Release: #4323-99 (CFTC Docket No. 97-3)

For Release: October 7, 1999


CFTC Order Accepting Settlement Offer Finds Fraud In The Solicitation of Customers To Enter Into Off-Exchange Agricultural Options

WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced today that it issued an order on October 7, 1999, accepting an offer of settlement from Southern Thumb Co-op, Inc. (Southern Thumb), a Michigan grain elevator, and finding that Southern Thumb offered to enter into and entered into illegal agricultural commodity option contracts and fraudulently marketed the contracts by recklessly misrepresenting the risks involved in entering and using these contracts.

Specifically, the CFTC's order finds that from November 1993 through November 1996, Southern Thumb's commercial grain marketing program included contracts that were illegal option contracts in violation of section 4c(b) of the Commodity Exchange Act (CEA) and CFTC regulation 32.2. The order finds that Southern Thumb offered Option Offer and Mini-Max contracts, which operated as call option contracts, and Floor Price contracts, which operated as put option contracts. The order settles a CFTC complaint filed against Southern Thumb and other entities on September 13, 1999 (see CFTC News Release 3965-96, November 13, 1996).

In addition, the CFTC's order finds that Southern Thumb defrauded producers when it offered and entered into the option contracts by failing to inform producers adequately of the risks in such transactions in violation of 4c(b) of the CEA and CFTC regulation 33.10. The order specifically finds that Southern Thumb failed to inform producers adequately that exercise of the call options of the Option Offer and Mini-Max contracts would result in additional delivery obligations, of the likelihood of such exercise in an inverted market, and the effect of an inverted market on the producers' delivery prices. The order also finds that Southern Thumb misrepresented the usefulness and costs of the Floor Price contracts, and failed to inform producers adequately that, upon expiration of the put options, the producers would have to purchase additional put options to maintain their price protection, thus incurring additional premiums and fees and further reducing producers' ultimate delivery prices.

Without admitting or denying the CFTC's findings, Southern Thumb, which ceased doing business as a grain elevator after filing bankruptcy in January 1997, consented to the entry of the order:

-- directing it to cease and desist from further violations of the CEA and CFTC regulations, and

-- requiring Southern Thumb to retain a compliance consultant to review all new proposed types of grain contracts and any type of contract involving option features for the legality of such contracts under the CEA and CFTC regulations should it resume business as a grain elevator or grain marketer of any kind, under the name Southern Thumb or any other name.

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