Dozens of Traders, Brokers to Be Indicted in Commodities Scandal

The first grand jury indictments will be returned today in the government’s extraordinary three-year-long undercover investigation of alleged fraud at the Chicago Board of Trade and the Chicago Mercantile Exchange, the world’s two biggest commodities futures markets.

Dozens of traders and brokers at the two exchanges will be charged with offenses ranging from racketeering to fraud, defense lawyers said. The indictments are the result of one of the most elaborate FBI stings and one of the most wide-ranging federal probes ever of white-collar crime.

To penetrate the little-policed and widely utilized Chicago futures markets, FBI agents with fabricated identities worked for months as traders in the noisy, frenetic trading pits. The undercover agents not only traded but also befriended traders, socializing with them and surreptitiously making electronic recordings documenting alleged illegal activity.

Underscoring the significance of the indictments, top federal officials are scheduled to join Chicago’s U.S. attorney, Anton R. Valukas, in announcing the charges, the first government acknowledgement of the investigation. Sources close to the investigation said they will include Atty. Gen. Dick Thornburgh, FBI Director William S. Sessions and Commodity Futures Trading Commission Chairwoman Wendy L. Gramm.

“That gives you an idea of the magnitude of these cases,” said veteran commodities lawyer James A. McGurk, a former federal prosecutor and former CFTC Midwest regional senior trial counsel. “It’s unprecedented.”

Traders and brokers are expected to be charged with a wide range of offenses, including making illegal trades to reduce their income tax liability, making prearranged trades at non-market prices, and “front running,” or executing trades for their own accounts in advance of trading for their customers’ accounts.

Targets of the investigation are traders and brokers working in the soybean and Treasury bond pits at the Chicago Board of Trade and in the Japanese yen and Swiss franc pits at the Chicago Mercantile Exchange. The soybean and Treasury bond pits are two of the three busiest at the Board of Trade, while the currency pits at the Mercantile Exchange are two of the most volatile.

Sources said that, in addition to the indictments, a small number of other traders will be accused of felonies and misdemeanors in criminal informations, a sign that these persons have cooperated with federal investigators and have negotiated plea agreements.

“There have not been widespread defections to the government side,” said a defense lawyer familiar with the investigation. Other sources said the government has been frustrated by the large number of traders who invoked the Fifth Amendment when questioned by the grand jury.

Several other traders are expected to be barred from participating in commodities trading for years under terms of an agreement they have worked out with the CFTC as part of a negotiated settlement of violations of that agency’s rules. The extent of the CFTC’s role in the investigation has been a mystery since word of the probe became public in January.

‘Facing Quadruple Jeopardy’

In addition to the Justice Department and CFTC, brokers and traders implicated in the federal investigation also face disciplinary action by the exchanges themselves and by the National Futures Assn., which registers brokers and traders.

“Those implicated are facing quadruple jeopardy,” McGurk said.

An indication of what awaits those implicated in the federal investigation came Tuesday when the Wall Street Journal disclosed that four traders in the Mercantile Exchange’s yen pit who traded with undercover FBI agents have been charged in an internal investigation by the exchange.

Sources familiar with the investigation said Brian E. Sledz, his younger brother James, James Cali and Thomas A. Crouch have all been charged with engaging in prearranged trading. Cali and Crouch have also been accused of failing to cooperate with the exchange’s investigation.

A spokesman for the Mercantile Exchange refused to confirm or comment on the pending cases. But other sources said the investigation of the four began Jan. 20, the same day that the federal undercover investigation surfaced in news reports.

Brian Sledz, who sold his exchange membership for $350,000 in January, sued the Mercantile Exchange earlier this year after the proceeds were frozen pending the internal investigation.

Earlier this year, federal investigators reportedly asked the exchanges not to conduct their own internal investigation until the government probe was concluded. Federal authorities had no comment on the Mercantile Exchange’s action.

The federal investigation has been controversial from the moment it surfaced in a Chicago newspaper.

Officials of both exchanges criticized the government for using undercover agents to penetrate their arcane world. Defense lawyers criticized the late night and early morning visits by Justice Department lawyers and FBI agents to subpoena witnesses who were often threatened with Draconian charges if they did not agree to cooperate.

The government was also criticized for threatening to use the Racketeer Influenced and Corrupt Organizations Act, or RICO, against commodities traders. Conviction on RICO charges can result in government seizure of assets, including cars, homes and bank accounts. The first successful prosecution under the law in a securities case came Monday in New York with the conviction of six persons in the Princeton/Newport Limited Partnership case.

A ruling by a federal judge last week allowing the government to use tape recordings made surreptitiously in the trading pits by undercover FBI agents cleared the way for this week’s indictments.

U.S. District Judge John Grady turned back a challenge by defense lawyers who claimed the tapes were made illegally because they violated the privacy rights of some traders who were overheard in the tapes. The judge rejected the argument.

Times staff writers Ronald J. Ostrow in Washington and Bill Sing in Chicago contributed to this story.