THE CHICAGO COMMODITIES PROBE : The Investors : Some Players Worry They Are Mistreated


Just who are the victims of the investment scandal du jour , the suspected price rigging in the pits of the Chicago commodities markets?

Edward Horowitz, a former commodities broker for a national brokerage house who now works in Los Angeles as a consultant on securities and commodities fraud, thinks he’s a likely candidate.

Even Marc Fishzohn, managing partner of Cambridge Research & Management in Century City, which invests $400 million a year in commodities, says he can’t swear that he wasn’t clipped.


“Probably everyone has been hit at some time or another by unscrupulous trading,” Horowitz says. And with an admitted touch of hyperbole, he adds: “The guys on the floor (of the Chicago commodities markets) have a license to steal. And they do.”

With most of the specifics of the latest fraud investigation still under tight wraps, it remains unclear how the suspected illegal price rigging affected the thousands of professional traders, institutions and individuals who regularly buy and sell agricultural and financial futures on the Chicago Board of Trade and the Chicago Mercantile Exchange.

According to early reports, the scandal is believed to include allegations that brokers cheated clients by charging them more for their trades than they actually cost. The brokers allegedly pocketed the difference.

Although investigators haven’t identified the victims, commodity trading experts throughout the nation offered some insights on the potential targets.

In general, the experts say that if the fraudulent price rigging was pervasive and systematic, it affected all the market’s participants, even professional money managers and institutional funds.

However, for such a fraud to have escaped notice from the professional side of the market, which accounts for about 72% of all trading on the nation’s 12 commodity exchanges, the price skimming would had to have been minuscule to escape detection by the sophisticated monitoring systems that institutions and professional investors use to ensure that their trades are executed as the best possible prices.

According to Merton Miller, a finance professor at the University of Chicago, all professional and institutional investors monitor the trading activity in the pits of the commodities exchanges on computerized screens that flash current market prices. Because of the lightning speed of today’s communications systems, most trades are verified within minutes of being placed, so investors can easily check the price at which their order was filled against the most recent “screen price.”

“The big guys can generally detect if they’re getting bad ‘fills,’ ” Miller says. “And if you’re a big player, you probably have the right to demand some quality service from your traders.”

Still, Fishzohn says that even his price-tracking efforts could not detect a fraud on the scale of 1/8 to 1/16 of 1% on the price of a contract. At worst, such skimming would have produced an overcharge of $250,000 to $500,000 on his total business volume last year, and he would never have suspected it.

“It’s like some guy at the bank taking 2 cents from each checking account every month. No one notices it, so no one complains. But it adds up to big money because it’s being done to millions of accounts,” he explains. “It’s a far cry from the guy who tries to steal $85 million from the Bank of America all at once. But the money is probably still the same.”

Miller suspects that the most likely victims of the commodities fraud are the investors he likes to refer to as the “dentist from Peoria,” the fellow who has a few hundred thousand dollars to invest and wants to make some big money in something interesting.

“Think about doctors and lawyers; they’re your most likely victims,” Miller says. “They can’t possibly know what’s going on.”

Adds Michael Friedman, a Pasadena commodities attorney, “These people are sold on the notion that they can make money relatively easily and relatively painlessly. Most of these people have no idea of what’s going on at the exchanges and no way of finding out.”

And even those who do know what’s going on are powerless to do anything, claims Horowitz, the Hollywood broker-turned-consultant. He says few individual investors really know enough to do well in the commodities market, let alone know if their accounts are being overcharged pennies or even hundreds of dollars.

“Even when I was a broker, I knew I was getting the worst possible prices available in the time the trader had to execute my order,” he complains. “I would watch it carefully on the screen. I knew what was going on. It was true.”

Still, Horowitz says he continues to play the commodities markets. “I have made millions and I have lost millions,” he says. “I just get enjoyment out of it.”