Comex, Failed Trading Firm Settle : Volume Investors’ Owners to Pay Customers $4.1 Million

The Commodity Exchange said Tuesday that it has reached an agreement with the owners of a commodity firm that failed last March to restore nearly $14 million in options and futures trading funds to as many as 100 of the firm’s customers.

The agreement includes the payment of $4.1 million, including $2.5 million in cash and a $1.6-million promissory note, by the owners, longtime Comex traders Charles E. Federbush and Owen J. Morrissey.

Although Comex President Alan J. Brody called the pact “the successful culmination of more than three months of intensive negotiations,” objections already are cropping up from customers who contend that its terms will not fully cover their claims.

A spokesman for the firm’s court-appointed receiver says objections from 13 people are on record.

Furthermore, an attorney for Morrissey and Federbush objected to a suggestion in a Comex statement Tuesday that the exchange decided against prosecuting them in part on condition that they make the $4.1-million payment.

“Had the agreement (with Comex) said word one about a quid pro quo, “ said the attorney, Fred Santo, “we would have taken the papers, ripped them into pieces and walked out the door.”

Back on Trading Floor

The Comex statement said the exchange decided against prosecuting the two men because of “the nature and extent of Federbush’s and Morrissey’s conduct and the absence of any evidence suggesting that they had engaged in any fraudulent activity, as well as their offer to contribute $4.1 million.”

Federbush and Morrissey appeared on the Comex gold trading floor Tuesday morning for the first time since their firm, Volume Investors Corp., failed. Until the settlement was reached, explained Santo, “they didn’t feel as if they would be welcomed by the other members because of the financial difficulties some of them have had as a result of Volume. They didn’t feel as if it would be etiquette.”

But Federbush, reached later, said the pair had not appeared on the floor before Tuesday because “we were spending all our time trying to get our customers their money.”

Volume was suspended from trading and placed in receivership last March 20 when three other customers--Gerald and Valerie Westheimer and James Paruch--missed a $26-million margin call on gold option positions that they held through the firm. The $26 million was the difference between the value of those positions and the amount that the customers had put up in cash. Their squeeze came because gold had shot up in price by $35 an ounce on March 18-19.

In the course of Volume’s failure, the accounts of about 100 other customers not involved with the missed margin call were liquidated and the proceeds frozen.

The Volume case became something of an embarrassment for Comex and the non-affiliated Comex Clearing Assn., which helps execute all Comex trades, because it demonstrated for the first time that Comex rules failed to protect customers from another customer’s default.

The case has already generated several lawsuits and an investigation by the Commodity Futures Trading Commission, which regulates futures and options exchanges. A CFTC report is expected soon.

According to the terms of the Comex agreement, the $4.1 million put up by Morrissey and Federbush will be added to $10.4 million already on hand in the firm’s accounts to cover the other customers’ claims. The $1.6-million promissory note will be held by Comex for five years without interest while the two men pay it back out of their own funds or the proceeds of litigation that they have against the Westheimers and Paruch.

Payment to the customers will be made sometime after Aug. 16, when U.S. District Judge Kevin T. Duffy, who is overseeing the case, rules on the Volume receiver’s motion to distribute the firm’s money.

Before that, Duffy also may have to rule on the objections of several customers who argue that the March liquidations of their accounts were made at “fire sale” prices, costing them millions of dollars.

Among them are gold traders Abraham Goldstein and Ronnie Apfel, who contend in a lawsuit that the liquidators turned their account balance of $1.3 million into a $1.7-million loss in two days while they were denied permission to take control of their accounts.