THE NEW YORK COMMODITIES PROBE : CFTC May Gain Power From Scandals

The Commodity Futures Trading Commission, often criticized as a weak regulator, may become a big winner when the smoke clears from the wave of futures-trading scandals in Chicago and now New York.

A Congress angered by repeated abuses in the freewheeling futures markets is likely to give CFTC more money and muscle to pursue wrongdoers. Legislators with authority over the independent commission said Thursday that they are pleased it played a key role in investigating the latest round of alleged abuses by traders.

Thursday’s raid by federal agents on commodities exchanges in New York was a “CFTC initiative,” said Senate Agriculture Committee Chairman Patrick J. Leahy (D-Vt.). The burgeoning scandal in New York demonstrates that “concerns about floor trading practices are not limited to Chicago but are industrywide,” Leahy said.

“It looks like they (CFTC) are on top of things,” said House Agriculture Committee Chairman E. (Kika) de la Garza (D-Tex.).

The praise for the commission stands in sharp contrast to the situation in January, when CFTC remained in the shadows as the U.S. attorney’s office in Chicago flooded brokers and traders with subpoenas and seized their records.

The Chicago investigation featured FBI agents posing as traders in a two-year effort to discover whether investors were being cheated with false prices and improper trades. In Washington at that time, CFTC Chairman Wendy Gramm called a press conference to affirm that her agency had been involved in the Chicago probe.

Thursday’s events in New York, by contrast, were clearly orchestrated by CFTC, with postal inspectors seizing documents and delivering subpoenas as the climax of a probe by the commission. The investigation moved into an active public phase “to protect documents so they don’t get shredded,” De la Garza said.

He said the problems in New York do not signal a widespread failure of the futures exchanges or of government regulation.

“It just appears to be human nature and greed and somebody trying to skim a few bucks here and there,” he said. “You can’t legislate morals and integrity.”

Personnel at CFTC “are doing their job,” he added. “If they see something that needs to be investigated, they do it.”

Leahy said he favors a bigger staff and increased budget for CFTC, along with tougher penalties for violating rules governing futures trading.

“Obviously, it is too early to comment substantively on any New York investigation,” Leahy said. “However, lawbreakers must be punished. And if futures retail customers have been cheated on a large scale, this raises serious questions about the way our futures markets are operating.”

Leahy’s committee, which has been reviewing surveillance and discipline of traders in New York and Chicago, will hold hearings on the issue later this month.

CFTC’s importance has increased dramatically since its creation in 1974, when it assumed control from the Agriculture Department of the oversight of futures trading.

Futures are agreements to buy or sell a commodity at a specified future date at a price fixed now. Farmers and others have long used them to avoid dramatic fluctuations in costs or incomes.

More Speculative

In more recent years, however, futures contracts have been developed for such goods as Treasury bills and currencies and such intangibles as stock price averages. They enable investors to speculate on price fluctuations.

CFTC needs more money and personnel to cope with the expanding markets, said Rep. Glenn English (D-Okla.), chairman of the House Agriculture subcommittee that oversees the commission.

“Resources are a serious question,” he said. “There is a strong case to be made that the CFTC desperately needs additional resources.”

English said he is pleased with CFTC’s role in leading the New York investigation. “It’s a positive sign,” he said. “I am hopeful we will see further evidence of an aggressive CFTC.” He said he hopes that Congress will complete work by September on legislation reauthorizing the continued existence of CFTC.

Thomas A. Russo, a former CFTC director of trading and markets, said: “It is not a question of whether Congress is going to reauthorize. Rather, it is what changes are necessary.”

The latest scandal will generate added pressure to reform the industry, and the law will become more complex, according to Russo and congressional sources. CFTC will continue as the cop on the commodities beat, but it will be given more firepower to go after cheaters and thieves.

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