Two California Firms Accused of Futures Fraud : High-Pressure Tactics, Misleading Claims Cited in Agency Suit

WASHINGTON —  The Commodity Futures Trading Commission, filing the largest fraud suit in its 14-year history, on Monday accused two companies operating in California of using high-pressure tactics to earn massive commissions from customers who were suffering enormous losses.

CFTC charged International Trading Group Ltd. of making misleading claims in the sale of futures options that produced $283 million in commissions for the firm but $428 million in losses for its customers.

The regulatory commission also sued Siegel Trading Co., whose customers lost $33.6 million while the company collected $40 million in commissions.

Fixed Price for Delivery

Both firms promised customers a chance to earn big profits with little risk, CFTC said in suits filed in U.S. District Court in Los Angeles. It quoted International Trading salesmen, who earned 40% commissions on their transactions, as telling potential customers: “You don’t have time to think it over--you must take action now--I’ve only got two minutes.”

The companies deal in a variety of options on futures contracts for agricultural commodities, precious metals, foreign currencies and financial instruments, according to CFTC officials.

A futures option gives the right to buy or sell a futures contract, which in turn provides a fixed price for delivery of a commodity at a later date. A modest investment in an option contract can control a much larger value in a commodity, and price movements are highly volatile. International Trading, based in San Mateo, Calif., has offices there and in San Francisco, Foster City, Newport Beach, San Diego, Honolulu and Coconut Grove, Fla. Siegel, based in Chicago, has offices in Los Angeles and Irvine.

Michael Diamond, an attorney for International Trading, said: “The company believes that its sales practices are carried out in compliance with the law and are not misleading or fraudulent. The company intends to vigorously defend the suit.”

Diamond said: “There are plenty of profitable transactions done on options” bought through the firm.

Siegel Trading had no immediate comment.

CFTC charged that the firms made false and deceptive statements about the potential for profit, the need to act immediately and the risk of losing money.

“The most graphic example of the lack of truth is . . . (that) the customers lost $428 million,” Dennis Klejna, the CFTC enforcement director, told a news conference, referring to the International Trading Case. “The representations (to customers) about profits and losses are not true.”

High Commissions

CFTC did not challenge the size of the commissions, which are not subject to federal regulation, even though CFTC officials said the unusually high percentages charged by the two firms made it extremely difficult for investors to earn profits.

International Trading charged a commission of 40% of a client’s investment. Siegel charged a 45% commission plus a fee of $155 for each trade.

By contrast, CFTC officials said, common commissions in the industry range from $45 to $100 per transaction. They said one firm using a percentage basis charges 5% of the money invested, up to maximum of $100.

CFTC said 85% of the customers of International Trading Group and Siegel Trading have lost money since 1984.

CFTC asked for preliminary court injunctions to stop the alleged sales frauds and for the appointment of receivers to take control of the companies.

The lawsuit said International Trading Group’s “sales techniques include manipulation of investors’ fears, dreams and greed, emphasizing profits over risks, pressuring prospects to make immediate decisions, promising special service and investment advice, using automatic responses to overcome customer objections and employing ‘closings’ to pressure prospects into buying decisions.”

Telephone Solicitation

International Trading salesmen did most of their work on the telephone, the suit said. It quoted salesmen as telling prospective customers: “I don’t want you to take a chance on losing this great price--I haven’t seen them this cheap.”

“If within three minutes you don’t know how many dollars he (the customer) wants to put in, you haven’t done your job,” International Trading told its salesmen, according to the suit.

Siegel sought new customers through telephone solicitations and a 15-minute television program broadcast every day on cable-TV channels, with sales representatives playing the role of news broadcasters, CFTC said. It said sales personnel were required to make up to 100 calls a day seeking new business.

A typical Siegel sales pitch, it said, included: “I would recommend the sugar option immediately. Time is of the essence. . . . When this market moves, it moves fast. . . . It is one of the last chances we have to buy silver at under $7 an ounce.”

CFTC Chairman Wendy L. Gramm said the filing of Monday’s lawsuits demonstrated that her agency was “ready to take any and all steps necessary to protect the public and the integrity of the markets through aggressive enforcement actions that affect all aspects of the futures industry.”