Sting in Chicago Shows FBI’s New Skill at Cracking ‘Crime in Suites’

When FBI agents posing as representatives of a bogus Arab sheik began arresting congressmen for bribery nearly a decade ago in the famed Abscam sting, there were cries of outrage on Capitol Hill.

Similar expressions of shock and anger were heard last month when it was disclosed that FBI agents pretending to be commodities traders had spent months secretly tape recording conversations in the pits of the world’s two largest futures exchanges here.

“This wasn’t a cocaine ring. This, at best, was a little white-collar crime,” Thomas A. Crouch, a commodities broker who dealt with one of the undercover agents, complained to a Chicago newspaper.

Dozens of traders and brokers at the Chicago Board of Trade and Chicago Mercantile Exchange have unexpectedly found themselves entangled in what appears to be the most ambitious and sophisticated undercover operation ever launched by the Justice Department.

The Chicago undercover operation is graphic evidence to business executives who hide behind legitimate and often complex enterprises that they are not immune to the investigative tools developed over the years to go after criminals ranging from common burglars to mobsters.

Indeed, as prosecutors and the FBI grow more adept at mounting undercover operations, they are turning their new skills more and more often on what U.S. Atty. Gen. Dick Thornburgh recently called “crime in the suites.”

But the use of these invasive techniques, coupled with the tough federal racketeering law, has prompted a chorus of protests from the pits of the commodities exchanges to the editorial page of the Wall Street Journal--just as Abscam evoked howls from the halls of Congress.

Dismisses Complaints

“Part of the concern is that white-collar people who commit white-collar crimes don’t like to consider themselves a part of the same social class as the Mafia or as the people who commit street crimes,” said Geoffrey Miller, a constitutional law expert and dean at the University of Chicago Law School. “So they really object when their homes are searched or their telephones are bugged.”

Anton R. Valukas, the U.S. attorney in Chicago, has heard plenty of the complaints over the last few years and last few weeks. He finds no merit in them.

“I don’t think that just because people have a position of wealth or power in the community that they ought to be immune from prosecution,” Valukas said last week in a rare interview. “That suggests that those individuals somehow are above the law or that we ought not use all the means at our disposal to prosecute those individuals because the means are tough and harsh.

“To the contrary, I think that those are exactly the people who have traditionally been beyond the law and against whom these methods and means ought to be used.”

Nowhere have undercover operations and racketeering laws been used more effectively than Chicago, where recent targets have ranged from corrupt judges and lawyers to city officials and police officers.

Chicago has become, according to law enforcement officials, an incubator for the type of aggressive white-collar prosecution likely to turn up elsewhere in the country. One Chicago operation even had the title “Operation Incubator.” The expertise gained here now is being shared with prosecutors from coast to coast.

A close examination of the earlier Chicago operations, particularly at the effective techniques for persuading people to cooperate, offers a glimpse of how the current commodities investigation may proceed in the coming months.

Grown More Daring

The examination also reveals how federal investigators have grown more daring and ambitious in combating white-collar crime since the end of the J. Edgar Hoover era at the FBI.

During his 48 years as director, Hoover prohibited agents from operating undercover in criminal investigations because he feared his men would be corrupted by such firsthand contact with criminals.

After Hoover’s death in 1972, the bureau began to develop an interest in mounting undercover investigations. But the targets of those modest initial efforts remained traditional criminals--mobsters, thieves and drug dealers.

Even Abscam, the first undercover operation to capture the public’s imagination, started out as an investigation of art thieves with ties to organized crime. It uncovered congressional corruption only by serendipity.

FBI agents lured congressmen to a Washington townhouse, where legislators were videotaped accepting cash in exchange for promises of arranging favors for a non-existent sheik. A senator, seven representatives and 11 others were eventually convicted.

But it was through an investigation of corruption in the country’s largest municipal court system in Chicago--Operation Greylord--that the government polished the art of the sting and laid the groundwork for its undercover investigation of the commodities exchanges.

