Details of FBI Sting Unfolding : Fear and Anxiety Grip Commodities Markets
Shortly before 11 p.m. on Wednesday, a commodities trader sleeping in his Gold Coast apartment was jarred awake by the telephone.
“This is the FBI. Be down in your lobby in 10 minutes,” ordered the agent, calling from a car phone.
When the frightened trader arrived in the lobby of his expensive building, waiting for him were two FBI agents and a man he had known for the last year as a fellow trader working at the Chicago Mercantile Exchange.
The fellow trader, it turned out, was one of five undercover FBI agents who had spent months at the exchange and the larger Chicago Board of Trade secretly tape-recording conversations in and around the trading pits.
Similar scenes played out in wealthy neighborhoods around Chicago and its suburbs that night marked the first disclosure of the federal sting operation that is sending waves of anxiety and fear through the world’s biggest commodities trading markets.
“I don’t think anybody is talking to anybody they don’t know,” said a veteran commodities broker in the pits of the Mercantile Exchange, “or even to people they’ve known and traded with for years.”
There were other signs that disclosure of the investigation was worrisome to those who make their living in the fast-paced world of commodity futures trading. At the Mercantile Exchange, commonly called the Merc, nine trading memberships--including one owned by an undercover FBI agent--have been sold in the last two days, about the number normally sold in two weeks. The value of a single full membership has dropped $40,000. At the Board of Trade, 11 seats have been sold, and the value of a single full membership has fallen $25,000 in two days.
“The first thing I tell a client is to sell their seat,” said a commodities lawyer. “Once you’re not a member, the exchanges have very little leverage over you and you have a cash asset, $500,000 or $400,000.”
Both exchanges have rules allowing them to freeze the membership of a trader or broker who is under investigation and to use the sale of that membership to pay internally levied fines. So it is common for traders under investigation to attempt to liquidate their memberships before exchanges learn they are targets.
The scope of the federal investigation remains unclear, but so far numerous traders and brokers have been subpoenaed along with six-years’ worth of trading records and disciplinary files at the two exchanges.
The early targets of the investigation appear to be the young traders and brokers who work in the frantic trading pits at the Board of Trade and the Merc. But prosecutors and the FBI seem to have bigger targets in their sights.
“Right now, it’s the big squeeze,” said a prominent Chicago defense attorney who has been retained by two traders. “They are bringing in all the little guys to see if they can go up the ladder. The targets appear to be the (trading and clearing) houses.”
“They must be looking for people higher up,” said a trader who has policed activity on the trading floor in the past. “A broker is small potatoes. They have to be looking for higher-ups who on a daily basis would be making huge amounts of money.”
One source close to the inquiry said the government is trying to determine whether management officials at the exchanges were aware of the questionable practices and whether supervision may be too lax.
The Wednesday night incident was described by a defense lawyer hired by the trader. The lawyer refused to name his client or identify the undercover agent, but similar tales of late-night confrontations were told by lawyers for other traders and brokers from both exchanges.
Interviews with defense attorneys and law enforcement officials have begun to reveal details about how the FBI penetrated the complex world of futures contracts in an effort to accumulate evidence.
Paid $1 Million for Seats
Sources close to the investigation have confirmed that the government paid more than $1 million for at least three seats on the exchanges--one for about $400,000 on the Board of Trade and two for $350,000 each at the Merc.
In addition, at least two of the undercover agents were trained in the complexities of the commodities business through the cooperation of one of the nation’s biggest agriculture businesses, sources said.
Also emerging is a picture of young FBI agents adopting the high-rolling life style of their targets, living in expensive apartments and working out at the trendy East Bank Club north of the city’s financial district.
The FBI and U.S. attorney’s office here came up with the plan for investigating the commodities markets in November, 1985, according to a source close to the investigation.
U.S. Atty. Anton R. Valukas had taken office six months earlier with a pledge to clean up shady practices that were believed rampant on the two exchanges. He had learned about the activities while defending some commodity traders in private practice, including a client accused of some of the same swindles said to be at the heart of the current inquiry.
The FBI and other prosecutors in the office also had developed extensive experience in commodities cases as a result of nearly a decade of investigations and prosecutions.
In the probe, prosecutors and FBI agents originally suspected that false trades were being used on both exchanges to launder illegal profits from drug trading, as well as other practices to bilk customers, according to one source familiar with the early stages of the inquiry.
Valukas and other government officials have refused to comment on the case, and attempts to reach some of the targets whose names have been learned were unsuccessful. Sources said that the undercover agents left their exchange jobs a few weeks ago.
Sometime in 1986, two young FBI agents using the names Richard Carlson and Michael McLoughlin went to work as trainees with ADM Investors Inc., a commodity-trading subsidiary of Archer-Daniels-Midland, a giant agribusiness located in downstate Decatur, according to sources.
The parent company confirmed that the two men worked as trainees, but refused to say whether the company knew that they were FBI agents when it hired them. A source close to the government’s investigation, however, said that ADM cooperated with the probe, providing cover and training for the two agents.
Sources said Carlson and McLoughlin were runners on the floor of the Board of Trade during part of 1986 and 1987.
In 1987, Carlson used about $400,000 in government money to buy a seat on the Board of Trade. At about the same time, the government paid $700,000 for two seats at the Merc for agents using the names Peter Vogel and Randy Jackson, according to sources. That gave the FBI moles a far better vantage point from which to monitor what federal authorities had come to believe was pervasive fraud.
The agents all migrated to the most active of the trading pits, places where fast price changes and fast-paced deal-making offered the best opportunities for fraud.
One source with knowledge of the investigation said that, as the government uncovered more evidence of what it considered illegal trading practices, more resources were committed to the sting. The level of expenditures required approval from Justice Department officials in Washington.
Defense attorneys, who have learned details about the inquiry from clients, said the government appears to be examining a wide variety of potentially illegal trading activities that went beyond typical bilking of customers.
Among the other practices under scrutiny, according to several sources, are creating fake trading profits to launder illicit money and inventing trading losses to offset taxes on profitable transactions.
But it was rarely the average individual investor who was cheated when customers rather than the government were the objects of fraudulent activity.
“By and large the public does not speculate or invest in commodities,” said an official of one of the exchanges who would not speak for attribution. “Maybe some dentists and doctors invest but not little old ladies in tennis shoes. These are not retail markets in the same way the stock exchanges are. Our investors are big business, institutions, grain companies, banks . . . . “
As the government stepped up its presence at the exchanges, rumors began to circulate that FBI agents were operating there. Several defense attorneys said that they heard the rumors as early as late 1986.
“Traders live in their own world and they hear rumors every day,” said Stephen J. Senderowitz, a former federal prosecutor who has been retained by two traders under subpoena. “They get thick-skinned about them. They think they are cool enough and smart enough and slick enough not to get caught.”
Staff writers Ronald J. Ostrow in Washington and Paul Richter in Chicago and researcher Tracy Shryer in Chicago also contributed to this story.
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