A Wall Street commodities broker pleaded guilty today to bilking investors out of about $6 million through three fraudulent commodity investment ventures, including the relatively new technique of selling gold for delivery sometime in the future.
The government also accused Steven M. Arabatzis of running fraudulent schemes to sell London Commodities options, which have since been outlawed by the Commodities Futures Trading Commission, and of operating commodity pools in which individuals jointly invest in commodity futures.
Robert B. Fiske Jr., U.S. attorney for the Southern District of New York, said it was the first time the government has prosecuted for fraud in the sale of deferred gold contracts and the sale and operations of commodity pools.
Arabatzis pleaded guilty to four counts of mail fraud -- each of which carries a maximum penalty of five years in jail and a $1,000 fine -- and will be sentenced March 30.
The government said that Arabatzis sold gold contracts from February 1978 until October 1978 that gave investors the right to purchase gold at a particular price at the end of six months, promising investors the contracts would yield substantial profits.
In fact, of the $942,000 that 140 investors paid for the gold contracts, only $1,887 was paid back, the government said.
Arabatzis' firm, Astor & Montcalm Inc., charged customers a fee ranging from $2,550 to $5,000 -- which was called a down payment but did not reduce the customer's obligation to pay for the gold -- and added additional carrying charges of one to 2 percent for storage and interest.
The government said the price of gold would have to have risen between $30 and $70 an ounce, depending on the initial fee, for a customer just to break even.
The U.S. Attorney's Office said that when "unexpectedly, gold did rise about $35 per ounce during the period from March through August 1978, customers who had purchased contracts in March were owed some money.
"To avoid paying the customers that money when the contracts expired in August, Arabatzis ordered the customer agreement that had been signed in March be altered to increase the additional carrying charges from one percent to 2 percent per month. Arabatzis then calculated that those customers were owed little or no monies." Only eight customers ever got a penny back from Arabatzis.
All three commodities schemes were aimed at investors in states other than New York, and most business was conducted by long-distance telephone.
The government said Arabatzis also sold participations in commodity pools through a firm called Fairchild, Arabatzis and Smith Inc. at the same time he was selling gold contracts. Each pool was to consist of $50,000 from no more than 30 individuals for joint investment in commodity futures contracts.
About 178 persons invested $647,000 in 13 such pools. The pools lasted for four months, and Arabatzis charged $322,000 in commissions -- charging $100 to $300 a trade even though the trades actually were made by other brokerage firms. The rest of the investment was "dissipated by trading losses," the government said, and $84,000 never was invested at all but used to pay the company's expenses.
Only 32 investors got any money back and, of the $647,000 invested, only $10,000 was paid back.
From April 1977 until March 1978, Fairchild, Arabatzis and Smith sold $4.4 million in so-called London commodity options.
But the government said the commissions charged on the options -- which give investors the right to buy or sell a certain commodity at a specified price at some date in the future -- were so high that it was "improbable that the customer would break even on his investment." Sometimes the commissions were as high as 100 percent.
"To prevent investors from discovering that they were paying excessive commissions, confirmations of purchase deceptively designated the commission as a 'foreign service fee,'" the government said.
More than 900 persons from 45 states bought London commodities options. They got $222,000 back out of the $4.4 million they paid in.
The government said that the firms used a Wall Street address to create an impression of "respectability" with out-of-state residents, although in fact the two firms were merely "high pressure telephone sales operations."
The salesman often used phony names, and some had prior criminal records, the U.S. Attorney's Office said.