Legality of ‘Human Bugs’ in Chicago Sting Questioned

The federal investigation of alleged fraud at Chicago’s two major commodities exchanges may result in a precedent-setting court battle over the government’s right to use “human bugs” in undercover sting operations, attorneys who have been retained by some of the traders said Friday.

At issue is whether the government can legally record “ambient conversation” without a court order, said commodities lawyer and former federal prosecutor Stephen J. Senderowitz.

“This is an issue that has never really been decided in court,” Senderowitz told a standing-room-only meeting of the Chicago Bar Assn.’s futures regulations law committee. “Evidence that has been gathered as a result of violations of the (federal) eavesdropping statutes taints anything it comes in contact with.”

At the same meeting, criminal lawyer Edward Genson disclosed new details about how government agents operated to gather evidence in the undercover FBI investigation of trading practices at the Chicago Board of Trade and the Chicago Mercantile Exchange, the world’s two largest commodities futures exchanges.

Agents, posing as traders, worked on the exchange floors for almost two years wearing concealed recording devices to collect evidence of wrongdoing by traders and brokers.

In the coordinated twin investigations of the Board of Trade and the Mercantile Exchange, government agents did not have prior court approval to tape record conversations on the trading floor and in the trading pits.

Federal law allows a government agent to wear a concealed recording device to tape a conversation with a targeted suspect in an investigation without a court order. But, Senderowitz said, to make recordings in a room with a concealed recording device, the government must get the OK from a federal judge to plant the bug.

“In this case, you have a situation involving a private exchange,” Senderowitz said. “The public is not entitled to be on (the trading) floor. If they get on the floor, they go through security checkpoints with a guest badge and they can’t even get into the pits. The FBI agents got into the pit through a ruse. And once in the pit, without any identifiable target, they acted as roving bugs in our opinion. In fact, they acted like a planted microphone.”

“Is that the type of overhear that needs judicial approval, or is it the type that does not need judicial approval?” That, Senderowitz said, is the question.

Senderowitz did not refer to any specific cases in his remarks and refused to respond to questions from reporters about whether any challenges have been filed in court.

25 Interviews

However, other legal sources said a challenge of the government’s case based on improper use of “human bugs” would probably have to be decided by the U.S. Supreme Court in a precedent-setting decision.

In his remarks, Genson disclosed that an FBI undercover agent who traded at the Mercantile Exchange and used the name Peter William Vogel ended most trading days with “some sort of disparity” in his trading account. In some instances, he volunteered to “eat” losses to ingratiate himself to brokers. In other cases, he agreed to apparently illegal schemes to wipe out losses.

Genson said his investigation, based on 25 interviews with traders and brokers, revealed that Vogel asked “brokers to launder money through some sort of ruse. A lot of people turned that down.”

Senderowitz, who prosecuted commodities crimes when he worked for the Justice Department in Chicago, said that if the investigation were focusing on relatively common trading infractions, there would be no need for an undercover investigation. Information on those activities could be obtained from the exchanges’ internal disciplinary reports.

Humor in Yen Pit

“I think some of the more dastardly things reported may have been the main thrust of the investigation,” Senderowitz said. “I think it remains to be seen whether money laundering and tax fraud are ultimately the subject of indictments.”

The undercover investigation, which has kept Chicago’s best legal minds busy since it first surfaced a month ago, has spawned both fear and paranoia on the trading floors of the exchanges but has also resulted in some black humor.

This week, traders in the Mercantile Exchange’s yen pit--a focus of the federal probe--were seen wearing little white lapel buttons to indicate they were not carrying concealed tape recorders. The buttons showed a microphone crossed out by a red slash.