THE CHICAGO COMMODITIES SCANDAL : Extent of Alleged Trading Abuses Surprises Victims

Charles Plocar, a Sarasota, Fla., financial adviser, has suspected for some time that he might be getting cheated when he bought or sold futures contracts in Japanese yen and U.S. dollars. Brokers executing the trades, he suspected, didn’t always seem to give him the best prices, as exchange rules require.

But Plocar never suspected that such cheating might also harm his trades in Treasury bond futures. That was until earlier this week, when an FBI agent called to inform him that his trades were among several allegedly manipulated by an independent broker. That broker on Wednesday was indicted along with 45 other traders in the largest futures industry fraud scandal ever.

“I’ll keep trading, but I definitely want to know what is going on,” said Plocar, adding that he might alter some of his trading practices to reduce his chances of being cheated again.

Plocar is one of dozens of individuals and businesses that are discovering this week that they were victims of alleged systematic cheating by brokers and traders on the floors of the Chicago Board of Trade and Chicago Mercantile Exchange, the nation’s two largest futures exchanges.

The victims include individual investors such as Plocar, who dabble in futures as a hobby and probably lost only a few hundred dollars each through allegedly fraudulent trades.

But they also include giant firms that may have been cheated out of hundreds of thousands of dollars. That group includes Archer Daniels Midland, the Decatur, Ill., agribusiness firm whose complaints as far back as 1986 about questionable futures trades are believed to have been a key factor in triggering the probe. Big victims also include such large brokerages as Shearson Lehman Hutton, Drexel Burnham Lambert and others that allegedly were cheated by the independent broker-traders often used to execute trades.

One large brokerage that handles trades for individuals, Lind-Waldock & Co., is cited as having been a victim of dozens of allegedly fraudulent trades by an independent broker in the Treasury bond pit. It also was cited as a victim of allegedly corrupt trades in soybean, Japanese yen and Swiss franc futures.

Some of these victims, along with others who trade frequently in futures, say the scandal points out the potential for abuse in the “open outcry” system of trading used in the futures exchange.

Futures contracts are commitments to deliver or take delivery of a specific quantity of a certain commodity or financial instrument at a set price and date. In the open outcry system, such contracts are traded through shouts and hand signals among traders. Because it is difficult to pinpoint such trades to the exact second, such a system leaves room for abuse through price manipulation, prearranged trades and other schemes designed to enrich brokers at the expense of customers.

“Ninety-eight percent of the trades are clean . . . but anytime there’s a chance to cut corners, some people will,” said Larry Pesavento, a former trader in Chicago who is now a futures investor and publisher of a commodities trading newsletter in San Luis Obispo.

The scandal also shows how some investors could have been victims without really knowing it.

For example, in one popular scam called “front running,” broker-traders would place orders for their own personal accounts ahead of orders they received from outside customers. Because they knew in advance how those outside orders would move the market, the brokers could profit by trading themselves first. Customers would have no idea they were being taken advantage of.

Checked Orders

In many cases, prosecutors contend, fraudulent brokers were cheating customers of amounts so small in trades that even the most vigilant and sophisticated of customers would not have noticed.

Claude Tardiff, a Lowell, Mass., accountant, said he was not aware that he was a victim until a newspaper reporter called him Wednesday after seeing his name listed in indictments against three traders from the Treasury bond pit.

“I have no idea how extensive my account was victimized,” he said, noting that he checked his orders vigilantly and always thought they were within the price range of being proper.

Lind-Waldock, the large brokerage, also was unaware that its trades, at least in Treasury bonds, were subject to fraud. William G. O’Donnell, Lind-Waldock’s president, said the firm’s internal review process never indicated that trades were fraudulent.

But O’Donnell and others cautioned that the public should not make too much out of the indictments.

“There are always going to be a few bad apples and you will find them out,” said Tardiff, adding that he will not scale back his futures investing.

Times staff writer Carla Lazzareschi in Los Angeles contributed to this story.