Commodities Probe Termed ‘Far Reaching’ : Atty. Gen. Thornburgh Pledges ‘Beefed-Up’ Effort Toward Reform

U.S. Atty. Gen. Dick Thornburgh Sunday called the FBI’s undercover probe of alleged fraudulent trading on the world’s two largest commodities futures exchanges “far reaching” and “significant.”

It was the first government acknowledgement that traders and brokers at the Chicago Board of Trade and the Chicago Mercantile Exchange--and perhaps the exchanges themselves--are targets of a federal grand jury investigation into a range of illegal trading practices that may have cost customers tens of millions of dollars.

Thornburgh’s confirmation of the investigation came as a Board of Trade veteran and former exchange official said the investigation alone, regardless of its outcome, was “a disaster for the reputation of the board. And a loss of reputation cuts down trust in the market.”

The probe “does reflect an increased concern on our part, in the Department of Justice, to deal with fraud and insider dealings in both the securities and commodities markets,” Thornburgh said on NBC’s “Meet The Press.” “The people who trade on these markets are entitled to their integrity, and we hope to work with the leadership in both the commodities and securities markets to ensure that people are getting a square deal. We’ll be announcing soon a much beefed-up operation in this regard because this is basically a pro-consumer initiative.”

The three-year investigation is “the result of an uncover operation carried out superbly by the FBI,” Thornburgh said. At least five FBI agents worked as commodity traders for 18 months while wearing hidden microphones to collect evidence of alleged wrongdoing.

“We’ll be gathering and submitting evidence (to a grand jury) to see if violations of the federal criminal laws have occurred,” said Thornburgh who, since becoming attorney general last fall, has emphasized fighting white-collar crime. He declined to predict when any definitive action can be expected from the grand jury, which began calling witnesses and seeking records last week.

Before Thornburgh’s acknowledgement Sunday, both FBI and Justice Department officials refused all comment on the investigation in an apparent attempt to minimize any impact it might have on trading at the two exchanges. However, word began to spread throughout Chicago’s financial community last week after the first subpoenas were delivered.

So far dozens of commodities traders and brokers who work in the noisy, bazaar-like trading pits of the two exchanges have been subpoenaed during by the grand jury--some as recently as Sunday. Both exchanges have also received subpoenas from the grand jury asking for six years of records covering tens of millions of complex transactions.

“This (investigation) really gets to the core of the exchange. It questions the reputation and the integrity of the exchange,” said a 30-year veteran and former Board of Trade official who discussed the government’s investigation with The Times on the condition that he not be identified by name. “Regardless of the outcome it will take years to build up confidence again.

“This could rob users of the marketplace of confidence in the way that market works,” the former official said.

Centered in Chicago, commodities futures exchanges are international markets. They are used by major financial institutions, insurance companies, farmers, grain companies, importers and exporters and multinational corporations as a hedge against price swings. Traders and brokers, working in crowded pits--literally depressions or small arenas on the trading floor--buy and sell contracts guaranteeing delivery of commodities at a future date for a guaranteed price.

Commodities traded this way range from corn, soybeans and pork bellies to foreign currencies, Treasury bonds and precious metals. The markets provide those using them with a kind of insurance. For example, a farmer can sell his crops at a set price months before the harvest and food processors can assure themselves quantities of commodities at a set price months before they actually need them.

Larry Green reported from Chicago and Ronald J. Ostrow from Washington.