Greylord was an intricately scripted undercover operation that at times seemed more like a made-for-TV movie than a federal investigation.

Hidden in Cowboy Boots

Phony criminal cases, complete with FBI agents posing as criminal defendants, were manufactured and sent on their way through Chicago’s courts. Courtrooms and judges’ chambers were infiltrated by undercover FBI agents acting as attorneys and wearing concealed tape recorders. A real judge cooperated and allowed the government to hide a tape recorder in his cowboy boots to document offers of bribes.

Initial disclosures suggested that only low-level court personnel and one judge had been caught in the three-year investigation. But, in a technique common to undercover operations, prosecutors persuaded many small fry to provide information against the bigger fish. For instance, police officers who had been recorded taking bribes wound up providing evidence against the judges to whom they had delivered the money.

Today, six years after the sting went public, more than 80 people have been convicted of bribery, conspiracy and racketeering. Among them are 12 judges and dozens of attorneys. And the government has lost only three cases.

Greylord demonstrated convincingly to top Justice Department officials the value of undercover investigations, and the quality of the evidence they generate.

“As aggressive as this office had been for over a decade in prosecuting corruption in Chicago, we were never able to successfully prosecute judges until we used the methods which were involved in Greylord,” said Valukas, whose father is a respected Chicago judge.

Miller agreed, saying: “Greylord really gave a tremendously good name to undercover investigations of the sting type. You had a (criminal justice) system that was unbelieveably corrupt and had been for years. The Augean stables needed to be swept, and Greylord was excellent at doing that.”

At the time the U.S. Attorney’s Office and FBI were conducting Greylord, the Justice Department’s Organized Crime Strike Force in Chicago was operating an elaborate undercover operation aimed at more traditional targets--organized crime and gambling.

In Operation Safebet, two FBI agents posing as businessmen took over a credit card operation whose owner had come to the government in 1981 after being shaken down by organized crime figures.

The business provided phony receipts for customers who used credit cards at a couple of lounges near O’Hare International Airport that were fronts for prostitution. Instead of showing that the credit card had been used at the lounge, the receipt used the name of a legitimate-sounding business.

$970,000 Profit

Under the stewardship of the government, the business expanded to perform the service for 15 to 20 lounges, gambling operations and escort services, many operating under protection of mobsters and high-ranking officers in the Cook County Sheriff’s Department.

By the time the undercover portion of the investigation was closed down in 1984, the credit card business had made a profit of $970,000--for the U.S. Treasury.

And the illusion had been so successful that when the operator of an escort service was confronted by one of the undercover agents flashing his FBI credentials, she laughed and said: “Where did you get those? They look real.”

So far, 58 people have been indicted on various federal charges as a result of Safebet. Two of them are fugitives, two cases were dismissed and one mob associate was found shot to death in a car trunk.

The 53 people convicted include several mobsters; five Sheriff’s Department officers, including the chief of intelligence and the head of vice; operators of the houses, and two bankers who provided loans to crooks in exchange for kickbacks.

As often happens in an undercover operation, information was turned up that led to charges in unrelated crimes. Charges were brought in connection with an unsolved murder, and a Colombian drug ring was broken up.

“This is the only time we’ve ever had a sting where we were able to show the organized crime aspect of running an industry and the role of police and political protection,” said Gary S. Shapiro, chief of the organized crime prosecution unit.

Other undercover operations were being conducted in Chicago and elsewhere in the United States at the same time, including a successful penetration of municipal corruption in Chicago that triggered a larger investigation in New York City.

But Safebet and Greylord showed how effective and sophisticated such operations could be. Greylord demonstrated that the government could penetrate places as sacrosanct as a judge’s chambers with electronic bugs and agents wearing wires. In Safebet, the FBI operated a business successfully and gathered evidence at the same time.

The experiences were combined in 1985 when the FBI launched the first of two highly ambitious undercover operations aimed at the Board of Trade and the Mercantile Exchange.

