Refco Trading Excessive, CFTC Complaint Charges

The Commodity Futures Trading Commission said Tuesday that it has charged Refco Inc. of Chicago, one of the world’s largest futures brokers, with excessive and unauthorized futures trading.

Also named in an 11-count CFTC administrative complaint were Paragon Futures Assn., a guaranteed introducing broker of Refco, and eight former Refco employees.

CFTC officials said the charges stemmed from trading activity that took place in 1985. They would not say in which futures markets the alleged violations were committed.

The federal futures regulator said it charged Refco with churning customer accounts and making unauthorized trades.

Churning is defined as excessive trading that permits a broker who controls an account to earn excessive commissions while disregarding the best interests of the customer.

In Chicago, Refco Inc., a unit of Refco Group Ltd., denied the allegations and said it has refused to enter into a consent decree with the CFTC to settle the claims.

Refco said Paragon began introducing customer accounts to it in November, 1984, but Refco terminated this relationship in July, 1985, after it discovered that Paragon brokers might have churned some customer accounts.

Refco said that “the CFTC has not told Refco what, if anything, Refco should have done differently.”

Refco said only three customers ever complained about the handling of their accounts at Paragon and it quickly satisfied all three claims.

The complaint charged violations of the anti-fraud, registration, record-keeping, supervision and commodity trading advisory disclosure provisions of federal law and CFTC regulations, the agency said in a news release.

CFTC said Paragon, which folded shortly after the agency launched its investigation, had been barred from trading on futures exchanges.

Refco is one of the biggest, and considered among the most aggressive, futures brokers.

CFTC officials said it was only the second time that a futures commission merchant, or FCM, had been charged with being liable for violations committed by a guaranteed introducing broker. Introducing brokers handle trades for FCMs, which are responsible for collecting investors’ good-faith deposits and guaranteeing the execution of trades.

In the first case 1 1/2 years ago, the FCM settled the case and paid a fine, the officials said.

Refco said it should not be held liable for Paragon’s alleged misdeeds.

“Refco acted promptly and decisively to correct the problems at Paragon. It should not be punished for the wrongdoings of others that it could not have prevented and that it did stop as soon as it discovered them,” it said.

The CFTC said a public hearing has been ordered to determine whether the charges filed against Refco are true and, if so, what sanctions, if any, should be imposed.

Each violation of federal commodities law is subject to a $100,000 fine. CFTC officials said there was no way of determining at this time how many potential violations the case might reveal.