Leema Enterprises, Inc. - Page 17




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          to market risk.  Thus, Merit would find a willing party to take the         
          opposite position for every position it sold or purchased.  Merit           
          employees, as well as others recruited by Merit, functioned as              
          market makers who would accept positions offered by non-market-             
          maker customers of Merit.  These market makers took "assignments"           
          of stock from other non-market-maker customers.  Often these                
          parties were subsidiaries, such as Omni and Horizon, controlled by          
          Dr. Richartz.                                                               
               Although it ostensibly offered open positions in stock                 
          forwards, Merit traded only in spreads or combinations of spreads.          
          In a stock forwards spread position, an investor would purchase             
          both a long contract to purchase stock from Merit at a future date          
          and specified price together with an equivalent short contract to           
          sell the same stock to Merit at another future date and specified           
          price.                                                                      
               A combination spread involved two spreads in different stock.          
          Typically in one of the spreads, the long position matures before           
          the short, while in the other spread, the short position matures            
          first.  A combination spread in stock forwards in two different             
          stocks operates as a hedge against adverse market moves.                    
          Differences between the relative performances of each of the                
          spreads have an economic effect.                                            
               Merit issued a PPM for its stock forwards program, advising            
          that the holder of a stock forwards position had three options for          
          acting with respect to that position:  (1) The investor could hold          



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Last modified: May 25, 2011