Within the government, they were known as Operation Hedgeclipper and Operation Sour Mash, and they offered the prospects for an inside look at the highly lucrative and arcane world of futures trading.

Serves as Central Casting

The first stage in a major undercover operation involves collecting enough evidence to justify the expenditure of time and money. For example, the government spent well over $1 million in laying the groundwork for the commodities investigation. Potential targets must be deemed worthy of the operation, the undercover portion must be viable and a convincing argument must be made that the evidence is not available another way.

A proposal and budget for a big undercover probe, known as a Group One investigation, is presented to a group of Justice Department lawyers and top FBI officials in Washington known as the Undercover Committee.

Once a project is approved, the Undercover Committee serves as Central Casting for the operation, providing names and qualifications of agents around the country who can be brought in to play undercover roles.

“There is a whole pool of people in the bureau with special skills,” said Robert G. Long, an FBI agent in Chicago. “The guy who can pull it off as a banker may not work out posing as a drug dealer.”

In the commodities investigation, two young agents with backgrounds in accounting were brought in from FBI offices outside Chicago. They used the names Richard Lee Carlson and Michael D. McLoughlin and received training in the commodities business with the cooperation of Archer-Daniels-Midland, a major agribusiness that had complained to the government about the way the exchanges were operating.

At least two other agents with similar backgrounds, who used the names Peter William Vogel and Randy George Jackson, were brought in as the probe expanded.

The FBI created false backgrounds for the agents, listing previous employers, Social Security numbers and educational references. They also set them up in expensive apartments and bought them memberships at trendy health clubs so they would fit in with their prey.

Some backgrounds were less than airtight. For instance, an official at Siena College in Loudonville, N.Y., said there was no record of McLoughlin graduating in 1981, although that was what McLoughlin listed on his commodities registration form.

The official said, however, that Michael Bassett graduated from the school in 1980. Michael Bassett was the name the agent used when he confronted traders during late-night visits to their homes to deliver grand jury subpoenas.

The registrar at St. Mary’s College in Moraga, Calif., told The Times that the school has records showing that Jackson graduated with an accounting degree in 1978. Quoting an unidentified source, the Chicago Tribune reported that the records were created at the request of the FBI as part of the agent’s cover.

But no one at the exchanges apparently checked the backgrounds, allowing the agents to work alongside the traders and brokers for months, recording conversations in an investigation that began unfolding last month.

If it follows the patterns of Greylord and Safebet, the commodities probe may last years. The first charges, which could come within weeks, will likely name small players, just as the initial Greylord indictments focused on low-level police and court personnel.

The scenario is already being played out in lawyers’ offices, with prosecutors and before a special federal grand jury: Traders and brokers who did business with the undercover agents have been subpoenaed and threatened with harsh sanctions usually used against organized crime figures if they refuse to cooperate in the government’s efforts to catch bigger fish.

‘Brokers Are Upset’

According to defense lawyers, some traders have already “flipped” and begun to cooperate in the government’s attempt to build cases against more influential traders, supervisory officials in commodities firms and possibly executives at the two exchanges.

“The ultimate targets may be higher-ups in the back offices who knew what was going on and permitted it or benefited from it,” said Susan Bogart, a defense attorney and former federal prosecutor. “Flipping the low-level traders in the pits would permit the government to obtain evidence which would explain the execution of trades and the corresponding paper trail that could lead higher.”

The elaborate and expensive commodities investigation is likely to be deemed a success only if it moves beyond the traders in the pits of the exchanges and implicates higher-ups the way Greylord did in the courtrooms. And that means that, before the end of the investigation, more protests are likely from targets and potential targets alike.

“The congressmen were pretty upset about Abscam and the judges were pretty upset about Greylord,” said Albert W. Alschuler, a criminal law professor at the University of Chicago Law School. “And now the commodities brokers are upset about this operation. But I don’t know that the public is upset about it.”

Researcher Tracy Shryer in Chicago contributed to this story.