CFTC News Release 4486-01

CFTC News Release 4486-01 (CFTC Docket No. 01-05)
For Release January 8, 2001

CFTC FILES AND SETTLES ENFORCEMENT ACTION AGAINST FORMER GRIFFIN TRADING COMPANY CHIEF FINANCIAL OFFICER, SCOTT N. SZACH

CFTC Finds that Szach Failed to Supervise Griffin’s London Branch Office, Filed False Reports, and Committed Segregation and Recordkeeping Violations in Connection with His Unauthorized Trading

WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced today that it instituted and settled an administrative proceeding against Scott N. Szach of Hinsdale, Illinois, the former Chief Financial Officer of Griffin Trading Company (GTC), a registered futures commission merchant. The CFTC order finds that Szach failed to supervise GTC’s London branch office, where a customer repeatedly breached his trading limits, ultimately leading to GTC’s bankruptcy on December 30, 1998. The order also finds that Szach filed false reports and committed segregation and recordkeeping violations in connection with his unauthorized securities trading using GTC and other customer funds. Szach consented to the entry of the order without admitting or denying the findings made in the order.

William J. Rainer, Chairman of the CFTC, commented:

This case is a reminder to all of the importance of maintaining effective supervisory and risk management controls, particularly in a global marketplace. Firms with both domestic and foreign operations face daily challenges in ensuring that they are able to safeguard both firm and customer assets from the risks of rogue traders. The failure to establish and implement adequate policies and procedures to monitor customer trading, as occurred here, could threaten the viability of registered firms and the funds of innocent customers.

Specifically, the CFTC order finds that as of January 1997, Szach, who worked out of GTC’s Chicago office, was responsible for supervising all activity in GTC’s London branch office, but failed to supervise adequately the handling of customer accounts and risk management activity there. According to the order, Szach did not ensure that GTC’s policies and procedures involving risk management were followed, including GTC’s policy that a written give-up agreement be executed with every execution broker; he did not insure that customer trading limits were monitored and permitted trading to occur that could not be monitored; he failed to institute written policies and procedures relating to risk management; and he failed to supervise adequately personnel in the London office.

The order finds that as a result of Szach’s supervisory failures, Szach failed to control the account of a customer who was trading on Eurex through an execution broker and who breached his trading limits by substantial amounts and for substantial periods of time. The order finds that GTC had imposed an intra-day trading limit on the customer that was tied to the amount of money in his account and did not allow the customer to carry positions overnight, but that the customer was able to breach those limits. For instance, the order finds that on at least five days before December 21, 1998, the customer had intra-day limits ranging between 200 and 540 contracts but was able to establish positions ranging from approximately 1,000 to 5,700 contracts, and that at the end of the trading day on which he placed the trades that caused GTC's financial failure, he had established an overnight position of approximately 10,000 contracts. The order finds that the customer sustained huge trading losses on December 21 and 22, 1998, and that as a result, GTC received two margin calls of approximately $2.85 million and $7.68 million. The order finds that neither the customer nor GTC could satisfy the second margin call, which led to GTC filing for bankruptcy protection on December 30, 1998.

Separately, the order finds that from August 1997 until the end of December 1998, Szach lost more than $2 million through unauthorized securities trading using the money of GTC and its customers. As the order finds, to conceal this activity, Szach omitted and misclassified his trading losses on GTC’s books and records, and signed and filed, on behalf of GTC, false reports with the CFTC that incorporated the overstatements and misclassifications. The order further finds that Szach used customer money to fund his unauthorized trading, which caused GTC to have less than the amount of funds required to be on deposit in customer segregated accounts. The order finds that Szach failed to comply with his obligation to report the under-segregation to the Commission.

CFTC Orders Szach to Pay a Contingent $220,000 Civil Monetary Penalty Pursuant to a Payment Plan, Imposes a Ten-Year Trading Ban, and Requires Him to Comply with Undertakings, Including Never to Seek Registration with or Practice before the CFTC

Szach has consented to the entry of the CFTC order that makes findings that he violated, directly and as a controlling person of GTC, and aided and abetted the violations of the Commodity Exchange Act (CEA) and CFTC regulations. The CFTC order also, among other things:

directs him to cease and desist from violating sections 4d(2), 4g(a), 6(c) of the CEA and regulations 1.10(d), 1.12(h), 1.18(a), 1.20 and 166.3;
requires him to pay a contingent $220,000 civil monetary penalty pursuant to a ten year payment plan;
prohibits him from trading on or subject to the rules of any contract market for ten years;
permanently bars him from practicing before the Commission pursuant to Part 14 of the Commission’s regulations, and;
requires him to comply with certain undertakings, which include never applying for registration or seeking exemption from registration with the CFTC, except as provided for in regulation 4.14(a)(9), and, for a period of ten years, taking employment with any person registered, required to be registered or exempt from registration, unless such exemption is pursuant to regulation 4.14(a)(9).

In bringing this action, the CFTC worked cooperatively with the Office of the U.S. Attorney for the Northern District of Illinois, the Chicago Board of Trade, and the Securities and Futures Authority and the Financial Services Authority of the United Kingdom.

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