Massive Fraud Uncovered at Chicago Board of Trade : Could Rival Scandal on Wall Street

FBI agents posing as traders have uncovered millions of dollars in fraud at the world’s two largest commodities exchanges in an investigation that could rival the Wall Street insider trading scandal.

Key individuals in the investigation have been subpoenaed, a source close to the investigation said today, and mail, wire fraud and racketeering charges may result. Both trading floors were awash with rumors.

More than 150 brokers, traders and industry executives may be indicted, the source said.

The Chicago Board of Trade, the world’s biggest futures exchange, and the Chicago Mercantile Exchange, ranked second, had no comment on the report.

U.S. Atty. Gen. Dick Thornburgh, asked by reporters in Washington whether he had been briefed on the investigation, said: “We don’t have any comment on that.”

Chicago newspapers carrying banner headlines about the investigation were snapped up by floor traders and clerks, who stood in stunned groups discussing the report. The offered price of a seat on the Board of Trade dropped $35,000 in the first few hours after business opened for the day.

News of the investigation also depressed prices in the grain pits at the Board of Trade, apparently out of fears that some traders might have to liquidate their accounts to hire lawyers.

The two exchanges allow traders to buy and sell contracts covering everything from corn and soybeans to $100,000 bundles of U.S. Treasury bonds. Business is conducted via shouted bids and offers and with hand signals on crowded trading floors where thousands of clerks, traders and runners come and go daily.

FBI agents posing as floor traders were on the exchange floors for two years, the source said. The undercover agents were wired for sound to secretly record illegal trades.

Allegations that commodity firms were engaged in illegal trading sparked the investigation, the source said. He added that one illegal practice uncovered involved “bucketing”--either pocketing a customer’s money without making the investment or skimming money from a trade.

A large part of the suspected criminal activity was “personal fraud for personal gain,” but much was done on a larger, more organized scale, the source said.

“As information becomes clear from sources close to the investigation, it is obvious that the 150 to 200 people is just the tip of the iceberg,” he added.

There is the potential of hundreds more people being named in the case “depending on information from those who cooperate,” he said.

The scale of the fraud is in the tens of millions of dollars. “We are not talking chump (small) change,” the source said.

Business on the two exchanges has mushroomed in recent years, particularly in the areas of financial instruments. Business grew from 101 million contracts in 1983 to 181 million contracts annually at the end of 1988.

In the process, the folksy days when many people on the floor knew each other disappeared.

“There had to be some monkey business going on. It was just too fast; there was too much money and too many young people. It was just too tempting,” one trader said.