Release: #4043-97 (CFTC Docket #97-14)
For Release: August 13, 1997
CFTC Files Enforcement Action Against First Capital Strategists of York, Pennsylvania, and the Four Partners of the Firm and Simultaneously Accepts Respondents' Settlement Offer
Respondents Agree to Pay $2.6 Million in Restitution to Educational Institutions as a Result of the Misconduct, Among Other Sanctions
WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced today that it has issued an order instituting proceedings and accepting the offers of settlement from the respondents in an enforcement action against First Capital Strategists (First Capital) of York, Pennsylvania, and its four partners: John J. McCollum, of Stamford, Connecticut, and Paul J. Gangemi, Robert E. Frith, Jr., and Keith H. Cunningham, all of York, Pennsylvania.
Based on the settlement, the CFTC made findings of fraud, failure to supervise, and recordkeeping and registration violations under the Commodity Exchange Act (CEA) against First Capital and its partners.
Without admitting or denying the findings in the CFTC order, respondents have agreed to pay $2.6 million in restitution to the educational institutions that lost money as a result of the misconduct. Under the settlement order, the individuals have also agreed not to apply for registration with the CFTC for a 5-year period, nor to act in supervisory roles for 7 years.
The restitution sum also satisfies the disgorgement required under the settlement order of the Securities and Exchange Commission (SEC), also issued today. The staffs of the CFTC and the SEC worked together to investigate and to negotiate the settlement with the respondents.
The CFTC's order finds that First Capital employed Kent A. Ahrens as a trader of an "index arbitrage strategy" for the firm's clients, principally The Common Fund, a not-for-profit corporation which manages investments of educational institutions. The order finds that First Capital is liable for Ahrens' fraud, which resulted in an approximate loss of $137.6 million to member colleges of The Common Fund based on his "short market bet" against the S&P 500 Index. Ahrens' violations, including his unauthorized trading, his failure to disclose his short market position over a 3-year period and the resulting loss, are the subject of a prior action by the CFTC against Ahrens, and a consent permanent injunction (U.S. Dist. Court, M.D. Penn., Docket No. 1-CV-96-1855, Oct. 22, 1996, as amended) (CFTC News Release #3958-96, October 16, 1996).
The CFTC order finds each of the respondents directly liable for his own conduct, including failure to supervise diligently, and for his own fraudulent acts which violated section 4o of the CEA. In particular, the order finds that each of the partners described the index arbitrage program as "low risk" and "fully hedged." Yet, each knew or should have known that Ahrens' trading entailed significant risks and that First Capital did not employ adequate controls for evaluating trading positions, relying instead principally on the trader, according to the Commission's order. The CFTC order finds each of the partners individually liable for knowingly participating in the decision not to report a loss suffered in a separate trading strategy in the spring of 1995, while effecting a wire transfer in the amount of the loss to reimburse The Common Fund's account. In a separate incident, the CFTC order finds three of the partners liable for misrepresenting the controls in place at First Capital in a memorandum to The Common Fund in the late spring of 1995.
According to Geoffrey Aronow, Director of the CFTC's Division of
"The Commission's settlement and order address the consequences of the failure of a firm and the people responsible within that firm to institute necessary controls to oversee the type of trading conducted for The Common Fund's account. When, as here, commodity professionals make representations about the nature and riskiness of trading they conduct for other persons, they must have a basis to know what they are saying is true, including adequate systems of control designed to prevent and detect conduct that would make their representations false."
The firm and two of the partners have also been found liable in the Commission's order for registration violations. Also, First Capital is found liable for failing to maintain records in accordance with CFTC regulations.
The CFTC's Aronow reiterated that "the duty to supervise set forth in the CFTC's regulations is an affirmative obligation. The order stands as a reminder to persons with supervisory obligations that they cannot simply delegate their responsibilities to the very traders and other persons who they are supposed to supervise and rest easy."