APPENDIX Mr. HOWARD MENELL, CHRISTOPHER M. HINCHEY, ATTORNEY-AT-LAW, Salem, Mass., May 23, 1980. Assistant Counsel, Committee on Banking, Housing, and Urban Affairs, DEAR MR. MENELL: In connection with your conversation of May 22, 1980 with Mr. Brian Walsh, Mr. Marutzky, and myself, I am sending you a copy of the CFTC memorandum which contains the information about Dr. Henry Jarecki's use of silver coins to raise money from banks. The first inclosure (A) explains the source of the series of memoranda; the second inclosure (B) contains, on its second page, a brief explanation of the nature of Dr. Jarecki's dealings. (Dr. Jarecki is chairman of Mocatta Metals Corp. and a member of the COMEX Board of Governors). The concern which we have, and which we believe is within the purview of the Senate Banking Committee, is that large participants in the commodities markets had an unequal and superior access to credit as compared to the smaller participants in those markets, a superiority which was not simply a reflection of their greater wealth and creditworthiness. We believe that the large investors availed, themselves of financing methods which were not generally available, and some of which may have been of doubtful legality. It would seem that the transaction described in the CFTC memorandum was financially and economically the equivalent of a collateralized loan by the banks to DR. Jarecki, and that the banks were using a portion of their reserves to earn a return and generate credit. Although the return was denominated as payment for an option, it is hard to see now it differed, as a practical matter, from payment of interest. Moreover, it appears improbable that the silver coins subject to Dr. Jarecki's option were truly available as reserves to meet the banks' cash needs. We do not purport to give any legal opinion on whether any of these actions were in violation of any banking or credit statutes or regulations; our concern is merely to bring to the Committee's attention one example of an unorthodox financial mechanism or gimmick which was not generally available to investors in the commodities markets. There are quite possibly other examples of which we are not aware, and which would be equally appropriate subjects for the Committee's investigation and consideration. Very Truly Yours, CHRISTOPHER M. HINCHEY. Hon. BENJAMIN S. ROSENTHAL, COMMODITY FUTURES TRADING COMMISSION, Chairman, Subcommittee on Commerce, Consumer and Monetary Affairs, DEAR MR. CHAIRMAN: Enclosed, as per your request, are memoranda by members of the Commodity Futures Trading Commission staff of the meetings with the Hunts which I have attended. My only written communication with them was a letter dated December 20, 1979, acknowledging receipt of an article. Please notice that, in this letter, I stated that I thought it would be necessary to reevaluate the economic purpose of the silver futures market if it continued to be used as a substitute for the cash market. You also asked about contacts with the Department of Treasury, the Federal Reserve Board and the Securities and Exchange Commission. I am enclosing copies of memoranda summarizing my meetings and discussions with these agencies from August 1978 to the present as the CFTC liaison. More detailed memoranda to the Commission on the recent discussions, which are referenced in the summaries, are available, if desired. (635) You asked whether CFTC had been responsive to the requests of the other agencies. The enclosed copy of my letter to Robert Mundheim, General Counsel of the Department of Treasury, dated July 27, 1979, expressing appreciation for the cooperation of the Department of Treasury and the Federal Reserve Board in connection with the applications for financial futures, indicates that numerous changes were made by CFTC as a result of the discussions and states that the contracts finally approved conform substantially to the specific recommendations of the Treasury and the Federal Reserve Board. The SEC was not specifically involved in the financial instrument contracts. However, when the CFTC was considering applications for contracts on commodity options, I had numerous discussions with the SEC to learn as much as possible from their experience and to get their suggestions. The staff document on options, which the Commission considered, contained many of the SEC suggestions. Subsequently, the CFTC decided to postpone consideration of options for a year. With regard to silver, no one from any of the other agencies ever requested that the CFTC take any action in the silver market. The closest anyone came to a request for action was Robert Carswell's suggestion that we consider a suspension in order to give Bache time to reorganize its financing. Otherwise, I am not aware of any specific requests to the Commission from these agencies. Your interest in the subject is appreciated. Sincerely, To: John G. Gaine, Pat G. Nicolette. Re Meeting between Commissioner Dunn and William H. Hunt. On November 7, 1979, I attended a meeting between Commissioner Read Dunn and William Herbert Hunt. The meeting was held in Commissioner Dunn's office. Mr. Hunt requested the meeting in order to present his side of the silver situation. Mr. Hunt believes that the emergency measures which the Chicago Board of Trade ("CBOT") and the Commodity Exchange ("Comex") have proposed are not "market-neutral". The CBOT is considering the adoption of speculative limits. Any speculator with holdings in excess of those limits would be required to reduce his holdings by early February. Mr. Hunt's present holdings exceed the proposed limits. If he is forced to liquidate the excess in a short period of time, he will suffer a significant financial loss. The Comex proposes higher margin requirements for existing positions over certain levels. Mr. Hunt maintains that adoption of this proposal would be unfair. The margin requirements for all positions should be the same. Mr. Hunt questions whether a decision by either of these exchanges to take emergency action would be disinterested. He understands that certain members of these exchanges hold large short positions. Adoption of the speculative limits and margin requirements proposed would benefit these exchange members to the detriment of non-members like himself. He