt-of-court charge.
Two more officials of the firm, Lloyd Carr & Co, were being sought in San Francisco and Chicago on the same charges. The arrests were the first such enforcement actions in a continuing investigation by the Commodity Futures Trading Commission in conjunction with local law enforcement officials and U.S. marshals around the country.
The five named in yesterday's action were ordered arrested by a federal judge in Michigan for allegedly disobeying his order to halt false and deceptive practices in selling commodity options.
A commodity option is a contract giving the buyer the right to purchase a commodity futures contract or the physical commodity at a future date for a price agreed on at the time of the option sale.
No options in commodities are traded in the United States but futures contracts are.
Yesterday's action was the first of two major moves the agency had been planning in this sector. The CFTC plans to launch an unprecedented campaign against other firms allegedly involved in the fraudulent sale of London options later this week.
Such sales are the basis of nationwide high-pressure, boiler-room operations which have come under the scrutiny of federal, state and local officials, as well as the news media. Scores of newspaper and magazine articles on the options technique have made headlines in the past two years. A recent segment of CBS-TV's "60 Minutes" featured this market and Lloyd Carr in particular.
Commission sources said the agency has decided to deploy nearly its entire enforcement and investigative staffs throughout the nation, plus attorneys from the Office of General Counsel and from the commissioners' personal staffs in a three- to six-month operation designed to "clean up" the London options market.
The concentration of manpower will leave the nation's 10 commodity futures exchanges, which handled an estimated $1 trillion-plus annual volume, unregulated, commission sources conceded.
"It means the Merrill Lynches and the Shearson Hayden Stones and Huttons will go unaudited and the exchanges will be functioning on their own," a source said. Describing the move as an unavoidable "abdication" of its congressionally mandated role to oversee the futures markets, the source said whether any enforcement problems will arise as a result is problematic.
Lloyd Carr and its five partners named in court papers yesterday --Barry Brown, Michael D. Shuster and Ralph R. Zolla -- have been the target of half a dozen administrative and court actions by the CFTC over the past two years. Lloyd Carr has offices in a dozen major U.S. cities and a sales force of between 600 and 1,000 persons.
The commission rejected the company's registration application in August. The company's unregistered operation and allegedly deceptive sales practices violate federal laws, according to the CFTC's director of enforcement, Jack Field. Field announced the arrests at a press conference yesterday here.
Arrested at his Marblehead, Mass., home yesterday by federal marshals was Carr, 45, the company president. One of his assistants, Ralph Zolla, 56, of Boxford, Mass., was arrested at the firm's downtown Boston headquarters. Another top aide, Brien, 28, of Sudbury, Mass., turned himself in to federal authorities. Still being sought are Michael Shuster, the San Francisco office manager and Barry Brown, assistant manager of the Chicago office.
Bail for Carr was set at $100,000. Bond was set at $20,000 for Brien and $10,000 for Zolla. The three were held in custody, with extradition hearings on their removal to Michigan set for Jan. 18. Each was ordered to surrender his passport and not leave the United States.
Chief Judge Noel Fox of the U.S. District Court for the Western District of Michigan ordered the arrests after the Michigan U.S. Attorney's Office provided him with affidavits from Massachusetts residents concerning the company's sales practices in that state.
The five named in yesterday's warrants have been ordered to appear in federal court in Michigan April 1 on the contempt citations.