ContiCommodity Fined $1.5 Million for Alleged Fraud
Federal regulators on Wednesday fined what was once one of the nation’s largest commodity firms a record $1.5 million in connection with its role in alleged silver manipulation in 1979 and 1980 and its slipshod supervision of a multimillion-dollar sugar and cocoa futures trading program.
The Commodity Futures Trading Commission also charged eight former executives of the firm, ContiCommodity Services, with fraud in connection with the trading program. The program, which allegedly cost customers more than $15 million, led to the 1984 sale of Conti by its parent, Continental Grain Corp., to Refco, another big commodities broker. Conti now does not exist in any active form, a Continental spokesman said.
The $1.5-million penalty is the largest such settlement in the CFTC’s history, said Dennis Klejna, the commission’s enforcement director. Conti settled the CFTC’s fraud and record-keeping charges without admitting or denying them, the CFTC said, but the fraud charges against the eight executives are pending.
Arthur Andersen & Co. Also Fined
The agency did not specify which share of the penalty applied to the silver manipulation charges and which to the remainder of its complaint.
The CFTC also charged Arthur Andersen & Co., the nation’s largest auditing firm, with illegally failing to tell the agency that Conti’s operation of the sugar and cocoa program and of a second program involving government securities was “materially inadequate.” The commission fined Andersen $50,000, its first such penalty against any of the so-called Big Eight auditing firms.
“This should be a pretty strong message to the accounting profession for the commodities industry that they should take their reporting responsibilities seriously,” Klejna said. He said Andersen had discovered in the course of routine audits that Conti’s data-processing system and its financial controls were inadequate for the supervision of the trading programs but failed to report that fact to the CFTC as required.
Andersen officials were unavailable for comment.
The CFTC fined four of Conti’s executives a total of $70,000 for failing to supervise Conti brokers and salesmen in the trading programs.
The executives include Herbert Evers, Conti’s former president and chief executive, who was fined $25,000.
In a statement issued by its Chicago law firm, Conti contended that it was “the victim of trading conduct and defaults by certain of its customers.”
It claimed to have “substantial defenses to the CFTC’s complaints” but said it chose to settle the cases because it has ceased operating and the cost of a court defense would exceed the penalty. The penalty will presumably be covered by Continental Grain.
Evers, reached at his New York office, where he is a director of the Carroll, McGee & McIntee unit of Marine Midland Bank, declined to comment.
“I don’t have anything to add,” he said. “I think the statement speaks for itself.”
Conti ran its trading programs for investment customers between 1982 and 1984. They involved arbitrage between the sugar and cocoa futures markets in New York and London and similar trading between the government securities and the Treasury bond futures markets. Arbitrage is the simultaneous buying and selling of theoretically equivalent commodities in different markets to take advantage of slight price differences between the markets.
Class-Action Suit
Klejna said Conti and its executives misrepresented to clients the competence and experience of the traders handling the programs, specified an improperly optimistic rate of return and materially misstated the risk inherent in the trading.
Several Conti customers, in a class-action lawsuit filed in 1984 in Palm Beach, Fla., charged that the cocoa and sugar program cost more than 100 customers about $15 million in actual losses and forgone profits. Conti brokers marketed the program to relatively wealthy and sophisticated members of the investing public as something as secure as a money-market fund in which customers could not lose money, the lawsuit said.
Conti officials shut down both trading programs in 1984, but their losses apparently forced the firm’s parent, Continental Grain, to pump extra capital into the firm.
Later in 1984, Conti’s assets were purchased, reportedly at fire-sale prices, by Refco, one of the nation’s largest commodity traders.
In the silver case, the CFTC had earlier charged that Conti failed to supervise a floor broker, Norton Walduck, who was handling silver trades for Conti customers during an outbreak of market manipulation in 1979 and 1980.
The Conti action occurred during the same period that the Hunt brothers attempted to corner the silver market, but no connection has been established.
CFTC charges are still pending against the Hunts.
