Long-Term Fraud Seen at N.Y. Futures Markets : Sources Claim Illegal Practices by Cliques Have Cheated Investors and Other Traders for Years

A day after government agents swooped down with subpoenas on New York’s biggest futures markets, sources familiar with the inner workings of the exchanges said Friday that small cliques of traders, exploiting inadequate government scrutiny, have long engaged in various illegal practices defrauding both investors and other traders.

“Insiders have advantages in terms of trading. That’s the source of (long-standing) complaints. These markets are not fair, open markets operated for the benefit of the public,” said Martin R. Gold, whose law firm, Gold, Farrell & Marks, handles securities litigation.

Sources familiar with the probe said investigators are checking the possibility that trades were illegally manipulated to avoid taxes. Also under investigations, they said, are allegations that traders tried to escape their losses by improperly paying off officials at other firms to declare them “errors,” which would forces those officials’ firms to unwittingly absorb the losses.

Few details of the Commodity Futures Trading Commission investigation have been made public, but initial indications are that it so far has a much narrower focus than the ongoing federal probe of the much larger futures exchanges in Chicago.

Where the Chicago investigation grew from a large-scale sting operation, with undercover FBI agents acting as traders, the one in New York is believed to have arisen from complaints CFTC received from one or more exchange members. Officials have indicated that the FBI is not involved in the New York investigation.

Although CFTC has subpoenaed information about dozens of past and present members of the four New York exchanges, only a few--two of whom are well-known and influential figures within the markets--are believed to be at the center of the investigation.

A search warrant was served and records taken from the offices of a firm, MBF Clearing Corp., owned by Mark B. Fisher, 28, of Long Island, N.Y.

Also believed to be a target of the investigation is Preston Semel, 39, a well-known and controversial figure in the New York commodity trading world. Three years ago Semel was fined $5,000 by CFTC to settle a civil complaint in which he was accused of a variety of trading violations.

Both Fisher and Semel were reported to have been served subpoenas on Thursday. A subpoena is a demand for information, which does not necessarily identify the recipient as a target on an investigation. Both declined comment.

Although business went on as usual at the exchanges, many traders were confused and nervous about Thursday’s surprise raids. “Listen, I know everybody on this floor,” said Russell Rosenthal, a Rafferty Associates broker. “Everybody’s coming over to everybody else and asking what’s happening, and nobody knows. The only ones who know are the ones whose names have been in the paper.”

Nonetheless, the investigation brought forth a torrent of complaints and accusations from traders and others familiar with the exchanges.

Hope for Some Honor

“When you walk into the silver pit or the gold pit, you are hoping there will be some honor among the traders,” said one source.

But often, he said, traders collude and “trample the group trust,” with serious fraud being “winked at.”

The four exchanges--the Commodity; New York Mercantile; Coffee, Sugar & Cocoa and New York Cotton exchanges--are far smaller than the giant stock and bond markets of Wall Street, and all do business on the same trading floor in the World Trade Center.

Traders often belong to more than one exchange, and some, including Fisher, are members of all.

Buying and selling using in noisy “open outcry” trading pits, traders rely more heavily on personal relationships than do their counterparts in securities markets, where transactions are handled by computer.

But in this more intimate atmosphere, some of the most powerful are “throwing their weight around, doing things for their own advantage,” said one source, who asked not to be identified. “The floors are controlled by small cliques of people, and if they want to get together and distort things, there’s ample opportunity.”

One of those opportunities, he said, comes in tallying up the trades at the end of each day.

In the chaos of the trading pits, a buyer or a seller may not have recorded the trade they made together. Or the buyer and seller may have recorded trades of different sizes.

Firms usually maintain an “error account,” to take care of these imbalances without the customer suffering. Some claim that traders have improperly paid others to declare their personal losses as errors; such a declaration would mean that a firm maintaining an error account unwittingly absorbs someone else’s loss.

“Errors is an area where there has been a lot of abuse,” said one source. “It’s a kind of black market in errors.”

Many of those interviewed were highly critical of CFTC, saying it does not keep close enough watch on futures market activities and that its rules are geared more toward catching minor technical violations than major fraud.

“The CFTC has been far less a factor in policing the market than the (Securities and Exchange Commission) has in the securities markets,” said one lawyer.

“The problem is that there’s not as good of an audit trail as there should be,” added Thomas A. Russo, a New York securities and commodities lawyer who was once a high-ranking regulator. In cases of so-called front running--where traders defraud their own clients by trading for themselves before they execute their customers’ buy and sell orders--it is hard for CFTC to reconstruct the deal, he said.

The various exchanges vigorously defend their enforcement record. The Commodity Exchange, for example, has noted that it fines its members an average of around $500,000 a year as a result of its internal investigation.

CFTC also has instigated complaints over the years, generally accusing traders of manipulating markets or arranging bogus trades to avoid paying taxes on their actual gains.

Several Past Charges

Semel was one of 15 individuals and companies named in a civil complaint by CFTC in July, 1980.

He and the others were accused of a variety of violations, including make “fictitious sales or causing prices to be reported, registered or recorded which were not true and bona fide prices.”

Such transactions, the commission said, had a variety of purposes, including “producing losses in one fiscal year and gains in the next fiscal year” to reduce traders’ tax bills. Also a goal, the agency said, was “cheating and defrauding” in trades, and executing contracts in ways that were “open and competitive.”

All the violations were alleged to have occurred on the New York Mercantile Exchange.

Times staff writers John J. Goldman and Charles Hirshberg contributed to this story.

BAFFLED

Silence settled over a federal probe into fraud at two Chicago commodities trading pits. Page 4.