TIME: Almanac 1993/TIME Almanac 1993.iso/time/020689/02068900.017

Text File | 1992-09-23 | 3.8 KB | 76 lines

                                                                                BUSINESS, Page 52

A Bid to Salvage a Go-Go Legacy


Chicago's commodities guru pledges to clean up the pits


    Leo Melamed had good reason to take on the role of a
born-again reformer last week. Melamed, 56, guru of Chicago's
go-go futures markets, was watching in dismay as federal
prosecutors trampled on his legacy while they stepped up the
pressure in the biggest fraud investigation ever to hit the
commodities pits. The two-year FBI sting, which broke into the
open in late January, intensified last week as investigators
raked in evidence for a grand jury that will consider criminal
indictments against dozens of brokers and traders for allegedly
defrauding their customers.

    Threatened with prison terms or other penalties, as many as
30 exchange members reportedly agreed to cooperate with the
probe. Investigators also issued a snowstorm of subpoenas for
the financial records of Chicago's 237 commodities
clearinghouses. The probe, initially conducted by FBI agents
posing as traders, took officials by surprise at the Chicago
Mercantile Exchange and the Chicago Board of Trade. Said
Melamed, chairman of the Merc's executive committee and a
creator of its innovative financial instruments, in an interview
with TIME: "It was a terrible shock, and it has had the expected
fallout in terms of people feeling pretty bad."

    Last week Melamed took an aggressively contrite stance,
apparently hoping to head off or at least mitigate the
regulatory scrutiny and congressional clampdown that are likely
to result from the scandal. He conceded, more freely than some
exchange members would like, most of the major charges. "Our
view is that as long as we've got this pain, let's not ignore
what is going on," Melamed told TIME. "Let's use this as an
opportunity to make some fundamental changes." He announced
formation of a committee to study trading practices and
professed a willingness to consider profound reforms in the
Merc's open-outcry method  of trading. The system has been
criticized as outmoded and ripe for abuse because it does not
leave a complete paper trail or electronic record of a
transaction.

    Melamed, who began his career at the Merc as a runner,
blamed the heady growth of the exchanges over the past decade
for many of their problems. Because trading volume on their
floors has grown at an annual rate of 50% (average current value
of daily transactions: $150 billion), the exchanges have become
far more difficult to monitor. Even so, Melamed points out, the
Merc has tried to enforce the rules. Last year, he said, "we
caught and punished over 200 violators, enforced some 30
suspensions, imposed $1 million in fines and approved a couple
of outright expulsions."

    One of the areas Melamed suggested for reform is a practice
known as dual trading, which allows members to trade
simultaneously for their personal accounts and for customers.
That system is prone to abuse: if a trader knows in advance that
his clients are all buying gold or soybeans that day, it is
tempting for him to buy a few personal contracts first, then
profitably resell them to the customers as prices go up. Closer
electronic scrutiny  may also be warranted. The Merc's
computers, Melamed says, could be programmed to watch for
suspicious trading patterns.

    Melamed sees the Chicago scandal as just part of an ethical
malaise in financial markets around the world. Said he:
"Whatever the reason, it's a shame, and I think it's our
greatest danger." His conciliatory move this week may actually
hasten reform and speed up the Government investigation by
reducing the elements of conflict, as he intends. But Melamed's
response recalled a bit of wisdom from a bygone era in Chicago:
when surrounded by the Feds, come out with your hands up.