Chicago Firm Suspended for Improper Bond Trade


The Chicago Board of Trade on Friday suspended the brokerage firm that initiated a series of improper trades that jolted the government bond market a day earlier and sent interest rates gyrating wildly.

Meanwhile, as new details emerged, market participants said the incident could shake public confidence in a market that helps determine interest rates on government bonds and influences rates on everything from home mortgages to auto loans.

The episode, in which the brokerage firm, Stern & Co., traded up to $3.4 billion worth of Treasury bond contracts, is being investigated by the U.S. attorney’s office, FBI, Commodity Futures Trading Commission and the CBOT.

“I think these types of incidents undermine public confidence in the market and call into question whether the regulatory system is adequate,” said Lawrence Leuzzi, managing director for fixed-income trading at S. G. Warburg & Co., a New York brokerage firm.


Leuzzi noted that Thursday’s episode, in which trader Darrell L. Zimmerman made billions of dollars worth of questionable trades in options and futures in an apparent attempt to drive up interest rates, is only the latest black eye for the CBOT and the huge government bond market.

In 1989, an undercover federal investigation of trading fraud at the CBOT and the smaller Chicago Mercantile Exchange resulted in criminal charges against 48 people. And last year, industry giant Salomon Bros. was caught submitting phony bids during Treasury auctions in an attempt to corner the market for certain securities.

“Once again, we find ourselves defending the integrity of the futures and options market,” Leuzzi said. Futures and options are contracts that investors and speculators use to bet on trends in commodities or securities prices, interest rates or other items.

CBOT Chairman William F. O’Connor, in a statement issued Friday, tried to put a positive spin on Thursday’s incident, in which two visitors to the trading floor--in violation of exchange rules--"apparently assisted in the direction of the trading activity.”


O’Connor said the incident “demonstrated once again the resiliency of the unsurpassed system that guarantees the financial integrity of the Chicago Board of Trade.”

Leuzzi acknowledged that “the fact that the activity was caught and the trades were unwound quickly is reassuring that something like this can’t go too far.”

Zimmerman is employed by Stern & Co. CBOT officials said the memberships of the firm’s three principals--Lee B. Stern, Daniel Stern and Lester Mouscher--might be sold to pay any liabilities resulting from Thursday’s episode. The principals were also suspended.

Traders said that, while the incident might lead to calls for tighter regulation, they were at a loss to say what the changes might be. “It’s going to be difficult to put further safeguards into place. We’re dealing with human behavior,” Leuzzi said.