First Lady’s Broker Used Improper Block Trading : Market: Practice could allow unfair split of profits, losses. There is no evidence that Mrs. Clinton benefited.


Like First Lady Hillary Rodham Clinton, Hayden McIlroy made spectacular profits in the commodities markets by doing business with Robert L. (Red) Bone, a broker in the Springdale, Ark., office of a Chicago-based trading firm.

It was not until McIlroy visited the trading floor in Chicago in early 1979 that he met a young trader named Ira Brill and discovered what may have been one factor in making such success possible.

As McIlroy recalled in subsequent court testimony, Brill revealed that he regularly bought cattle futures in blocks of 600 contracts at a time on behalf of a large pool of Springdale clients of the trading firm. Then, after the market closed and the outcome of the day’s ventures was clear, the contracts--many purchased without the permission of the individual customers--were divvied up and assigned to specific accounts by the trading firm, Ray E. Friedman & Co., commonly called REFCO.


“His (Brill’s) job was to hold the orders and not turn them in until Springdale had called him after the market closed and (had) given him customer account numbers and how they wanted those orders divided between all customers in the Springdale office,” McIlroy said. In other words, brokers in the Springdale office were buying and selling contracts in large blocks, then allocating gains and losses after the fact to their roster of clients.

Such so-called day-trades were subject to less stringent margin, or credit, requirements and the pooling of resources also made it possible for REFCO to make larger commodity purchases. Thus, investors with relatively modest amounts of capital could take part in deals that offered far larger potential profits than they otherwise would have been able to obtain.

One of REFCO’s clients in 1978 and 1979, a notably successful one with a modest grubstake, was Mrs. Clinton, wife of the governor of Arkansas and future First Lady of the United States.

Block trading is a practice that violated the rules of the Chicago Mercantile Exchange at the time and has since been made illegal because it gives unscrupulous brokers the power to allocate profits and losses to their clients on the basis of favoritism.

“It opens the window of opportunity for fraud,” explained Elliot Bercovitz, vice president for strategic planning at Lind-Weldock, Inc., of Chicago, one of the nation’s leading commodities trading firms.

According to White House officials, Mrs. Clinton had no knowledge of any block trade allocations, was not aware at the time she began dealing with Bone that he previously had been censured for making improper commodity trades and did not authorize him to make trades in her name.


Nor is there documentary proof that she benefited from block trading or allocation. But there is extensive evidence contained in federal court records now warehoused in Ft. Worth, which suggest that many of Bone’s clients benefited at one time or another from the unauthorized allocation of trades. The beneficiaries included clients who had “non-discretionary” accounts, which require the client’s approval of trades. Mrs. Clinton’s account was non-discretionary.

James Blair, whom Mrs. Clinton has identified as the mentor who assisted her in her commodities trading, acknowledged in court testimony that he was aware of these so-called “600 orders” and occasionally had unauthorized trades allocated to his own account.

In fact, REFCO brokers and traders who were familiar with practices at the Springdale office during the late 1970s said the practice was so widespread that it would have been difficult for Mrs. Clinton to have earned $99,000 on an initial investment of $1,000, as she did, without benefiting to some extent--wittingly or not--from Bone’s trading practices.

Commodities analysts have expressed particular puzzlement over how an ordinary investor with as little capital as Mrs. Clinton--and with such modest total resources--could have taken positions large enough to win the profits she banked. During the period she was trading commodities, she and her husband owned no substantial assets and were living on a combined income of about $50,000 a year.

Moreover, the White House portrayal of Mrs. Clinton as an exceptionally canny and attentive commodities trader contrasts with the Clintons’ description of their role in the Whitewater real estate development during the same period. In Whitewater, the Clintons said that they were passive investors who did not follow the project’s financial activities closely and left its management entirely to their partners, former savings and loan owner James B. McDougal and his then-wife, Susan.

Whitewater became entangled in a series of complex financial transactions involving McDougal and his Madison Guaranty Savings & Loan, which ultimately went bankrupt at a cost of at least $47 million to U.S. taxpayers. The Clintons have said that they were not aware of McDougal’s activities, which are now part of the wide-ranging investigation by special counsel Robert B. Fiske Jr.

In her commodities trading, Mrs. Clinton turned out to be luckier than many of Bone’s other clients because she got out of the cattle futures market in July, 1979, just as many of REFCO’s other big Arkansas clients--including her friend Blair--were starting to lose millions of dollars.

