COMMODITIES SCANDAL : Many Indicted Traders Agree to Cooperate

Up to a third of the 46 commodities traders and brokers indicted for allegedly cheating customers at the Chicago Board of Trade and the Chicago Mercantile Exchange have agreed to cooperate with federal prosecutors, defense attorneys said Thursday.

While the level of cooperation is greater than previously known and strengthens the government’s case, legal experts say that a number of hurdles remain in the way of both prosecution and defense lawyers.

“These are going to be complicated trials with mounds and mounds of documents and lots of witnesses,” said Ronald J. Allen, a Northwestern University law professor. “Some of this is pretty much uncharted waters. The government is just starting to bring indictments in securities cases.”

Likely Battles

In fact, in the 10 years beginning in 1978, only 100 commodity brokers and traders were indicted for criminal offenses related to trading in Chicago, the biggest commodity futures trading center in the world. That helps to explain why Wednesday’s indictments sent shock waves through the markets here.

Now that the charges are public, battles are likely over the government’s use of the tough Racketeer Influenced and Corrupt Organizations Act, or RICO, the use of tape recordings made surreptitiously by FBI agents investigating commodities fraud and whether traders and brokers will be tried as individuals or in groups.

And then there is the problem of teaching a jury about the arcane world of commodity futures trading, the futures markets and the tangle of rules, regulations and laws that govern those who work in them.

Heavy Penalties

Wednesday’s indictments marked the first time that the Justice Department has charged commodities brokers with racketeering under provisions of RICO. Eighteen of the 46 people named in the indictments are accused of violating the law, which provides for seizure of assets ranging from homes and art collections to bank accounts of those convicted.

In one case, the government is seeking not only the exchange membership--worth hundreds of thousands of dollars--of John M. Baker Jr., a broker in the Japanese yen pit of the Mercantile Exchange, but also all of the commissions he earned for almost a decade.

The first successful use of RICO against prominent securities executives came last Monday in the Princeton/Newport Limited Partners case in New York. There six defendants were convicted of conspiracy, racketeering and racketeering conspiracy for scheming to make bogus securities trades in an attempt to evade paying federal taxes.

Nonetheless, several defense lawyers, who spoke on the condition that neither they nor their clients would be identified, said a legal challenge of the government’s use of RICO in the commodity cases was almost certain.

Meanwhile, skirmishing has already begun over the legality of the tape recordings made by at least four undercover FBI agents who worked as traders to collect evidence of illegal trading.

Two defense lawyers, Stephen J. Senderowitz and Susan Bogart, have asked a federal appeals court to review a lower court ruling that the recordings, made without a court order, are legal. Even if they lose in the appeals court, lawyers may still raise the issue when their clients come to trial.

The complexity of commodity trading and the rules and regulations governing it is likely to be a major hurdle for federal prosecutors.

Burden on Prosecution

“A prosecutor’s biggest fear in a futures case is trying to educate the jury on how commodity markets operate and why there was a fraud,” wrote former federal prosecutor Senderowitz in law review article that will soon be published.

“Not only does the government have the very heavy burden of establishing what this crime is, they face the problem of simply trying to explain to a jury how commodity trading is conducted,” said James A. McGurk, also a former federal prosecutor and former senior regional counsel for the Commodity Futures Trading Commision. “You have to understand the lingo and the background before you can find that someone violated something.”

Complicating this issue, McGurk said, is the Commodities Exchange Act, which several traders and brokers are accused of violating. “The act is hardly an example of great legislative drafting. It is not a simple statute to explain. Among other things, a commodity futures contract is not even defined in the act.”

Group Indictments

Defense lawyers will also attempt to win individual trials for their clients even though traders were indicted in groups in massive multi-count indictments that, in some cases, charged conspiracies.

Group indictment is a tactic designed to give the government the upper hand, said Albert W. Alschuler, a University of Chicago law professor.

“There is a sense that prosecutors can gain unfair advantage in one of these mass, complicated conspiracy trials,” said Alschuler. “When you have a lot of defendants, there is sort of an inference that birds of a feather are flocked together.

“And when you’ve got a lot of allegations, the jury is supposed to think, ‘Well, the guy might be innocent of one charge, but he’s not innocent of 20 charges, and we better find him guilty of something,’ ” Alschuler said. “The philosophy is to throw a lot of dirt at the wall and hope that some of it is going to stick.”