When Alice and John Herring decided to open a commodity trading account in 1985 with Chicago-based RB&H Inc., the novice investors thought they had a sure-fire retirement investment plan.
After all, the brokerage firm was headed by Jack Sandner, a former chairman of the Chicago Mercantile Exchange and a veteran trader who had reputedly made millions in the futures market.
During a fast-paced tour of the exchange followed by lunch, RB&H employees assured the couple that under the firm`s individual managed account program, Sandner, one of the Merc`s most powerful figures, would be making the trading decisions himself.
”The salesmen took us through Sandner`s office, and I remember them showing us his private sauna and making a big deal about the phone in his private bathroom and how far he had come,” said Alice Herring, who works as a bookkeeper for a Chicago firm.
Unfortunately, the Herrings in the next several months lost $2,500, half the amount they had deposited for trading. The couple subsequently closed their account, chalking up the loss to bad luck.
Official records and interviews with former RB&H salesmen and customers show that the Herrings were far from alone in losing money. Losses in the managed account program were rampant, customers and salesmen said, despite assurances that clients would reap profits and had done so in the past because of Sandner`s connections and trading skills.
Records and interviews also indicate that unlicensed employees were used to train salesmen, and employees worked at RB&H despite checkered histories and past run-ins with commodity regulators.
In addition to his six terms as Merc chairman and current $150,000-a-year post as senior policy adviser to the exchange, Sandner heads the central regional business conduct committee of the industry`s self-regulatory body, the National Futures Association.
Sandner said there was nothing improper about the managed account operation and, as far as rules are concerned, described himself as a
”compliance nut.”
These allegations about a company run by so influential a Merc official raise questions about the futures industry`s ability to police itself.
The issue of self-regulation has attracted new attention since reports surfaced Jan. 19 of the FBI investigation of exchange trading practices. As an outgrowth of that probe, FBI agents have questioned at least one former RB&H employee about customer losses in the managed account program, sources close to the investigation confirmed.
Six former RB&H employees had been charged by federal authorities in December and January with defrauding customers while working previously at the scandal-ridden First Commodity Corp. of Boston.
In an interview, Sandner said he shut down the managed account program at the end of last year to devote more time to his exchange duties, including supervising implementation of the Merc`s new computerized trading system. He said he decided Nov. 1 to close the operation, an action he said wasn`t related to the FBI investigation.
As late as Nov. 13, however, RB&H was seeking to hire brokers. In want ads, the firm said it was ”expanding” its brokerage force and that employees could earn $200,000 annually.
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Sandner said his salesmen have acted properly. He said he demands the highest level of conduct from his sales staff and from Bill Kelly, a boyhood friend who manages RB&H daily operations.
It is ”ludicrous to open up an account based on the fact that I founded this or that,” Sandner said. ”The forms we send the customer talk about the risk, and there is a plethora of such forms.”
Futures trading is certainly risky, but it isn`t clear why so many of RB& H`s managed account customers lost money. Sandner declined to make public customer records and said he didn`t know precisely how customers fared overall.
But he said his customers` estimated loss rate of about 90 percent was at least as good as that for investors in the rest of the futures industry. ”At least if you lose money with Jack Sandner, you lose it the right way,” he said.
Some experts disagree. Although the vast majority of investors who speculate for themselves in the futures markets are known to lose money,
”There isn`t any question that you`ve got a better-than-even chance of profits with a professional money manager,” said Leon Rose, who publishes a Columbia, Md.-based newsletter on managed commodity programs.
Under federal commodity law, RB&H wasn`t required to disclose Sandner`s past trading performance to customers because the firm is licensed as a futures broker; only licensed commodity trading advisers must turn over their track records. Nevertheless, ”Many well established (brokerage firms) have given the same type of information to their clients,” said Chicago attorney Mark Mitchell.
