Ever since he was in high school, Harlan J. Strauss, a middle-level government employe who lives in Southeast Washington, had watched the commodity markets, following the peaks and valleys of grain futures.
Two years ago, as the boom in commodity investments was beginning, Strauss decided it was time to get in.
His plan was to play what are known as "spreads" in commodity futures, buying and selling offsetting contracts for the same commodity in different time periods. Spreads are considered a conservative commodity investing strategy because the offsetting contracts protect the investor against major losses although they also limit the profit potential.
Strauss invested $12,000 by opening a discretionary account with ContiCommodity Services Inc., one of the biggest futures firms in the nation, and gave his broker full authority to decide what futures contracts to buy and sell.
In the 14 months that followed, Strauss' broker moved him in and out of 17 different commodities, buying and selling futures in wheat, corn, soybeans, soymeal, soybean oil, gold, silver, copper, live cattle, hogs, pork bellies, sugar, frozen orange juice, eggs, West German marks, cottom and plywood.
By the time his introduction to commodity investing was over, Strauss had only $325 6eft of his $12,000.
Strauss contends in a lawsuit filed in U.S. District Court in the District of Columbia that the remainder of the money was paid to Conti in commissions or lost because of trading that violated the investment strategy he wanted to follow.
Strauss' lawyer, Loren Hershey, a former staff attorney for the Commodity Futures Trading Commission, is asking the courts to declare the suit a class action against ContiCommodity on behalf of any Washington customers who lost money in similiar circumstances.
Admitting that Strauss "was not informed about trading in commodities in general or in any and all of the commodities subsequently traded in his account," the lawsuit raises what is becoming a major issue in the rapidly growing commodity markets: Are commodity futures a suitable investment for amateurs?
Stock brokers are required by the Securities and Exchange Commission's "suitability requirement" to assure that investments they recommend or make for clients are appropriate to the investor's financial position, investment needs and stated objectives. But there is no suitability requirement for commodity futures dealers.
When the Commodity Futures Trading Commission was pulled out of the Department of Agriculture three years ago and made into a separate agency to oversee the growing business, regulators considered following the SEC example. But the CFTC decided against it, arguing that commodity salesmen could not be held responsible for evaluating the suitability of every trade made by every commodity investor.
With no suitability requirement to fall back on, lawyers for Strauss hope to establish the legal principle that commodity dealers are responsible for keeping their clients out of inappropriately risky situations on other grounds. Their petition argues that Strauss' brokers breached their fiduciary duties by negligent and reckless trades, "fraudulently induced and persuaded" Strauss to try highly speculative trades and failed to supervise his account properly.
Conti officials declined to comment on the case while it is still pending in court, except to say the company would defend itself vigorously against the lawsuit.
Strauss invested his $12,000 in what is called a "managed futures account" designed for investors who lack the time or expertise to make daily decisions about buying and selling futures contracts and want the brokers to do it for them.
Managed futures accounts in which the broker makes the decisions are spurned by Merrill Lynch, Pierce, Fenner & Smith -- which is the nation's biggest stock broker, but not such a big commodity house -- and are not widely used in the futures industry.
ContiCommodity's version, like those of many other firms, uses computer programs to measure the movements of the market and suggest trading choices.
The potential for lawsuits from clients who blame their broker for trading losses has led many commodity houses -- including Conti -- to restrict the use of managed accounts. As an alternative, ContiCommodities and others in the business offer pooled commodity accounts in which investors put their money into a pot to be managed by a designated specialist. Sold through a prospectus, pooled accounts give investors the track record of the trader running the account just as a stock perspectus shows the past earnings history of a firm.
The lawsuit against Conti also raises questions about another complex commodity issue because it accuses Tiger, the broker managing Strauss' money, of "churning" the accounts, that is, of making tades for the sake of the commissions they generate for the broker rather than for the good of the customer.
Strauss says that $1,800 of his $12,000 investment went for commissions. Like many firms in the business, Conti sets guidelines for the portion of an account that is spent on commissions, but experienced commodity traders say an inexperienced investor who decides to trade fequently could run up larger commission charges.