CFTC News Release 4376-00 (Docket 99-6)

For Release March 9, 2000

CFTC SETTLES ACTION AGAINST FARMERS COOPERATIVE COMPANY, FINDING THAT IT OFFERED TO ENTER INTO, AND ENTERED INTO, ILLEGAL FUTURES AND OPTION CONTRACTS AND OPERATED AS AN UNREGISTERED FUTURES COMMISSION MERCHANT

CFTC Order Also Accepts Offers of Settlement from Three Former Employees and Finds that Richard Houge and Larry D. Peterson aided and abetted each of Farmer Co-op�s Violations and that John A. McPherson aided and abetted Farmer Co-op�s operation as an unregistered Futures Commission Merchant

WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced today the issuance of an order accepting offers of settlement from Farmers Cooperative Company (Farmers Co-op), a grain elevator headquartered in Farnhamville, Iowa, and Richard Houge, Larry D. Peterson, and John A. McPherson, three former co-op employees.

The CFTC order finds that Farmers Co-op, aided and abetted by Houge and Peterson, offered to enter into and entered into hedge-to-arrive (HTA) contracts, that constituted futures contracts and commodity options contracts in violation of the Commodity Exchange Act (CEA) and CFTC regulations.

The CFTC�s order also finds that Farmers Co-op, aided and abetted by Houge, Peterson, and McPherson, operated as an unregistered futures commission merchant (FCM), failed to issue monthly statements to producers, and failed to issue risk disclosure documents to producers, also in violation of the CEA and CFTC regulations. The order settles a five-count CFTC complaint filed against Farmers Co-op, Houge, Peterson, and McPherson on January 12, 1999 (see CFTC News Release 4230-99, January 12, 1999).

Specifically, the CFTC�s order finds that Farmers Coop�s HTA contracts were futures contracts because they provided for the purchase or sale of a commodity for delivery in the future at a price or using a pricing formula that was agreed upon when the contract was initiated, and the contracts were undertaken to assume or shift price risk for monetary credits and debits rather than to deliver grain either to or from Farmers Co-op. The order further finds that those contracts were not being offered on a designated contract market in violation of section 4(a) of the CEA. The CFTC�s order finds that Houge and Peterson aided and abetted Farmers Co-op in offering the illegal futures contracts by taking producers' orders for the HTA contracts, writing the HTA contracts, buying back the producers' HTA contracts, thereby knowingly extinguishing the producers' HTA delivery obligations, and preparing invoices for the producers' monetary profits and losses resulting from the HTA contracts.

In addition, the CFTC�s order finds that Farmers Co-op violated section 4c(b) and regulation 32.2 by offering short call option feature contracts that, under certain circumstances, could and did result in additional grain delivery obligations, and thereby possessed characteristics of commodity options prohibited by the CEA and CFTC regulations. Houge and Peterson aided and abetted Farmers Co-op in offering the option feature contracts by, among other things, causing Farmers Co-op to exercise the contracts against the producers and by buying back the option feature contracts before the options were exercised, the order finds.

The CFTC order also finds that Farmers Co-op operated as an unregistered FCM in violation of sections 4c(b) and 4d(1) of the CEA and regulations 32.3 and 33.3(b) because it permitted producers to speculate in commodities by allowing them to buy and sell exchange-traded futures and option contracts through one of Farmers Co-op�s trading accounts. According to the order, in operating as an unregistered FCM, Farmers Co-op failed to issue monthly statements and risk disclosure documents to producers who bought and sold the exchange-traded futures and option contracts in violation of regulations 1.33(a) and 1.55. The order finds that Houge, Peterson and McPherson aided and abetted Farmers Co-op in operating as an unregistered FCM by, among other actions, taking producers� orders to buy and sell exchange-traded futures and options and placing the orders in the designated Farmers Co-op trading account and by failing to issue monthly statements and risk disclosure documents to producers.

In consenting to the CFTC�s order, Farmers Co-op admits to the CFTC�s findings that it operated as an unregistered FCM and failed to issue monthly statements and risk disclosure documents to producers. Farmers Co-op neither admits nor denies the other findings in the order. Houge, Peterson, and McPherson neither admit nor deny the order�s findings. The CFTC�s order:

• directs each respondent to cease and desist from further violations of the CEA and CFTC Regulations;
• imposes joint and several liability on all respondents for payment of a $100,000 civil monetary penalty;
• requires Farmers Co-op�s General Manager and Head of its Grain Division to review all new proposed types of HTA contracts and any type of contract involving option features it plans to offer to producers to ensure the legality of such contracts under the CEA and CFTC regulations;
• requires Houge and McPherson never to apply for registration or seek exemption from registration with the CFTC in any capacity under that CEA and not to engage in any activity for which registration or exemption from registration with the CFTC is required under the Act or act as principal, employee, officer or agent of any person registered, exempted from registration or required to the registered under the CEA; and
• requires Peterson to comply with his undertakings, including not to seek registration with the CFTC in any capacity for six months and not to engage in any activity requiring associated person (AP) registration or act as a principal, director, agent or officer of any person registered or required to be registered with the CFTC, and should Peterson be granted registration as an AP after the expiration of the six month period, to have his registration be subject to conditions and a sponsorship, as specified in the order, for two years.

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