Release: #4043-97 (CFTC Docket #97-14)

For Release: August 13, 1997
    CFTC Files Enforcement Action Against First Capital Strategists of York,
    Pennsylvania, and the Four Partners of the Firm and Simultaneously Accepts
    Respondents' Settlement Offer
    Respondents Agree to Pay $2.6 Million in Restitution to Educational
    Institutions as a Result of the Misconduct, Among Other Sanctions
    WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced
    today that it has issued an order instituting proceedings and accepting the
    offers of settlement from the respondents in an enforcement action against
    First Capital Strategists (First Capital) of York, Pennsylvania, and
    its four partners: John J. McCollum, of Stamford, Connecticut, and
    Paul J. Gangemi, Robert E. Frith, Jr., and Keith H.
    Cunningham, all of York, Pennsylvania.

Based on the settlement, the CFTC made findings of fraud, failure to
    supervise, and recordkeeping and registration violations under the
    Commodity Exchange Act (CEA) against First Capital and its partners.

Without admitting or denying the findings in the CFTC order, respondents
    have agreed to pay $2.6 million in restitution to the educational
    institutions that lost money as a result of the misconduct. Under the
    settlement order, the individuals have also agreed not to apply for
    registration with the CFTC for a 5-year period, nor to act in supervisory
    roles for 7 years.

The restitution sum also satisfies the disgorgement required under the
    settlement order of the Securities and Exchange Commission (SEC), also
    issued today. The staffs of the CFTC and the SEC worked together to
    investigate and to negotiate the settlement with the respondents.

The CFTC's order finds that First Capital employed Kent A. Ahrens as a
    trader of an "index arbitrage strategy" for the firm's clients, principally
    The Common Fund, a not-for-profit corporation which manages investments of
    educational institutions. The order finds that First Capital is liable for
    Ahrens' fraud, which resulted in an approximate loss of $137.6 million to
    member colleges of The Common Fund based on his "short market bet" against
    the S&P 500 Index. Ahrens' violations, including his unauthorized
    trading, his failure to disclose his short market position over a 3-year
    period and the resulting loss, are the subject of a prior action by the
    CFTC against Ahrens, and a consent permanent injunction (U.S. Dist. Court,
    M.D. Penn., Docket No. 1-CV-96-1855, Oct. 22, 1996, as amended) (CFTC News
    Release #3958-96, October 16, 1996).

The CFTC order finds each of the respondents directly liable for his own
    conduct, including failure to supervise diligently, and for his own
    fraudulent acts which violated section 4o of the CEA. In particular,
    the order finds that each of the partners described the index arbitrage
    program as "low risk" and "fully hedged." Yet, each knew or should have
    known that Ahrens' trading entailed significant risks and that First
    Capital did not employ adequate controls for evaluating trading positions,
    relying instead principally on the trader, according to the Commission's
    order. The CFTC order finds each of the partners individually liable for
    knowingly participating in the decision not to report a loss suffered in a
    separate trading strategy in the spring of 1995, while effecting a wire
    transfer in the amount of the loss to reimburse The Common Fund's account.
    In a separate incident, the CFTC order finds three of the partners liable
    for misrepresenting the controls in place at First Capital in a memorandum
    to The Common Fund in the late spring of 1995.

According to Geoffrey Aronow, Director of the CFTC's Division of
    Enforcement:
    "The Commission's settlement and order address the consequences of the
    failure of a firm and the people responsible within that firm to institute
    necessary controls to oversee the type of trading conducted for The Common
    Fund's account. When, as here, commodity professionals make representations
    about the nature and riskiness of trading they conduct for other persons,
    they must have a basis to know what they are saying is true, including
    adequate systems of control designed to prevent and detect conduct that
    would make their representations false."
    The firm and two of the partners have also been found liable in the
    Commission's order for registration violations. Also, First Capital is
    found liable for failing to maintain records in accordance with CFTC
    regulations.

The CFTC's Aronow reiterated that "the duty to supervise set forth in
    the CFTC's regulations is an affirmative obligation. The order stands as a
    reminder to persons with supervisory obligations that they cannot simply
    delegate their responsibilities to the very traders and other persons who
    they are supposed to supervise and rest easy."