Client requests for Sandner`s track record were brushed off, according to former salesmen and customers. ”We were instructed to tell customers who asked about our trading history, `Hey, track records are like belly buttons. Everyone has one, and nobody will show you a bad one,` ” said one former employee.
Sandner said he barred salesmen from talking about his track record because such descriptions of past performance are misleading.
”You don`t tell them about the good times and you don`t tell them about the bad,” Sandner said. ”One day you are riding high, the next day you are going to church asking God to pick you up.”
Sandner said few RB&H customers have filed complaints with the Commodity Futures Trading Commission, the federal agency that polices futures trading, or with the futures association. He said this was a sign of general satisfaction with the managed account program.
But former salesmen said RB&H often tried to settle grievances before complaints were filed by offering to return part of customers` money. George Hurley, a retired air conditioner mechanic from Dorchester, Mass., who lost $4,092 in the program, was offered $500 to drop his complaint, according to documents filed with the CFTC.
The picture of the RB&H progam as an operation beset by problems stands in stark contrast to Sandner`s reputation as a highly successful trader and respected exchange official.
John Francis Sandner, 47, dropped out of a South Side high school in the 1950s and turned to amateur boxing for a time.
Later, he distinguished himself as a student at Notre Dame Law School, graduating with honors in 1968 and practicing law for several years.
In the early 1970s, Sandner became a member of the Merc. He developed a reputation as ”a very aggressive (trader) with nerves of steel,” said a former Merc official.
The scrappy outsider rose quickly in Merc political circles and with exchange special counsel Leo Melamed has dominated exchange governance for years. In December, Sandner ended a second string of three consecutive terms, the limit at one time, as Merc chairman.
In January, he 3.
”I think Jack has total integrity,” said Robert Wilmouth, futures association president and former president of the Chicago Board of Trade. Although Sandner has missed about two-thirds of the business conduct panel`s meetings, Wilmouth said he has been ”supportive of all staff (disciplinary)
recommendations.”
The RB&H program relied heavily on Sandner`s accomplishments to pull in clients, an unusually personal appeal for managed accounts from the head of a brokerage firm. A direct mailing in 1985, with Sandner pictured on the trading floor, was headlined, ”Jack Sandner personally directing your futures trades.”
”The whole sales pitch was Jack,” said a former salesman, who declined to be identified, as did the other six former salesmen interviewed by The Tribune. ”We`d give them Jack`s story, start on the South Side, through boxing, through Notre Dame. Then we`d ask, `Would you be interested in having a man like this trading your commodity account?` ”
Some RB&H salesmen even sent would-be customers copies of a book, ”The New Gatsbys,” that contains two complimentary chapters on Sandner. Clients also received photographs of the RB&H head with then-President Ronald Reagan and House Speaker Thomas P. ”Tip” O`Neill.
The allegations about RB&H`s operations center on the individual managed account program, known as IMAP, which represented the company`s first attempt to solicit customers from its Chicago headquarters.
The firm had traditionally depended on its branch offices, many of them at cattle markets along the Missouri River. RB&H was founded in 1969 by Robert Rufenacht, Glenn Bromegan and Fred Hertz, who had ties to the cattle business, according to Richard Digenan, former RB&H vice president.
IMAP was created in 1983, five years after Sandner became president of RB&H. His rise in the company followed a change of ownership and the departure of the founders.
From the start, IMAP hired salesmen from First Commodity, one of the nation`s largest futures brokerage firms until it collapsed in 1987 amid official probes and investor lawsuits.
Through 1988, at least 12 former employees of First Commodity worked at RB&H, according to futures association records and court documents. Six of them have been charged by federal authorities with racketeering and other crimes arising from their alleged practices at First Commodity.
Bruce Piazza, described by prosecutors as a key figure among 16 First Commodity employees indicted last January, was hired by Sandner as a $4,000-a- month ”consultant” in 1987. The CFTC a year earlier had charged Piazza, First Commodity`s former Chicago branch manager, with defrauding customers; as a result, he was unable to obtain a license from the futures association to be a futures broker or to supervise brokers.
