Two more former employees of Coastal Corp. (now part of El Paso Corp.) have been charged with stealing tens of thousands of dollars from the company through a futures profits allocation scheme. The Commodity Futures Trading Commission (CFTC) has filed an administrative action against Clay Krhovjak of Bellville, TX, and Paul Cochran of Houston, charging that the two engaged in a trading scheme over a five-month period in 1996 to allocate profitable trades belonging to Coastal to accounts controlled by other unnamed scheme participants. The CFTC believes the two made off with about $89,228 in stolen profits.

In 1996, both Krhovjak and Cochran, who were assistant vice presidents at Coastal’s commodity futures trading desk in Houston, were responsible for placing energy futures orders for Coastal with floor personnel at the New York Mercantile Exchange (Nymex). The complaint alleges that one of the Nymex floor operations Coastal used in 1996 was Refined Energy, Inc. (Refined) of Red Bank, NJ, and it was through Refined that this scheme was conducted. The Coastal employees and an individual who owned Refined Energy allegedly agreed to misappropriate profitable trades belonging to Coastal by allocating the funds into their own accounts and allocating unprofitable and less profitable transactions to accounts controlled by Coastal. This allocation scheme ensured Cochran, Krhovjak and other participants risk-free personal profits, according to the complaint.

In addition, the complaint charges Krhovjak and Cochran with defrauding Coastal by trading ahead of Coastal’s futures trades, in that they used their advance knowledge of Coastal’s trades to obtain profits illegally for themselves and others. The complaint alleges that Krhovjak and Cochran fraudulently allocated trades or traded ahead on nine different days between June and October 1996. From those misappropriated trades, Krhovjak, Cochran and their co-participants received nearly $90,000, according to the complaint.

In September, Krhovjak and Cochran each pleaded guilty to one count of conspiracy to commit commodities fraud in violation of 18 U.S.C. Section 371 before the United States District Court for the Southern District of Texas. Sentencing is expected to occur in early 2002.

A public hearing has been ordered by the CFTC to determine whether the allegations are true, and, if so, what sanctions are appropriate and in the public interest. Possible sanctions include a cease and desist order, restitution, civil monetary penalties, and trading prohibitions.

This case follows another similar case involving Steven G. Soule, Kyler F. Lunman II and Hold-Trade Inc. who worked together with Thomas F. DeMarco, a Refined Energy telephone clerk on the Nymex floor, in a scheme in which energy futures trades made on behalf of Coastal were misappropriated and wrongfully allocated to accounts controlled by Lunman from Sept. 4, 1993 through Dec. 31, 1994, according to the CFTC.

Both cases against former Coastal employees involve Refined Energy, whose owner Robert Rossi is now behind bars in Miami, FL. In the first scheme in 1993 and 1994, the individuals engaged in scheme in which energy futures trades made on behalf of Coastal were misappropriated and wrongfully allocated to accounts controlled by Lunman. Soule, an employee of Coastal States Trading Corp., a division of Coastal Corp., was responsible for entering Coastal’s large volume of energy futures orders to the floor of the Nymex on a daily basis, and initiated the fraudulent allocations based on his knowledge of Coastal’s trading on particular days. Soule entered most of Coastal’s crude oil, heating oil and natural gas futures orders, which he gave directly to DeMarco at Refined by telephone. Soule and DeMarco together ensured the successful completion of the wrongful allocations by creating doctored floor order tickets and entering into additional transactions to replace those transactions that were misappropriated, according to the CFTC. Lunman and Hold Trade completed the scheme by providing the accounts into which the misappropriated Coastal trades were placed, monitoring the movement of Coastal’s profitable trades into those accounts, and disbursing the ill-gotten gains among the scheme’s participants. All respondents benefited financially from their roles in the scheme, the CFTC complaint said.

The complaint in that proceeding is scheduled to go to a series of sanctions hearings in December. Each defendant in that case was found liable for fraud in a separate portion of the proceeding. Hearings will determine how much they have to pay and what other sanctions should be handed down. In the criminal proceedings against those defendants, they all pleaded guilty and went to jail.

Allocation schemes show up about once a year at the CFTC, but few appear in this guise where employees are allegedly defrauding their employer.

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