Agency Defends Role in Probe of Futures Markets : Gramm Says CFTC Was Involved in Undercover Operations From the Start

The Commodity Futures Trading Commission, fearful of appearing to be a weak federal regulator faced with a widening scandal on the Chicago exchanges, said Monday that it was involved from the beginning in the FBI’s undercover operations against brokers and traders.

“We use all the tools at our disposal, including undercover activity, to root out fraud and abuse,” Wendy Gramm, CFTC chairman, told an unusual news conference.

Regulatory agencies such as CFTC normally refuse to discuss their investigative work, but Gramm was apparently disturbed by the continuing news coverage featuring the FBI with virtually no mention of her agency. It appeared that CFTC, which is often viewed as a comparatively passive regulator, had little involvement in the 2-year-old probe of alleged widespread fraud.

‘Actively Involved’

Without providing details of the case, Gramm and her top aides insisted that their agency played a tough and aggressive role in seeking evidence of fraud.

CFTC staff members “have been actively involved” in the undercover operation and the investigation “from the beginning and continue to be involved,” Gramm said.

CFTC’s authorization is up for renewal by Congress this year, and Gramm is eager to demonstrate to legislators that her agency is keeping the futures markets honest.

“The question has arisen as to our involvement,” Gramm said. “The fact that we bring cases and have an active oversight program to root out fraud and abuse” demonstrates the agency’s determination “to protect the integrity of the markets,” she said.

FBI agents worked undercover as floor traders at the Chicago Board of Trade and the Chicago Mercantile Exchange, and they reportedly taped hundreds of conversations with brokers and traders as part of the investigation. Investors may have been cheated of millions of dollars through illegal activity by the traders, such as rigged bids. Traders may have conspired to buy and sell futures contracts at prearranged prices, pocketing the difference between the real market price and the price reported to customers, according to sources.

Futures contracts are agreements to buy or sell a commodity at a fixed price for delivery at a future date. Fluctuations in the price before the delivery date determine whether the investor makes a profit or suffers a loss. Under the best of circumstances, futures trading is a risky business, and studies indicate that most investors lose money when venturing into the futures market. The current scandal is likely to shake investor confidence even more.

Active Enforcement

Gramm refused to say whether she needs more enforcement personnel or tougher laws to combat fraud in the futures business. “Let’s not jump to conclusions,” she said.

“We have very active oversight and very active enforcement,” including action against rigged, prearranged trades, she said.

CFTC has the power to impose civil penalties of up to $100,000 for each violation of its trading rules. The current scandal involves allegedly criminal behavior, and thus it brings CFTC into cooperation with law enforcement agencies, including the FBI and the U.S. Attorney’s Office in Chicago.

The investigation marks the first time that undercover agents have been used on a wide scale during a futures trading probe, sources said. The undercover agents, with the material they have gathered against traders and brokers, are crucial to the investigation.

Normally, CFTC and other regulatory agencies depend on paper records and computer tapes to provide evidence of violations. But the records themselves could be corrupted if traders were conspiring to rig prices and simply reported false prices to the exchanges. “In some cases it is very difficult to detect abuses by looking at a lot of records,” Gramm said. “Undercover (work) can provide you with information not otherwise available.”

She refused to say whether CFTC or the U.S. Attorney’s Office in Chicago had first proposed using undercover agents as floor traders on the Chicago exchanges.

Standing by Gramm’s side, Dennis Klejan, CFTC’s director of enforcement, said the news conference was intended to convey “a message of strength” from the agency.