Sandner said Piazza set up the firm`s metals investment program, a position that didn`t require registration because it didn`t involve futures contracts. He said Piazza never supervised IMAP salesmen.
But former IMAP salesmen contend that Piazza acted as their sales manager, even instructing them on writing sales scripts. Piazza pressured them to raise money by moving their desks away from the computer screen if they weren`t bringing in enough business, they said.
Piazza ”berated me for being a `market head,` for paying attention to the market,” said one former employee. ”He just wanted people to pound the phones.” Piazza, who has pleaded not guilty, couldn`t be reached for comment. In 1985, another RB&H employee who wasn`t licensed was also acting as a sales manager, former salesmen allege. The issue was brought to the futures association`s attention because it surfaced at a customer arbitration hearing last year, and the hearing panel recommended that the association look into the matter.
”It was quite clear (the employee) wasn`t registered and should have been registered,” said Jerome Tatar, an attorney who represented former RB&H customers in an arbitration case. Futures association officials wouldn`t comment on whether they`re looking into the matter or into Piazza`s activities.
Also working as brokers at RB&H were Ira Greenspon and Norman Furlett, who were charged by the CFTC in 1988 with defrauding customers by allocating winning trades to accounts they controlled and losing trades to clients`
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accounts while employed at another firm, GNP Commodities Inc.
Sandner said he dismissed the two shortly after the CFTC issued its complaint. But Stuart Verson, a Chicago attorney who represents Vern Bolinder of Salt Lake City, said he will soon file a lawsuit charging that RB&H knew or should have known of the CFTC probe and disclosed it to his client.
Verson said Bolinder lost $175,000 last year in trading handled by Greenspon and Furlett. Although Bolinder wasn`t in IMAP, the salesmen convinced Bolinder to shift his account to RB&H from GNP based partly on Sandner`s reputed trading prowess and his alleged access to ”inside information,” Verson said.
Sandner said most of those hired, including the former First Commodity salesmen, had unblemished records when they joined RB&H. But observers said RB&H`s hiring of so many such salesmen was unusual. ”Any place that constantly hires people who had lots of problems in their backgrounds, you`ve got to wonder about,” Tatar said.
Even employees were frustrated by the continuous flow of red ink in customer accounts. In early 1986, a group of RB&H brokers refused to solicit new customers unless they were given an explanation ”of what was going on,” said one former salesman.
”Everyone was losing money. It was sort of funny at first, but then it got to where you started feeling sorry for the customers,” said the broker.
”We went into (RB&H official Bill) Kelly`s office and he told us: `You leave the trading to Jack and me. Your job is to bring in the money.` ”
Interviews and records show that the widespread losses contradicted the sales pitch used by RB&H employees in wooing customers across the country.
Richard Latin, a New York lawyer who lost $2,000 in six weeks, said he was told he would make an 85 percent annual return on his money. Hurley, the Massachusetts customer who lost $4,092 of his $6,400 investment in four months, said he was told that Sandner had doubled customers` funds in a year. Both men recovered their money after filing complaints with the CFTC. Agency officials said Latin`s account had been churned, or traded excessively to generate commissions, and that RB&H salesmen had misrepresented the kind of trading that would be conducted in Hurley`s account.
Salesmen also used scripts extolling Sandner`s business and political connections, former employees said. In one instance, they said salesmen urged investors to join the managed account program because of Sandner`s knowledge of an expected drop in the dollar.
”Jack does a lot of traveling between London, Singapore and Washington . . . where he`s very well politically connected, and he`s gotten the word that there`s going to be a large selloff in the dollar,” said one sales script obtained by The Tribune.
Latin said his experience at RB&H has soured him on futures trading.
”I learned my lesson. If you can`t trust the head of the Mercantile Exchange, the chairman of the ethics committee, who can you trust?” Latin said.