U.S. Seeking Sanctions Against Comex in Case of Failed Trading Firm
In one of the most far-reaching administrative actions ever taken against a futures exchange, federal regulators Tuesday charged the Commodity Exchange, two of its leading members and three gold traders with a raft of legal violations stemming from the failure of a futures trading firm last March.
The administrative complaint marks the second time in eight months that the Commodity Futures Trading Commission has sought sanctions against the Comex, a New York exchange where futures and options in precious metals and other commodities are traded. In November, the CFTC fined the Comex $70,000--the highest such penalty ever levied against an exchange--for failing to properly supervise a floor broker. Regulatory sources said such a frequency of complaints against a futures exchange is extraordinary.
Tuesday’s charges spring from the failure of Volume Investors Corp., which was suspended from clearing trades through the Comex after three of its customers missed $26 million in margin calls--that is, demands to pump cash into their trading accounts to cover market losses--on March 18 and 19. The customers, Gerald and Valerie Westheimer and James Paruch, had been trading options on gold futures to profit from a decline in the price of gold; on March 18 and 19, however, the precious metal’s price shot up by more than $44 per ounce.
Millions in Losses
Volume Investors’ subsequent collapse produced losses totaling millions of dollars among its about 100 innocent customers, whose accounts were frozen and then liquidated on the open market in the days following the failure. The CFTC concluded earlier that most of the losses could have been averted had the exchange and its affiliated clearing association suspended Volume from trading on March 20, rather than one day later.
The CFTC’s complaint is unique in its scope. Among those named as defendants are the Westheimers and Paruch, who are charged with holding an illegally large position in gold options; Owen Morrissey and Charles Federbush, Volume’s owners, who are charged with allowing them to exceed the legal limit, allowing Volume’s net worth to fall below the legal minimum and using customers’ money to meet the firm’s financial obligations, and the Comex and the Comex Clearing Assn., which functions as an intermediary in every trade made on the Comex floor, for not moving swiftly to suspend Volume’s activities.
“In a way, almost everybody involved in the process has been implicated,” CFTC Enforcement Director Dennis Klejna said.
Among the maximum penalties that the CFTC might impose after a hearing are suspension of the Comex as a futures exchange and the barring of Morrissey, Federbush, the Westheimers and Paruch from doing any commodity business.
Heavy Fines Possible
The agency could also impose fines of up to $100,000 for each violation of its rules. Although the number of violations must be determined at a hearing, the CFTC’s complaint does cite the Westheimers and Paruch for 51 violations each--one for each day that they exceeded the option-ownership limits between Jan. 7 and March 19.
A spokesman for the Westheimers said they would deny the charges.
Comex officials said in a prepared statement that the CFTC had been kept informed of its actions in the Volume case throughout the crucial days in mid-March. “It is both odd and disturbing that the commission has chosen to file a complaint against the Comex now, in light of their silent assent to the exchange’s actions,” the statement said.
In one count that Klejna described as unique, Morrissey is charged with fraud for tipping off one large customer, Zack Bacon, a futures trader, early on March 20 of Volume’s impending failure. Bacon, sources say, did a particularly large amount of business with another firm owned by Federbush, and Bacon’s wife, Eve, was a broker at Volume. Morrissey’s tip enabled Bacon to transfer out of Volume’s control futures contracts and $3.9 million in cash and securities, a move that by implication cost Volume’s uninformed customers their money. The Bacons have not been charged.
Howard Schneider, a lawyer for Morrissey and Federbush, called that allegation “an outrageous charge, and one that has no foundation in the Commodity Exchange Act,” which governs futures trading. “They’re trying to create some theory of insider trading that doesn’t exist in the law.”
He said that Morrissey and Federbush would “vigorously” contest all of the charges.
