Foreign commodity options trading in the United States was prohibited yesterday, as federal courts turned aside appeals from commodity options firms to prevent the ban from taking effect.
An order to halt the risky investments was issued by the Commodity Futures Trading Commission and the regulatory agency said the ban will continue "until such time as the commission determines that adequate protection to option customers can be assured."
High pressure tactics by salesmen and allegedly deceptive claims for a investment gains brought about numerous complaints earlier this year, including charges that a Boston firm, Lloyd Carr & Co., swindled investors of million of dollars.
Trading of commodity options has been banned on U.S. exchanges since 1937 but, until yesterday, U.S. citizens had been permitted to buy options traded on foreign exchanges.
U.S. District Court Judge Barrington Parker denied an appeal here by three firms for a temporary restraining order, seeking to block the ban. The firms, which plan to pursue a lawsuit to overturn the CFTC decision, are Chartered Systems Corp., New York; Precious Metals Associates, Boston and First Commodity Corp., Boston.
In Chicago, meanwhile, the Seventh Circuit U.S. Court of Appeals denied a similar request by Rosenthal and Co., in a split decision.
Circuit Judge Wilbur Pell. in a dissent from the 2-1 decision upholding a lower court's denial of an injunction, warned that the majority's action "will obviously have the effect of destroying a substantial business operation . . . the discontinuance of the business . . . will have severe deterimental effects on a large number of members of the public who have made substantial investments in commodity options [now] without supervision."
Commodity futures contracts obligate traders to buy or sell a fixed quantity of a commodity at a specific date at a fixed price. A commodity option is the right, but not obligation, to buy or sell a commodity futures contract or the actual commodity at a specific price within a specified period of time.
According to Wayne D. Greenstone, secretary of an Americn Bar Association committee on commodities regulation, thousands of unsophisticated investors have been contacted throught telephone canvass calls from "boiler rooms," manned by dozens of sales persons. Millions of dollars have been lost by purchases of options at inflated prices, he said.
During the past two years, the three-year old CFTC has closed down more than a dozen of these options sales operations and is investigating several dozen more.But the agency has not been able to police the marketplace, partially because of inadequate manpower. The ban has been established until the legitimate traders develop a self-regulatory mechanism to protect the public.
In the meantime, the agency is studying proposals for a pilot program of options trading on U.S. exchanges, if protective guidelines can be developed.
According to Greenstone, plans are afoot for commodities options trading of gold, cocoa, sugar, silver, copper and platinum on established U.S. exchanges, possibly by year's end.