FBI Probes Fraud in Futures Trading : Investors May Have Lost Millions in Massive Cheating in Chicago Markets
Undercover FBI agents working in the noisy, frenetic trading pits of the world’s two largest commodities exchanges have uncovered evidence of massive fraud that may have cost investors tens of millions of dollars.
The three-year investigation of futures transactions at the Chicago Board of Trade and the Chicago Mercantile Exchange came to light Thursday as FBI agents served subpoenas demanding six years of records covering millions of trades from the two exchanges and their internal auditing departments.
In addition, grand jury subpoenas were served on traders and others connected with the exchange as FBI agents fanned out through Chicago’s pricey Gold Coast neighborhoods and North Shore suburbs, beginning late Wednesday and working until dawn Thursday. Traders who did not get subpoenas got the news in headlines in the morning Chicago Tribune.
Up to 100 Targeted
Traders, brokers and commodities firms were asked for records, handwriting samples, fingerprints and photographs. Between 50 and 100 persons are believed to be targets of the investigation.
The alleged illegal activity uncovered in the investigation includes cheating of investors, manipulating trading losses for tax advantages and possible money laundering.
For example, some traders allegedly charged customers more for their contracts than they actually paid for them on the trading floor, and then pocketed the difference.
This and other complex schemes were uncovered in the arcane, little-policed, widely utilized financial markets where trades worth hundreds of billions of dollars a day are consummated on behalf of investors around the world.
Legal sources said they believe the grand jury will consider charges that include racketeering, conspiracy, wire fraud, mail fraud and various income tax violations.
“The investigation came right out of the blue,” an attorney representing a subpoenaed trader said. “No one knew anything about it.”
Actually, top Justice Department officials had known about it since last Friday, when Anton J. Valukus, the U.S. attorney for the Northern District of Illinois, flew to Washington and briefed Atty. Gen. Dick Thornburgh on the investigation.
Although the inquiry is far-reaching and may ultimately involve tens of millions of dollars in fraud, some Chicago lawyers who specialize in commodities law cautioned that it is too early to compare the unfolding story here to the insider-trading scandal that has engulfed Wall Street for nearly three years.
Still, there has been a perception in Chicago that these markets were ripe for a major scandal.
Exchange Called ‘Cesspool’
Just two months ago, U.S. District Judge Marvin Aspen called the Chicago Board of Trade “a cesspool . . . rife with potential corruption and manipulation.” Aspen sounded his warning as he sentenced a former trader to six years in prison for a $300,000 trading scam that involved wearing disguises to escape identification on the trading floor.
“Problems like these have been with the exchanges from the very beginning,” said Robert Tamarkin, a futures market historian and president of Intermarket Publishing Corp. “These markets can only be regulated by having a policeman in each pit. This is an example of the failure of self policing and shows the weakness of the Commodities Futures Trading Commission in regulating the pits.”
Some of the alleged illegal activity was documented on tape recordings made by at least five FBI agents. They wore concealed electronic monitoring equipment as they worked in the noisy, bustling trading pits--literally depressions in the trading floor--where all deals are settled by shouts and complex hand signals.
The FBI moles were placed in some of the busiest trading areas of the two exchanges. At the Board of Trade, agents worked in the soybean pit, often crowded with hundreds of traders and particularly busy as the result of last summer’s drought, and also in the heavily traded U.S. Treasury bond pit. At the Mercantile Exchange, undercover agents traded foreign currencies and the Standard & Poor’s Index.
The scope of the federal investigation is suggested in the subpoenas delivered Thursday afternoon. The grand jury demanded “all records relating to membership and trading activity for the period Jan. 1, 1983, to the present, including but not limited to trade registry records, time and sales records, disciplinary files and complaints, membership background and financial stock-holding investigation file.”
The government has asked for literally millions and millions of records. In 1988 alone, at the Chicago Board of Trade a record 143 million futures contracts were traded--fully half of all futures contracts traded in the world. Last year’s volume at the Mercantile Exchange was 78 million contracts.
Exchanges to Cooperate
In a notice to its members, the Board of Trade said that it “must and will comply fully with this subpoena.” A spokesman for the Board of Trade said he expects federal agents to begin inspecting the data at the board offices as soon as next week. A spokesman for the Mercantile Exchange said it too would cooperate with the investigation.
While word of the federal grand jury inquiry swept the trading floors and Chicago’s financial community--second only to New York’s in size--both Justice Department and FBI officials refused to confirm or deny that there was an investigation.
“The position of my office and of the FBI here is absolutely no comment,” said U.S. Atty. Valukus, who for months has been warning, in public statements, of a federal crackdown on commodities trading fraud.
Federal authorities in Washington were also uncharacteristically reluctant to discuss the investigation even privately Thursday, apparently in an effort to reduce the impact it might have on the markets that affect trading worldwide.
Still, the investigation made its mark. At the Chicago Board of Trade, the price of a membership fell $35,000 Thursday, to $410,000 from $445,000. And, at the Mercantile Exchange, the price of a full seat plunged $20,000 to $330,500.
One lawyer said a client had told him that there were suspicions in late 1987 that the FBI was investigating the Board of Trade. “They didn’t know the extent but they knew there was something going on.”
Kaleidoscope of Confusion
Despite a small army of security men who patrol the floors of both exchanges looking for improprieties, trading takes place in an atmosphere conducive to shady dealings. Together, the two exchanges have over 6,000 traders and hundreds of clerks, runners, telephone clerks and messengers--all identified by the colors of their jackets. The trading floors are a kaleidoscope of confusion and color in motion.
Commodities ranging from soybeans and corn to foreign currencies and Treasury bonds are traded at the two exchanges.
A futures contract is an agreement to deliver a quantity of a commodity at a specific time for a set price. For example, if a major grain company believes a drought next summer will raise the price of corn, it might buy corn now for July delivery--at a price it believes is lower than next summer’s price will be.
Similar contracts allow investors and speculators to buy everything from plywood and live cattle to soybeans and gold. Although some trades are made with the intention of actually taking delivery of the commodity, most are paper transactions with investors and speculators hoping to make money from quick, minute swings in the market.
Commodities futures traders are to Chicago what Wall Street brokers are to New York and what entertainers are to Hollywood. They have a reputation for glitz, living in the fast lane, enjoying the high life.
Traders provide the grease that helps run Chicago. Profits earned in the trading pits build restaurants and fuel limited partnerships that erect high-rise apartments and office buildings. Some of the city’s most valuable private art collections are owned by traders.
Staff writer Ronald J. Ostrow in Washington and researcher Tracy Shryer in Chicago contributed to this story.
How the trading pits work, Page 22. Additional stories in Business.