Many of the losers later claimed in civil lawsuits that they were victims of a fraudulent scam devised by REFCO President Thomas Dittmer in Chicago. The suits were unsuccessful, but they produced extensive testimony by REFCO employees and others about how Bone and the Springdale office operated during the period in 1978 and 1979 when Mrs. Clinton traded there.

In late 1979, according to Elizabeth J. Robbens, a Little Rock lawyer who has representedREFCO, Bone and other brokerage officials admitted to the Chicago Mercantile Exchange that the office made a practice of trading in block orders for numerous customer accounts. They were sanctioned by the exchange for violating trading rules.

Robbens insisted that, while Bone has acknowledged allocating trades, none of his clients ever complained that they were treated unfairly. (The lawsuits focused primarily on other aspects of REFCO’s activities.)

By all accounts, Mrs. Clinton was persuaded to enter the risky world of commodities trading by Blair, now the general counsel for Tyson Foods, which is headquartered in Fayetteville, Ark.

At the time, REFCO was widely regarded as the biggest player in the cattle futures pits. Bone, a onetime employee of Tyson, was widely known among the Arkansas elite as a broker who had made many investors rich.

With an initial investment of only $1,000, Mrs. Clinton quickly made $5,300 on her first trade and withdrew $5,000 in profit. There is no documentation of the exact trade and some experts said that she did not have enough money in her account at the time to cover a trade that would produce such a large profit so quickly.

Fast starts were not unusual for Bone’s new clients, however. McIlroy testified in court that he did not even have an account at REFCO when he received notice that Bone had purchased cattle futures on his behalf. The unauthorized investment made money for McIlroy, however, and that success persuaded him to keep trading with REFCO.

Buying blocks of contracts and allocating them to customers after the market closed was dismissed as a time-saver by Bone and other REFCO brokers, even though they were aware it violated the guidelines of the Chicago Mercantile Exchange. When former REFCO broker Bill McCurdy explained the system on the witness stand, he was asked if the practice was considered proper.

“I don’t think that it is,” McCurdy said.

It is not known what criteria Bone used to allocate the trades. Since Mrs. Clinton’s trading records were made public last week, some people who were frequent traders at that time at the Springdale office have questioned whether she received some favoritism, but there is no documentary evidence of it.

Though the White House has said that she was unaware of improprieties by REFCO at the time she stopped trading, Mrs. Clinton could have learned about them later while she served briefly as McIlroy’s attorney in a lawsuit against the brokerage firm. It was one of dozens of suits filed around the country in the early 1980s by traders and brokers--some of whom lost large sums in commodities trading--who accused REFCO officers of market manipulation and other improper activities.

Martin Elgison of Atlanta, attorney for a REFCO broker who lost large sums in trading after July, said that “Mrs. Clinton was fortunate to have gotten out when she did. One can speculate it was just luck or it was something more sinister.”

Blair, who also had a non-discretionary account, said that Bone sometimes made trades on behalf of his clients even if they had not authorized them.

It was during the summer of 1979 that REFCO’s Springdale brokers apparently were chastised by their supervisors in Chicago for buying cattle futures contracts in blocks and then allocating them to customers who never authorized them. McCurdy, in his testimony, described the flurry of activity in the Springdale office after he was told in August that the so-called “600 orders” had to be covered up.

“We locked the doors with the people that worked there still left there,” McCurdy recalled. “I don’t believe Red Bone was there at that time. And it was approximately 2:30 in the afternoon and he said . . . . ‘We’ve got to go back and individually time and date stamp all these 600 orders’ that had been ordered out of Chicago. And we sat down and changed our clocks back and the dates back and took the 600 orders and matched up and stamped enough orders to match the 600 that had originally gone in. . . . It was pretty close to dark when I left.”

Mrs. Clinton’s last transactions with REFCO occurred in July, 1979, just as many traders at the Springdale office began suffering large losses. White House officials said that she was pregnant at the time and did not think that she could devote enough attention to commodities trading.

In the final months of 1979, many longtime customers of Bone lost all of the money they had amassed with his help. Not only did the market take a sharp downturn, but many traders claimed they were double-crossed by REFCO President Dittmer, who made a tidy profit in October by taking a position that was exactly the opposite of the advice he was giving his customers.

Dittmer denied any wrongdoing.

Blair, who lost several million dollars, later sued REFCO for $15 million and settled out of court. McIlroy came out ahead in his account but sued on grounds that he was entitled to about $800,000 more than he received.

REFCO attorney Robbens said that Mrs. Clinton was just one of many smart traders who withdrew from the market at the right time. “They all made money and none of them ever sued us,” she said. “In fact, nobody who made money sued us, except Hayden McIlroy.”