U.S. Indicts 46 Traders in Commodities Probe : Racketeering, Fraud and Widespread Cheating of Customers at 2 Chicago Exchanges Charged

A federal grand jury indicted 46 commodity traders and brokers Wednesday for allegedly cheating hundreds of customers in thousands of transactions at the world’s two largest commodity exchanges, the Chicago Board of Trade and the Chicago Mercantile Exchange.

The indictments resulted from a four-year-long federal investigation of white-collar crime that marks the biggest government crackdown on illegal practices in more than 140 years of commodity trading in Chicago.

To gain evidence and to penetrate the club-like trading floors of the two exchanges, four specially trained FBI agents, armed with fictitious identities and phony financial credentials, worked under cover as traders. Carrying hidden tape recorders, they competed daily in the frenetic trading pits, where high finance often resembles the National Football League.

Eighteen brokers indicted Wednesday were charged under the Racketeer-Influenced and Corrupt Organizations Act. If convicted, they face confiscation of much of their assets, including their exchange seats, which are worth hundreds of thousands of dollars.

Other charges lodged against traders in the soybean and Treasury bond pits at the Board of Trade and in the Japanese yen and Swiss franc pits at the Mercantile Exchange include mail fraud, lying to federal agents, filing false tax returns, wire fraud, conspiracy to defraud the IRS and violations of the Commodities Exchange Act.

One indication of how widespread the cheating of customers may have been can be found in the indictment involving trading in the Japanese yen pit. Nearly a third of all regular traders and brokers who worked in that pit were charged Wednesday.

Although federal officials refused to put a dollar figure on the fraud, U.S. Atty. Anton R. Valukas, who has directed the investigation, called losses to exchange customers “significant.”

“We are not talking about technical violations,” he said, adding that the charges involve “the systematic theft of customer funds.”

Atty. Gen. Dick Thornburgh, who flew to Chicago to announce the indictments, said: “This probe is only part of an expanding Department of Justice crackdown on white-collar crime in all its various guises, from Wall Street to LaSalle Street to Main Street . . . . The activities uncovered at these exchanges . . . simply cannot, and will not, be tolerated.”

Thornburgh was joined by FBI Director William S. Sessions and Commodity Futures Trading Commission Chairman Wendy L. Gramm.

Defends Undercover Work

Gramm said that the undercover investigation, sharply criticized by the exchanges and many traders, was vital. “The charges . . . involve violations that could not be detected by commission oversight alone,” she said.

A futures contract is an agreement to deliver a specific quantity of a commodity at a specific time for a set price. For example, if a major grain company believes a drought next summer will raise the price of corn, it might buy corn now for delivery next spring--at a price that it believes is lower than next summer’s price will be.

In fact, Valukas said that last summer, when a drought was cutting into the Midwest’s harvest of soybeans, traders in the soybean pit at the Board of Trade sold futures contracts to favorites at premium prices, “while the orders of thousands of others went unfilled.”

Deals Made After Hours

An examination of the charges, spelled out over hundreds of pages of indictments, shows that both large corporations and individuals who invest in commodities were allegedly cheated in a variety of complex schemes. These ranged from price fixing to making deals after official trading hours, deals that were lucrative for conspiring traders and brokers at the expense of customers.

Neither the Chicago Board of Trade nor the Chicago Mercantile Exchange was implicated in any of the criminal activity.

“The Chicago Board of Trade does not condone violations of its rules or any abuses of customers,” said Karsten Mahlmann, chairman of the Board of Trade. “Trading abuses of the nature alleged represent serious violations of our rules and regulations and are a cause for grave concern,” he said.

On Wednesday, the Board of Trade said it had resumed some internal investigations of trading abuses that had been under way when word of the federal investigation first surfaced last January. At that time, Justice Department officials asked the exchange to suspend its probes. In addition, the exchange has now begun new investigations of all others named in Wednesday’s indictments, Mahlmann said.

Exchange Suspends Members

Although the Board of Trade agreed to allow those indicted to continue trading until they have been convicted of a felony, the Mercantile Exchange Wednesday ordered its indicted members “to immediately cease from conducting all public customer business.”

In a statement, the Mercantile Exchange said that it viewed the “allegations with the gravest concern since they reflect on the integrity of the (exchange). . . . If there has been criminal misconduct at the exchange, we are anxious that such wrongdoing be ferreted out and that all criminal wrongdoers be brought to the bar of justice.”

Seven of the defendants, who law enforcement sources said are cooperating with the investigation, signed an extraordinary agreement with the Commodity Futures Trading Commission agreeing never to work as traders or brokers again. An eighth trader, who is also cooperating with the investigation, was only charged with a misdemeanor and will not be subjected to such harsh penalties.

So far in the investigation, code-named Operation Sour Mash and Operation Hedgeclipper, subpoenas have been issued to 500 traders and brokers and more than 1 million trading documents covering the last four years have been collected.

Sources close to the investigation said that a second round of indictments could be handed down before the end of the year.

The commodity markets, established more than 140 years ago, have become a cornerstone of Chicago’s economy, as much a part of life in the Windy City as the entertainment industry in Los Angeles and the automobile industry in Detroit.

The Board of Trade, the older of the two exchanges, was founded in 1848 and now offers trading in futures contracts for agricultural commodities, financial instruments and precious metals. The tradition-bound Board of Trade is considered to be the more conservative of the two exchanges. It is housed in an Art Deco skyscraper topped with a statue of Ceres, the Roman goddess of agriculture, and dominates LaSalle Street, along which much of Chicago’s financial, legal and government business is transacted.

The Mercantile Exchange, founded in 1919, is often viewed as the more creative and aggressive of the two markets. Contracts in cattle, pork bellies, hogs and lumber and in currencies such as the Swiss franc and the West German mark are traded there. The exchange is housed in modern twin towers just up the street from the Sears Tower on Wacker Drive.

Times researcher Tracy Shryer in Chicago contributed to this story.

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