The score was 10 to 2 against the regulators yesterday, but at the close of the public hearing on the Commodity Futures Trading Commission's proposed suspension of commodity options sales, the regulators were winning.
Although testimony from brokerage, trade house and exchange officials overwhelmingly opposed the suspension, Congress clearly favors arguments advanced by the CFTC's enforcement chief and a New York State assistant attorney general for the halt.
"It's inevitable," one brokerage official said privately. "What we're all here for is to make sure the suspension is as narrow and as brief as possible."
The CFTC wants to suspend sales of all commodity options, both foreign and domestic, except those "for commercial purposes." The proposal was made in the wake of the growing scandal involving boiler-room telephone sales of options traded on the London Metals and Commodity exchanges. The most recent allegation involved Boston-based Lloyd, Carr & Co. and its president, Alan Abrahams, alias James Carr.
The proposal would permit the CFTC to implement its pilot program of domestic options trading on U.S. commodity exchanges, however.
At congressional hearings into the CFTC's reauthorization last week, reports by the General Accounting Office and a House Appropriations Committee were discussed. Both recommend that the domestic program be put aside until the agency can prove to Congress that it can monitor such trading adequately.
While "the LME is sympathetic to the current dilemma of the commission . . . it is an understatement to say that the LME is disappointed" by the suspension proposal, testified David Todd of the London firm of Patton, Boggs and Blow.
Todd stressed that the alleged fraudulent sales had nothing to do with the London exchange or its members. He argued on behalf of the earliest possible implementation of options regulations proposed last October to permit U.S. sales of London options in a manner guaranteeing the orders' execution in London. He said that proposal would help "eliminate the selling of options at 'pirate prices.'"
Jack Fields, CFTC enforcement director, reviewed the agency's investigations into allegedly fraudulent options sales. He said his staff is investigating 24 of 36 U.S. firms still selling London options and anticipates enforcement actions to result from most of the problems. He said that all of 400 purcrasers of such options recently examined by the CFTC lost money.
Fields strongly urged the five commissioners to approve the suspension.
Orestes Mihaly, New York assistant attorney general, testified that state officials favored "banning the trading of commodity options two years ago, and are even more in favor of such definitive action at this time."
". . . the commodity options field has been rife with fraud, and millions and millions of dollars have been lost by the American public . . . we do not see any economic benefit in the trading . . . that can justify or outweight the effect of the loss(es)."
In addition to the testimony on behalf of firms selling London options, officials of companies involved in other, noncontroversial options transactions also voiced their complaints about having their businesses wiped out by the proposal.
Dr. Henry Jarecki, chairman of Mocatta Metals Corp. of New York, said his firm handled more than $50 million of dealer options sales annually, or about 20 to 25 percent of the entire options market.
Jarecki said his company's stringent customer protection and "self-policing audit program" has assured "that our product is sold fairly so that there will continue to be a market for that product. Probably the best evidence of the effectiveness of our program is the lack of reparations cases and enforcement actions" (against Mocatta).
Jarecki termed the suspension "overregulation . . . particularly when there are ways to distinguish the good guys from the bad."
James Draper, who brokers Mocatta options for Bache Halsey Stuart in New York, testified that all but one of his scores of options clients are making considerable profits from their options holdings, refuting some assertions that the market is one which tends inevitably to speculative losses.