has made the exchanges aware of his concern in this regard. Mr. Hunt stated that he has asked the Commission to hold prompt hearings on any actions which the exchanges might take in connection with silver. However, he understands that the Commission's preliminary response to this request was negative. Mr. Hunt claims to have played no part in the rise in silver prices in the last few months. His holdings today are no larger than they were in August. Moreover, he maintains that the position which he presently occupies in the silver futures market is no larger than the position which he has held consistently since 1973. In fact, he contends that at various times during the last six years his holdings have been twice as large. Mr. Hunt concedes that his holdings now represent a larger share of the open interest than they have in the past. However, the maintains that this has occurred through no fault of his own. The higher margin requirements which the exchanges require have cut the open interest in half. At present, margin requirements are so high, they no longer make economic sense. Eighty percent financing can be obtained for the purchase of silver in the cash market. In contrast, the margin requirements for a silver futures contract represent almost 40 percent of the cash value of the contract. Mr. Hunt believes that the price of silver accurately reflects current supply and demand conditions, and expectations about the future. Moreover, he predicts that the price will rise even higher. This prediction is based in part of the fact that consumption of silver exceeds refining capacity by over 200 million ounces annually. However, Mr. Hunt maintains that silver is available in the cash market. Recently, Englehard Metals offered him 40 million ounces for delivery over several months at the then current price. Mr. Hunt also offered a fascinating glimpse into an aspect of Henry Jarecki's operations. Mr. Hunt recently transferred certain long silver futures positions to Mr. Jerecki in exchange for silver and options on silver. The options were unusual. Apparently, the cash reserve which banks are required by law to maintain exceeds the amount necessary to conduct their day-to-day operations. Mr. Jarecki sells bags of silver coins to banks at the face value of the coins for use as cash reserves, subject to Mr. Jarecki's option to repurchase the coins at their face value. The bank is paid 1 or 2 percent of the face value of the coins for the option. Mr. Jarecki is able to use the option as collateral for financing based on the silver value of the coins. Other matters were discussed at the meeting, but they were not relevant to matters presently before the Commission. RALPH C. FERRARA, COMMODITY FUTURES TRADING COMMISSION, General Counsel, Securities and Exchange Commission, DEAR RALPH: This is in response to your letter of May 12, 1980, concerning the priority under the Commodity Exchange Act of two advertisements which appeared in the Wall Street Journal. My Office has been analyzing the subject of advertisements by commodity professionals in general. Your letter, therefore, arrived at a most appropriate time. We anticipate presenting our recommendations concerning advertising policy to the Commission during the next quarter of the fiscal year. As always, your comments on our recommendations would be most appreciated. We will provide you with a draft of our proposals prior to the Commission meeting on this subject. The two specific advertisements you referred to in your letter present very different questions. You suggest that the First Commodity Corporation of Boston ("FCCB") advertisement presents an issue concerning whether selective reporting of past trading performance raises serious antifraud implications under the Commodity Exchange Act. I must refrain from comment on this specific advertisement. The Commission has instituted an administrative proceeding against FCCB. (I have attached a copy of the Commission's complaint for your information.) I have been informed that during this proceeding the Division of Enforcement may seek to introduce this advertisement into the record. Accordingly, it would be, at best, inappropriate for me to comment on this advertisement since, as in the case in all administrative proceedings, I will participate in the Commission's decision-making process should an appeal to the Commission be taken in connection with this proceeding. Nonetheless, I can inform you that, in my view, the antifraud provisions contained in Sections 4b and 40(1) of the Commodity Exchange Act, 7 U.S.C. §§ 6b and 60(1), as well as the Commission's antifraud regulations, are sufficiently broad to encompass advertisements which would operate to defraud a customer or prospective customer of any commodity professional. You also suggest that the Conti-Commodity advertisement might confuse prospective commodity customers since it suggests that the CFTC is patterned after the Securities and Exchange Commission. You appear to believe that the Commodity Exchange Act does not provide customer protection safeguards similar to those contained in the various federal securities laws. While I agree with you that there are statutory dissimilarities between the securities laws and our Act, I do not believe that the Commodity Exchange Act at the present time contains inadequate customer protection safeguards. In fact, some of the customer protection features of our Act which are dissimilar from the federal securities laws may operate to provide more protection to the public_than_is_available under the securities laws. For example, Section 14 of the Act, 7 U.S.C. § 18, provides commodity customers with an express private damage remedy for a violation of any provision of the Act through a Commission reparation proceeding. In addition, certain of the Supreme Court's recent restrictive interpretations of the securities laws may not be applicable to the Commodity Exchange Act. Indeed, it is the Commission's view that negligent conduct by a commodity professional may constitute a violation of the antifraud provision of Section 4b(A) of the Act. See Gordon v. Shearson Hayden Stone, Inc., et al., 2 CCH Comm. Fut. L. Rep. § 21,016 (CFTC, April 10, 1980) (copy attached). Very truly yours, JOHN G. GAINE, General Counsel. |