When his shares in IBM and Glaxo Holdings PLC tanked earlier this year, pro golfer James P. King thought he had found the perfect solution: cash in his stock portfolio and invest in a commodity fund that had been posting annual gains of 30% to 50%. His best friend, who had invested in the fund for years, swore by Lake States Inc. and its charismatic president, Thomas W. Collins.

On June 3, just months after the 60-year-old King handed over his $380,000 life savings, Collins left his suburban Chicago home and never returned. Now, bankruptcy and civil fraud cases pending in federal court describe Lake States as an elaborate scam, costing some 400 investors as much as $60 million. The lawsuits allege that Collins, 46, duped a local mayor, a police chief, an anchorman, and dozens of Greek American entrepreneurs--all the while successfully fending off the Commodity Futures Trading Commission, the government agency responsible for regulating commodity firms. In court documents, he is accused of running a Ponzi scheme, paying out "proceeds" drawn at least in part from the money of new investors.

As of mid-September, no criminal charges had been brought against Collins or other Lake States officials. But the CFTC has filed a lawsuit accusing him and a brother, Edward M. Collins, of massive fraud. Thomas Collins couldn't be reached for comment. Saying he is the target of a criminal investigation, the brother asserted his Fifth Amendment right in response to the civil fraud charges.

The episode, as documented in court filings, raises serious questions about the CFTC's ability to police the commodities markets. Some 41/2 years before Collins disappeared, an informant tipped off the CFTC about suspicious activity at Lake States. Yet agency investigators got nowhere in trying to bring a case. CFTC enforcement chief Dennis Klejna insists that "we tried everything we could have." Lake States was very enterprising in finding ways to resist the CFTC's efforts to gather evidence. But critics claim that the CFTC--which is dogged by a reputation for lax oversight--should have brought charges years ago. "The commission had no idea what was going on," declares Chicago attorney Mark S. Boyle, who represented Lake States investors during the agency's probe. When King learned that he had invested his money four years after the CFTC launched its probe, he said, "that made me sick. That's negligence."

The CFTC got wind of Collins in 1989 when an informant told the agency that Lake States was allegedly violating commodity laws by distributing false statements and investing customer funds without the proper license. When CFTC investigators questioned Collins, who didn't have the license, he denied the allegations.

SKIMPY STATEMENTS. Critics say the CFTC should have sought an injunction freezing the company's assets, on the theory that Lake States had improperly solicited funds from the public. Bank records obtained by the CFTC showed that Lake States was receiving millions of dollars from outside individuals. "All you had to do is walk into the office to know [it] was trading customer money," contends Arthur W. Aufmann, a Chicago attorney representing Lake States investors. The CFTC also had records showing alleged trading irregularities. But the agency needed more evidence, Klejna asserts.

The CFTC's biggest hurdle was getting Lake States customers to cooperate with its investigation. For one thing, they had a lot of confidence in Collins, who had been a member of the MidAmerica Commodity Exchange, an affiliate of the Chicago Board of Trade, since 1985. His firm's bare-bones monthly account statements showed skyrocketing returns. By the time Collins vanished, investors thought they had amassed $400 million, according to the bankruptcy trustee in the case.

Much of Lakes States' business relied on word of mouth. The firm hosted lavish parties, including a Christmas bash for 600 last year where guests dined on filet mignon while discussing their fortunes. Collins, dapper in a tuxedo, impressed the crowd with his friendly manner and devoted family.

Clients went along with Lake States' requests that they refuse to help the government. "They used to tell everybody to keep it quiet," says Dino Alexis, a suburban Chicago restaurant owner who says he has written off his $25,000 Lake States investment. Adds the CFTC's Klejna: "We did not get a single human being willing to admit they had a commodity investment with this guy until after he skipped town. If people had been more forthcoming, we would have had a lawsuit sooner."

The CFTC was thwarted on other fronts. It obtained Lake States' account statements from a Chicago-based firm that handled its trades. But Lake States resisted efforts to follow up on suspicious activity in the accounts. The CFTC had to fight for months to enforce routine subpoenas of bank records.

LOST TIME. Despite Lake States' tactics, critics say the CFTC should have brought a case early on. Even a modest case could have undermined investors' confidence. Instead, the agency spent two years trying to obtain income-tax records from Lake States officials, an effort rejected by an appellate court. An additional 10 months went by before the CFTC finally brought a case on May 19 based on technical trading irregularities as much as eight years old. That action may have precipitated the disappearance of Collins two weeks later.

This sorry saga leaves two lessons for investors. One, of course, is that if an opportunity seems too good to be true, it probably is. And if you choose to ignore the first lesson, pay special attention to the second: Don't count on the government to protect you.

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